Are you trying to figure out how to make your idle cash more productive and build wealth over time through investment income? This guide will help you get started investing in the stock market quickly.
Investing in stocks is one of the most popular methods to earn passive income and achieve financial independence. Many successful investors get their start from investing in stocks.
Many people invest money to save for long-term goals like retirement. You may also decide to invest cash you don’t need instant access to so it can earn a higher return than a bank savings account. But only invest money in stocks if you’re comfortable with the additional risk.
Buying stocks is easy, yet it’s essential to have a clear investment strategy and understand how stocks work to become a better investor and meet your financial goals.
Let’s go over the different types of investment opportunities to help you plan and build your portfolio of stocks with a diverse investment selection.
What are Stocks?
Stocks are also known as equities. Each stock is a tiny share of ownership in the company.
You can vote in annual shareholder meetings but don’t get to influence the day-to-day corporate decisions like CEO and the senior leadership team.
How Do Stocks Make Money?
Stocks can make money in two different ways:
- Rising stock prices (share prices)
- Dividend stocks (divident payments)
Not every stock pays dividend yields and you may only earn a profit when you sell shares at a higher value than the original purchase price.
If the stock investments pay a dividend, you earn a certain dollar amount per share you own. Most dividend-paying stocks distribute a dividend quarterly and the distribution amount can vary.
To earn a fixed investment return, you will need to invest in corporate bonds instead of corporate stocks. Bond investments let you lend money instead of buying an equity stake. But buying bonds can require a larger investment and also has a lower potential investment return. We’ve written about stocks vs bonds.
Are There Different Types of Stocks?
There are several different versions of stocks you can hold when investing in the stock market.
Many investing apps only offer common stock shares as they have the most liquidity and lowest investing fees. This stock type may earn a dividend but a fixed payout isn’t required.
Common shares also have voting rights and have more upside potential than preferred stock shares.
How do you know the difference between common and preferred stock shares? The brokerage or a stock research website notates if the stock is a common or preferred share. You can also tell by the ticker symbol as it may have extra digits:
- Ford Motor Company (common shares): F
- Ford Motor Company (preferred shares): F.PRB
When researching stocks, you will usually see “NYSE” or “Nasdaq” in front of the ticker symbol. This phrase lets you know you’re buying common stock instead of a riskier penny stock that can be more valuable and have less trading volume.
Most index funds and actively managed funds hold common shares.
There are also preferred shares, but these shares may only available to institutional investors and private investors.
Preferred shares are similar to a bond and may award a fixed payout. If a company goes bankrupt, preferred stock shareholders can receive compensation before common stockholders.
You may have to use a full-service online brokerage like Fidelity or E*TRADE to buy preferred shares.
The easiest way to invest in preferred stock shares is with a preferred stock mutual fund or exchange-traded fund (ETF). One example is the Global X U.S. Preferred ETF (Ticker: PFFD).
Over-the-counter shares (OTC) are usually international companies that primarily trade on non-US stock exchanges. Buying shares of these stocks on international exchanges can be expensive and most brokers don’t offer this feature.
Instead, companies offer OTC shares that trade on the New York Stock Exchange or Nasdaq. Offering OTC shares is also cheaper than common shares which have extra regulatory costs and procedures.
These stocks can have less liquidity and can have more volatile share prices as OTC stocks have less trading volume. You may not be able to reinvest the dividend either.
As these stocks are less common, some basic investing apps don’t offer OTC stocks.
Examples of OTC stocks include:
- Nestle (Ticker: NSRGY)
- Nintendo (Ticker: NTDOY)
- Vestas Wind Systems (Ticker: VWDRY)
- Volkswagen (Ticker: VWAGY)
The United States Securities and Exchange Commission defines “penny stocks” as a stock that trades for $5 or less.
Many penny stocks trade as OTC stocks, have volatile share prices, are high-risk and are not available on every investing app. Stock index funds don’t invest in penny stocks because of these risk factors.
To be fair, there are multiple common stocks that trade under $5 that have an NYSE or Nasdaq ticker symbol. One example is Nokia (NYSE: NOK) which produces consumer electronics and its share price is usually below $5.
Fractional stock shares are not a specific type of stock like common shares or OTC shares. A growing number of investing apps let stock investors buy fractional shares of a stock when they don’t have enough cash to buy an entire share.
Let’s pretend you want to buy a stock that costs $1,000 but you can only invest $100. If your brokerage offers fractional investing, you can buy one-tenth of a share.
Most brokers that offer fractional investing require a $5 minimum investment.
Brokers that don’t offer fractional investing require you to raise enough money to buy another share. Or you will need to invest in a stock fund that holds shares of that company.
Like fractional shares, stock funds allow you to buy stocks with small amounts of money.
You can either buy passive index funds that replicate the holdings of an index like the S&P 500, Russell 2000 or FTSE 100; or actively managed funds.
Passive funds have lower expense ratios than funds that try to perform better than their benchmark index. These funds make money when the benchmark closes higher but lose value if the index closes lower.
Actively managed funds hold stocks the fund manager believes will outperform their benchmark index. “Beating the market” isn’t guaranteed but some fund managers are successful.
Active funds have higher fees than passive funds as they buy and sell shares more frequently to rebalance the investment portfolio.
Not sure how to tell the difference between a passive and active fund? Here is an example of each fund type:
- Passive fund: Vanguard S&P 500 ETF (Ticker: VOO)
- Active fund: Ark Innovation ETF (Ticker: ARKK)
You can tell the Vanguard S&P 500 ETF is a passive index fund as its goal is to “closely track the (S&P 500) index’s return.” The share price of VOO mimics the S&P 500 and increases or decreases by the same amount.
An active fund like the Ark Innovation ETF invests in stocks it believes can outperform the overall stock market. The fund description specifically states, “ARKK is an actively managed ETF that seeks long-term growth of capital” by investing in stocks with a disruptive innovation theme.
Most fund descriptions mention if a you’re investing in an active or passive fund. You can also read the fund prospectus to read the full investment strategy as well. Reading the prospectus is also a good idea to understand how any fund works and the potential risks.
What’s the Difference Between Large Cap and Small Cap Stocks?
You may see recommendations to invest a portion of your money into “large cap” and “small cap” stocks.
These terms indicate the company size, also known as market capitalization.
There are several factors to look at besides the stock’s share price when researching stocks.
Large cap stocks tend to have more stable share prices in their industry and are well-known companies. Examples of large cap stocks are Amazon, Apple, Google and Walmart.
Small cap stocks are more volatile yet they can have high growth potential. These stocks may become the next Amazon, Apple or Google. For now, they may provide parts or services to large cap stocks and don’t necessarily directly compete with them.
A stock share value doesn’t indicate the size of a company. But you can multiply the current share price by the total number of outstanding shares to determine if the company is a large, mid or small cap stock.
You can also use these market cap guidelines:
- Large cap stocks: $10 billion or more
- Mid cap stocks: Between $2 billion and $10 million
- Small cap stocks: $2 billion or less
If you currently invest in an S&P 500 index fund, the fund invests in 500 of the largest large cap stocks.
Investing in a Russell 2000 index fund lets you get exposure to 2,000 small caps and mid caps.
Growth Stocks vs Value Stocks
Another way to decide which stocks to invest in is by screening growth and value stocks.
Growth stocks tend to have rising sales volumes, price-to-earnings (P/E) ratios and increasing projected volumes. These stocks may also be in growing industries. Another common trait is having little or no dividend as they reinvest their profits into company growth.
Some well-known large-cap growth stocks include:
These companies have seen above-average rising share prices in the past few years and gain market share within their industries.
Value stocks tend to be stocks that are currently out of favor. They may be trading near 52-week lows, have a low P/E ratio or slow growth prospects. These stocks can be more likely to offer a dividend but companies with an unhealthy balance sheet may not pay dividends.
During the 2020 pandemic, travel and oil stocks were considered value plays because people were favoring other industries instead.
Examples of well-known value companies include:
- JPMorgan Chase
- Proctor & Gamble
- Johnson & Johnson
- Walt Disney
These are well-established companies that might earn steady profits but don’t have rapidly rising share prices like growth stocks. Value stock share prices can be more stable during a market correction because they tend to be less volatile.
Active and passive stock funds may focus on either growth or value-type stocks instead of investing in an entire index.
A large cap growth fund, for example, focuses on the largest companies with that are growing. In 2021, growth industries might be digital technology, biotechnology or clean energy.
Meanwhile, a large cap value stock looks for holds that have below average share prices or less volatile share prices.
How to Start Investing in Stocks (Trading for Beginners)
It’s easier than ever to start investing in stocks as most online stock brokers are fee-free and have mobile apps. Below is a step-by-step guide to buy stocks.
Individual Stocks vs Stock Funds
One of the first decisions to make is whether to invest in individual stocks or stock funds. If you’re investing your first $1,000, index funds can be a better option as you get instant diversification.
Many stock trading investors only invest is stocks by buying funds for their entire investing career.
Note: some experts say that a good rule of thumb for investing in stocks is to have three months worth of living expenses in your trading account.
Once you’re properly diversified, you can start to invest in individual stocks too.
It’s important to ask this question upfront to pick the right online broker. Some brokers only let you invest in funds.
If you plan on investing in stock funds and individual stocks, initially choosing a brokerage firm that offers both can save you the headache of swapping brokerages in the future.
Be sure to never overload in a single stock when you’re first starting out. Begin with a minimal position until you feel more comfortable, then look into other stocks.
What are Mutual Funds?
Before we end this discussion on stock market investments, let’s discuss mutual funds since this is a common question among first-time investors. Mutual funds are how the majority of investors build up their retirement accounts and increase their retirement savings.
Think of mutual funds as basically a pool of money (funds) from a group of investors that allow them to invest in a wide variety securities, such as stocks, bonds, commodities or other assets in an investment portfolio.
A mutual fund can be thought of as a box of investments. When you invest in a mutual fund you buy a share of the box and now own a small fraction of the group of investments in that fund.
This allows the investors to receive shares as a form of ‘units’. They are generally managed by a human investment manager or financial advisors, as a fund manager, that have expertise and experience in this area.
Mutual funds are a great way to diversify your investment portfolio and can be a useful investment for beginners and experienced investors alike.
Many employees of larger companies have an employer-sponsored retirement plan, usually in the form of a 401k. These typically consist of multiple mutual funds and have penalties and other fees if you pull money from these accounts before retirement.
For first-time investors (“beginner investors”), it might be wise to check out low-cost mutual funds.
Choosing to go the route of a mutual fund might not be one of the riskier investments that exist, but like a real estate investment there can be risks involved and you can lose all of your initial investment if you do not do your due diligence.
Choose an Online Broker
Most online brokerages offer free stock trades and don’t charge monthly account fees and trading commissions, unlike traditional brokers, with many self-help tools that make online investment a breeze.
There are several factors to consider when choosing an online broker:
- Account options: Taxable brokerage account, traditional IRA, Roth IRA, robo-advisor
- Investment options: Individual stocks, stock index funds, options trading
- Brokerage fees: Trade commissions, account service fees
- Research tools: Charting tools, stock trading simulator, analyst reports
Depending on your investing preferences, you may also join a brokerage that offers other special features. Some options include a fully-automated robo-advisor, fractional investing and in-depth educational tools to learn to invest in stocks.
It’s also important to compare the potential brokerage management fees and account minimums. Many micro-investing apps and traditional online brokers no longer charge trade commissions to buy or sell stocks and stock funds, unlike most major brokerage firms.
Some brokers require a minimum initial account deposit to open taxable investment accounts or retirement accounts.
Here are some brokers to consider that have extensive investment options for self-directed investors.
Fidelity is one of the largest and oldest traditional brokerages, known for their equity investments. It’s also one of the better discount brokers online. You can open a taxable or a retirement account for free and with a $0 initial deposit.
Key features include:
- Fractional investing for most stocks and ETFs (Fidelity mobile app only)
- Fee-free Fidelity ZERO stock index funds (no trading fee)
- Extensive research tools
- Fidelity Go robo-advisor
You can open self-directed brokerage accounts or use Fidelity Go if you want a fully-automated robo-advisor.
They also offer US and international trading of stock index funds with no expense ratios when you buy Fidelity ZERO funds. The minimum initial investment is $1 for these funds.
Long-term investors that want fractional investing may like M1 Finance. Investment options include individual stocks, ETFs and premade portfolios.
What makes M1 Finance different than other investing apps is how you build your portfolio. You can assign a target allocation to each portfolio holding.
With each new purchase, M1 automatically buys more shares of underperforming assets with its “dynamic rebalancing” feature. Unlike a fully-automated robo-advisor, M1 Finance doesn’t sell any shares unless you request a manual rebalance.
The minimum initial deposit is $100 for taxable accounts and $500 for IRAs. Subsequent investments only require $25 with commission-free trades.
M1 Finance only has one daily trading window at 9:30 am Eastern Standard Time when the stock market opens when all open buy and sell orders execute.
You won’t want to use M1 Finance if you want to trade stocks on-demand or plan on doing short-term swing and day trading. You will want to use a broker that lets you offer market and limit orders that let you trade stocks at any time the stock market is open.
Betterment is a fully-automated robo-advisor that requires $0 to start investing in a taxable or retirement account. This investing app recommends a portfolio of stock and bond index funds based on your goals and risk tolerance. Using robo-advisors allow complete investment management with lower fees.
The robo-advisor automatically rebalances your portfolio and can use tax-loss harvesting to minimize your taxable investment gains. The annual advisory fee is 0.25%, which includes the trade fees, making this a great investment platform.
It’s time to buy your first stock, after opening your investment account(s). Your investment options are similar for most investing apps.
Here is a quick rundown of which stocks you might buy. It’s important to research each investment option to understand the potential risks and rewards. You can also look for investments that fit your investment goals and a model portfolio.
Stock Index Funds
Stock index funds and bond index funds can be the easiest way to invest in multiple stocks at once. For example, investing $100 into an S&P 500 index fund give you exposure to hundreds of stocks with one investment.
There are stock index funds for these indexes:
- S&P 500
- Russell 2000
- Developed international stocks
- Emerging markets
Target-Date Retirement Funds
If you don’t want to rebalance your stock portfolio or pay the advisory fees to use a robo-advisor, consider target-date retirement funds.
You can choose a fund nearest your planned retirement date. As retirement approaches, the fund holds more bonds to avoid stock market volatility.
You can buy a sector ETF to get extra exposure to a specific industry. Some options include:
- Clean energy
- Consumer staples
- Gold and precious metals
- Real estate
Sector ETFs can be more cost-effective to buy multiple stocks in the same sector. These funds can also be more diversified than only buying a couple of stocks if you’re not sure which companies to buy.
Buying individual stocks is also a good option if you want to invest in a specific company. For example, you may focus on investing in industry leaders that have less volatile share prices than the competitors.
Another advantage of buying individual stocks is buying high dividend stocks. You will want to make sure the dividend is sustainable.
Choosing a broker that offers fractional investing makes it easier to buy individual stocks and maintain a diversified investment portfolio.
Rebalance Your Portfolio
It’s also important to routinely monitor and rebalance your portfolio. You want to make sure your portfolio aligns with your investment strategy and doesn’t become too aggressive or too conservative.
You may also decide to sell assets that no longer fit your investment strategy.
Advantages of Investing in Stocks
- Can earn higher investment returns than bonds or bank savings accounts
- Many investment options
- Low investment costs
Disadvantages of Investing in Stocks
- Share prices can be volatile
- Not every stock or stock fund pays dividends
- May need to hold for several years to earn a profit
Investing in stocks is the primary way most people save for retirement and achieve financial independence during their working years. Stock gains can outpace inflation and earn more income than interest-bearing bonds and bank investments.
As you approach the time to access your investments, you may shift to less-risky assets that are less volatile and can earn a fixed income.
Due to the natural volatility of stocks, it’s always important to perform extensive research, diversify and only invest money you can afford to lose if you need to access to cash.
If you’re investing for retirement be sure to not put all your money at risk and make smart investment choices. Use extensive research to increase your investment performance.
Also, if you’re still feeling uncomfortable with using investment websites like those mentioned above, you can reach out to full-service brokers or an investment advisor to help guide you along the way. CreditBrite does not offer brokerage services or advisory, nor do/will we offer investment advice on any stocks or securities.