How to invest in stocks: the ultimate guide for beginners 

When you’re new to finance and want to learn how to invest in stocks in the US, this can be daunting and sometimes confusing. With the right knowledge and guidance, anyone can learn how to invest in stocks – and even grow their wealth. 

Whether you are fresh out of college, a new investor, or a finance professional who is just starting out, this guide has the basics on investing in stocks.  

We’ll share insights on how to: 

• invest in stocks and make money 
• invest in stocks for long-term financial gains 
• determine your risk appetite 
• invest in stocks for beginners with a little money 

After reading this guide, you should be familiar with important terms and the basics of investing in the stock market. The knowledge and confidence you gain will serve as a good foundation for making informed investment decisions.  

Let’s start you on the path to personal and financial growth.  

Introduction to stock investing 

The basic rules for investing in stocks can be taken from rules for investing in general. When planned well and done right, investing in stocks can reap a few benefits, the foremost being building wealth.  

There are several steps to investing that beginners and experts alike follow:  

Step 1. Decide on your investment approach.  

This is a very crucial step. You need to invest in a way that fits with how you plan to manage your investments. There are at least three different ways to invest in stocks:  

Trading individual stocks 

This involves picking individual stocks on the market, buying and selling them one by one. This is best suited to investors or financial advisors who have the time and interest to do thorough research on stocks.  

If you think you can do this regularly and plan to devote all your time to it, then adopt this approach. Just remember that this means doing a bit of mathematical computations, constant monitoring, and researching on each stock you plan to invest in.  

Trading Index Funds 

If a hands-on style of stock investing is not your cup of tea, you can go for a less active approach. One good way is to trade index funds.  

Index funds are mutual funds or Exchange-Traded Funds (ETFs) that aim to track the returns of a market index. You could say that index funds do this by mimicking the portfolios of popular indexes like the S&P 500, Nasdaq 100, or the Wilshire 5000 Total Market Indexes.  

In general, index funds: 

• are easy to invest in 
• have lower costs 
• are almost guaranteed to imitate the performance of their underlying indexes 

The S&P 500 is proof of this. It has a history of producing 10% growth year on year, building significant wealth in the long term.  

Using a Robo-Advisor 

This last option for an investment approach was introduced in 2008. The Robo-Advisor is not a robot. This is an algorithm used by brokerage firms to invest their clients’ money in a portfolio of index funds. The firms program the Robo-Advisor with their clients’ investing goals, age, and risk tolerance. The Robo-Advisor builds a portfolio for them based on these parameters.  

2. Decide on your budget.  

This is where many beginning investors feel discouraged or hesitant about investing. You do not need thousands of dollars to start investing wisely. You can begin investing in stocks with as little as $500 to $1,000.  

The starting amount for investing in stocks is not as important as where you will get the money. When it comes to investing in stocks for beginners, you shouldn’t get the money from:  

• emergency funds 
• vacation funds 
• money for your children’s education 
• money for a downpayment on a house, car, or other important purchase 

What do these money sources have in common? They are all funds you may need soon. Money you might need in the next 5 years or sooner should not be placed in the stock market. The volatility of the stock market could see this money get drastically reduced. Earning it back could take years. Using these types of funds also prevents you from reaching your financial goals.  

So, set your budget for stock investments but fund it with money that isn’t earmarked for something else.  

You should also set your asset allocation. This means setting the right percentage of the money you plan to invest in stocks. The rest of the money should be placed in fixed-income, secure investments like high-yield certificates of deposit (CDs) or bonds.  

Suggested formula for determining asset allocation
Your age subtracted from 110	Asset allocation percentage for stocks
Ex. 110 – 40 years old (sample age)	= 70% should be invested in stocks

The rule of thumb in figuring out your asset allocation percentage would be to take your age and subtract it from 110. The resulting number, in the case where an investor is 40 years old, for example, is 70.  

So, this means that stocks should take up 70% of their money, with the remaining 40% in other less risky investments.   

The number 110 is meant to account for rising life expectancy in the US. This is only considering that possibility that an individual investor may live to be a centenarian and will need more money for a longer retirement. You can change the asset allocation to a more realistic percentage if you feel that the resulting number gives too much weight to stocks.

3. Know your risk appetite.  

Another very important aspect of stock investing is figuring out your risk appetite or risk tolerance.  

Few other concepts in wealth management are as important as this. Your risk appetite can have a huge influence on your investment strategies and decisions.  

There are three types or levels of risk tolerance:  

Aggressive risk tolerance 

This is for investors who have a lot of experience and knowledge of the markets. They’re not afraid to lose part of or all their money for bigger profits. They understand the unstable nature of the market. They know which investment strategies to use to get the most out of their stocks.  

Moderate risk tolerance 

This is for investors who would like to grow their wealth in stock without losing too much money. In investment circles, the moderately risk-tolerant investor uses what’s known as the balanced investment strategy. This means stocks take up about 60% of their asset allocation, with the rest in bonds or mutual funds. Sometimes, a balanced strategy can mean a clean 50-50 split.  

Conservative risk tolerance 

This is for investors who have little to no tolerance for investment risk. Usually, this category includes investors who are retired or close to retirement and cannot afford or prefer not to risk losing any money. Their investment strategies often involve preserving a principal asset.   

Risk tolerance or risk appetite is highly influenced by:  

• age – the older the investor, the closer they are to retirement (i.e., no longer working and therefore earning less) and the less tolerant they are of risk 

• time horizon – this is the deadline for achieving a financial goal, and it is directly proportional to risk tolerance. The more time an investor can keep their money in stocks, the more risk-tolerant an investor can be and vice-versa 
• investment goals – the more important the investment goal, the less risk-tolerant the investor will be. For instance, if an investor wants to put aside money to buy their first home, then they would be less tolerant of stock market volatility 

Biggest Influencing Factors on Risk Tolerance 

Factor	Impact on risk tolerance
Age	The older the investor, the less risk-tolerant they are
Time Horizon	The shorter the time for achieving a financial goal, the less risk-tolerant the investor
Financial Goals	The more important the goal, the less risk-tolerant the investor

Speaking of risk and volatility, these are characteristics that are part and parcel of the stock market. Volatility is something that investors simply choose to ride out. In the following video, the presenter shows how the stock market crashed in the 80’s with the “Black Monday” crash, the dotcom bubble bursting, the Covid crash, and other stock market crashes.  

What did they all have in common? The stock market eventually recovered. If you have any misgivings about investing in stocks, this is worth watching.  

4. Set up your investment account.  

Once you’ve decided on your risk tolerance, asset allocation, budget, and investment approach, you can take the concrete step to investing in stocks. That means opening your investment account, aka brokerage account. You can open a brokerage account with established financial institutions like Charles Schwab, Fidelity Investments, Vanguard, JP Morgan, Merrill Edge and many others. 

Funding the brokerage account 

Nowadays, setting up a brokerage account is very straightforward and made easier by doing it online.  

To put money into the account, you can:  

• do an electronic money transfer 
• mail a check 
• transfer funds from a 401(k) plan  
• transfer funds from a retirement account from a former employer 

Choosing the right type of account 

Beginning investors who are just getting into investing in stocks have the option of opening:  

• a standard brokerage account 
• an Individual Retirement Account (IRA) 

Either type of account will allow you to invest in stocks, mutual funds, and ETFs. The main consideration when choosing an account is accessibility.  

Differences between a brokerage account and an IRA 

Type of Account	Withdrawals	Deposits
Brokerage Account	Can access money anytime	Can deposit any amount
Individual Retirement Account (IRA)	Account owner must be 59½ to withdraw income without tax or penalty; can withdraw contributions anytime	Can deposit amounts within contribution limits

To have easier access to your money, the brokerage account is a better choice. However, the IRA offers interesting tax advantages. With a Roth IRA, you can build a sizable retirement nest egg that lets you withdraw earnings in the IRA tax-free and penalty-free by the time you retire.  

Check the fine print on the terms and conditions of either account. Take the time to review and compare the costs and features of each. Most online brokers do not charge commissions for online stock transactions. However, they still charge trading fees for cryptocurrencies and stock options.  

5. Pick your stocks.  

After deciding on your risk tolerance, setting your financial goals, and opening an account, it’s time you chose your stocks. Here’s a list of good stocks to buy and hold for 2024. Go down the list and choose stocks from different industries. This is a form of portfolio diversification, or spreading your money over different stocks and/or assets to cushion the impact of potential losses. It also means “not putting all your eggs in one basket”.  

6. Keep on investing.  

Warren Buffett would advise newbie investors to buy stocks of reputable companies at reasonable prices. Hold on to the shares until you either need the money or the company stops being great.  

Take a look at Buffett’s biggest shareholdings and invest in those companies too if you wish. With this strategy, it’s not uncommon for even the biggest and most profitable companies to go through some instability. But you can still have your share of good returns.  

Investing in stocks or any other assets can be a complicated and daunting process. Remember, even the most successful investors and financial advisors started small. The chances of you becoming as successful in stocks are likely the same – if you adopt their strategies.  

When it comes to stocks, perhaps the biggest advantage you can leverage is time. The younger you are, the more risk you can take. And the more time you have, the more chances you have to recoup losses and grow your investment.  

Having more time also means gaining the experience and knowledge to help you make informed decisions. So, learn as much as you can about stocks. Consult more experienced investors or, better yet, hire a professional advisor.   

For more advice on how to invest in stocks, contact one of our Rising Stars for 2023 – the best and brightest financial advisors under 40. Check out our list to see what they can do for you!