You’ve read stories about the stock exchange. You’ve heard relatives and friends talk about buying stock in this or that company. Maybe you've even got some tips on investing in the company you currently work for. But if you’re still trying to figure out how to invest in stocks, don’t blame yourself—there’s a lot to absorb.
Schools (and parents) often don’t cover the basics of how to invest in the stock market, so anyone who doesn’t work in the field is bound to have a lot of questions—and little idea how to get the ball rolling.
We’ve got you covered with our step-by-step guide on how to start investing in stocks.
You need to make money to invest—check out these amazing open jobs on The Muse and find the perfect fit for your financial goals »
1. Put your emergency fund and budget in place first
When you put money into the stock market, you’re not guaranteed to get returns back right away, or at all. So before you jump in, you’ll want to take a good hard look at your savings and spending habits to ensure you’re not removing your ability to afford basic necessities and important luxuries.
“Your investment account is your money, but it’s not to be treated like a checking account where you’re taking money out every day,” says Gloria Garcia Cisneros, a Certified Financial Planner and Wealth Manager at LA-based investment consultancy LourdMurray.
Set yourself up for success by creating a budget. A simple spreadsheet often does the trick, or Garcia recommends utilizing an app or tool such as You Need a Budget (YNAB), Monarch Money, or EveryDollar.
Then, she says, after laying your finances out, set aside some reasonable portion of your earnings into an emergency fund dedicated to preparing you for life’s unexpected events, be it a medical issue or home repair. Some experts advise keeping anywhere between three and nine months of take-home pay in your emergency fund, while others follow the 50/30/20 rule for each paycheck.
Once that’s all in place, you can evaluate your discretionary income to figure out how much of it you feel comfortable putting toward stocks, bonds, real estate, or other investment opportunities that come with greater risk and fewer immediate payoffs.
2. Get familiar with the lingo
So, how should a beginner invest in stocks? You don’t need to be an expert in stocks to dabble in investing, especially if you plan to lean on an advisor or technology to do most of the work. But Garcia advises at least familiarizing yourself with common terminology and practices should you need to decipher financial statements or speak to investment decisions made on your behalf.
Her favorite resources for dipping your toes into this world include The Psychology of Money—“It’s really the frame of reference through which you need to look at investing, and it helps people who are creatives, who aren’t math people,” she says—and I Will Teach You To Be Rich, as well as Khan Academy’s library of courses on financial literacy and personal finance.
Social media and online forums, too, can be a useful place to get advice and learn the ins and outs of stock investing—but Garcia cautions users to vet influencers for reputable credentials and certifications before taking their words at face value. “Personal finance really is personal, and they’re usually trying to go viral on some mini hack—but they don’t have a full picture,” she says.
3. Open an account with a reputable investment firm
Picking and choosing which companies you want to own stock in, and the amount of stock for each, is certainly one investment strategy—like buying a slice of Google or Facebook’s pie. But Garcia says it’s a big gamble to make as a beginner. Not to mention, it’s incredibly time-consuming. “Going in and investing your money every month, or trading and figuring things out, and timing the market and analytics—it can be exhausting,” she says.
Instead, she suggests, utilize robo-advisors—digital financial platforms that use automation and machine learning algorithms to offer financial planning advice—or other established investing services to do a lot of the legwork for you.
“I encourage people who maybe aren’t ready for an advisor [to leverage robo-advisors] because there’s no complexity there,” she says. “It’s nice to feel like you don’t have to worry about it.” These avenues are also often cheaper and have a lower barrier to entry than hiring a human advisor.
4. Diversify, don’t duplicate
When trying to simplify the experience of buying stocks for clients, Gloria likens it to going to the grocery store. “The goal is not to pick and buy only bananas for the week,” she says. “You want to go in and think about how you make a healthy, balanced meal, and also how you can have diversification in that process, because say you get a cold, say you want to do a cleanse, say your family comes over—you want to be well-prepared and stocked with a variety of different ingredients.”
Diversification in the stock realm ensures you don’t sustain large losses, because when you put your eggs in multiple baskets (yes, we’re still using the food analogy) and one or two break, you can still rely on your other eggs for sustenance.
Diversification, she clarifies, can quickly become duplication if you don’t do your research or lean on the right advice. Consider index funds—which, if we’re keeping up with the grocery store analogy, are like pre-made meals.
“Index funds track a basket of securities,” Garcia says. But if you hold several index funds that include similar stocks—like the Vanguard S&P 500 ETF (VOO) and the Fidelity 500 ETF (FXAIX), which both track the 500 largest U.S. public companies—you’re not actually diversifying all that much.
“When it comes to diversification, it’s about owning different things that aren’t correlated,” she says, adding that it comes down to “what you own, not where it’s owned or who’s managing it.”
5. Be patient
Mastering the art of how to invest in stocks—and thrive—is (often) a long game that requires patience and resilience. “The more time you give it, the more it can grow,” Garcia says.
“People usually think, what stock should I invest in?,” she says. “But the answer is, let’s build wealth like the richest families have for the past decades—with simple, consistent, disciplined work where you put money away slowly over time, create systems for yourself, and don’t take on unnecessary risk.
That said, Garcia is also aware of how easy it is to let our emotions guide our money decisions. For those individuals, she reminds them to give themselves grace as they take their first steps, and treat it like working out, eating healthy, or other aspirational habits. “It’s a lifestyle,” she says. “So don’t give up if one thing goes wrong.”