How to Invest in Stocks

Brokers, Investing, Investments

1. Determine your investor type.

2. Choose either stocks or stock funds.

3. Calculate your budget.

4. Open a brokerage account.

How to invest in stocks, summarized

  1. Understand the difference between individual stocks and stock funds.
  2. Calculate your budget.
  3. Open a brokerage account that aligns with your needs.
  4. Research before you buy.
  5. Stick to a long-term plan.

How to invest in stocks, summarized

  1. Understand the difference between individual stocks and stock funds.
  2. Calculate your budget.
  3. Open a brokerage account that aligns with your needs.
  4. Research before you buy.
  5. Stick to a long-term plan.

Investing in stocks has never been easier, thanks to online brokers, investment apps and robo-advisors. That’s good, because the stock market is one of the best ways to grow your wealth.

But how do you actually buy and invest in stocks? How much money does it require? How do you limit risk? Below is a step-by-step guide for how to invest in stocks.

1 . Determine your investor type

Before you dive into buying stocks, it’s important to know that there are several ways to approach stock investing. Choose the option below that best represents your situation.

“I’m the DIY type and am interested in choosing stocks and stock funds for myself.” Keep reading; the steps below are for you. Or, if you already know the stock-buying game and just need a brokerage, see our round-up of the best online stock brokers.

“I know stocks can be a great investment, but I’d like someone to manage the process for me.” You’ll want to check out our top picks for robo-advisors, which offer low-cost investment management. All you have to do is answer some questions. They’ll take it from there, investing your money for you in a way that makes sense for your situation.

2. Choose between stocks and stock mutual funds

For most people, investing in stocks means choosing between these two investment types:

  • Stock (also called equity) mutual funds or exchange-traded funds. These mutual funds let you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs track an index; for example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it. When you invest in the fund, you also own small pieces of those companies. You can put several funds together to build a diversified portfolio.
  • Individual stocks. If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment.

The upside of stock mutual funds is that they are inherently diversified, which lessens your risk. But they’re unlikely to rise in meteoric fashion as some individual stocks might. The upside of individual stocks is that a wise pick can pay off handsomely, but the odds that any individual stock will make you rich are exceedingly slim. For the vast majority of investors — particularly those who are investing for retirement — building a portfolio composed primarily of mutual funds is the clear choice.

» Still unsure which is right for you? See stocks vs. ETFs vs mutual funds

3. Determine your budget

New investors often ask this question in two parts:

  1. How much money do I need to get started? The amount of money you need to invest in individual stocks depends on how pricey the shares are. If you have Champagne tastes and a limited pool of money, a broker that offers fractional shares — pieces of stocks — might be for you. But, remember, we like mutual funds, right? If you want mutual funds and have a small budget, ETFs may be your best bet. Mutual funds (including index funds) have minimums of $1,000 or more, but ETFs trade like a stock, which means you purchase them for a share price rather than a fund minimum. That share price might be $10 on the low side and $100 or more on the high end.
  2. How much money should I invest? If you’re investing through funds — have we mentioned this is our preference? — you can allocate a fairly large portion of your portfolio toward stock funds, especially if you have a long time horizon. A 30-year-old investing for retirement might have 80% of his or her portfolio in stock funds; the rest would be in bond funds. Individual stocks are another story. We’d recommend keeping these to 10% or less of your investment portfolio. That’s because trading in individual stocks carries more risk — it doesn’t have the built-in diversification of a fund — and more hands-on effort. Those stock tickers don’t always continue on an upward trajectory — just ask Enron’s investors.

» Got a small amount of cash to put to work? Here’s how to invest $500

4. Open an account

If you’re participating in a workplace retirement plan such as a 401(k), you may already be invested in stocks, likely through mutual funds.

If you don’t have a 401(k) or you find its investment choices lacking, you can use an online broker to buy stocks, funds and a variety of other investments. With a broker, you can open an individual retirement account, also known as an IRA — here are our top picks for IRA accounts — or you can open a taxable brokerage account if you’re already squared away for retirement.

If you’re opening a new account, consider brokers that have low fees and low account minimums. Many of those on the list of best brokers for beginners require no minimum deposit. Most brokers offer a list of commission-free ETFs or no-transaction-fee mutual funds, which will allow you to avoid a charge each time you buy or sell. With individual stocks, you can expect to pay $5 to $10 per stock trade depending on the broker, though there are free services like the app Robinhood.

When comparing brokers, be sure to consider:

  • Research resources. Reliable data on leading companies can significantly streamline your stock-buying homework, and many top brokers offer it.
  • Customer support. The best brokers offer real-time assistance through multiple channels, including by phone, email or chat. 
  • Educational resources. Broker-produced guides and tutorials can help beginners get up to speed on the stock-buying process much more quickly.
  • Trading platform. You can buy stock through any online broker’s website, but if you plan to nurture this habit, you may want to graduate to a more advanced and user-friendly system.

NerdWallet’s brokerage search tool can help you sort through the options:

Get the best broker recommendation for you by selecting your preferences

Investment TypeStep 1 of 5

What do you want to invest in?

What do you want to invest in?

Investors who trade individual stocks and advanced securities like options are looking for exposure to specific companies or trading strategies.

Mutual funds and ETFs are typically best suited to investing for long-term goals that are at least 5 years away, like retirement, a far-off home purchase or college.

Beginners and long term investors often look to get exposure to whole markets and don't have a preference on which type of securities to trade.

Back

Is that it?

Not quite. Here are a couple tips on building and managing your portfolio wisely.

Do your research

Research is key to investing in individual stocks. You can’t predict the market, but you can do as much as possible to steer your portfolio toward expected high-achievers. That means researching past performance, analyst ratings, recent news out of the company and annual reports. All of this information should be available through your broker’s website.

With ETFs or index mutual funds, researching an individual fund’s performance is less important than understanding its fees and whether the fund meets your investing needs. Because these funds replicate a stock index, their performance will align closely with that benchmark, and funds tracking the same benchmark should nearly mirror each other.

Your job is to figure out what kind of funds — and underlying those funds, stocks — you want in your portfolio. If you want to hold large U.S. companies, you may be drawn to S&P 500 index funds. If you want small companies, you might look at Russell 2000 funds.

Then compare funds that track the same benchmark by their fees. Each fund will clearly list its expense ratio — the percentage of your investment that goes toward the fund’s annual operating costs. Aim to keep that number under 0.25%, though it may stretch higher for niche funds.

Manage your emotions

This is potentially the hardest part about investing. Be prepared to see big swings in the share price tied to company news, general market turmoil and who knows what else.

Investing is emotional. It’s all too easy to panic and pull out at the wrong time or get swept up in a rally and invest more than you can afford in what feels like a winner. But it’s important to stay the course, as long as you have a long-term plan you feel good about.

That means knowing how much you want to invest at what price, and how far you’re willing to let a stock fall before you sell. These kinds of rules, as well as choosing the right order type when you place a trade, will limit your risk and help you fight back against emotional responses.

OK, what’s next?

No matter how you choose to invest in stocks — be it funds or individual securities — you’ll have to open a brokerage account. It’s important to find a broker that fits your specific needs. Check out our top picks for online brokers.

Read: Best online brokers for stock trading »

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.


More resources on stock investing:

Updated Feb. 3, 2017.