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To trade stocks, you need to set clear investment goals, determine how much you can invest, decide how much risk you can tolerate, pick an account at a broker that matches your trading style, fund your stock account, and start trading.
Investing in stocks is a powerful way to grow your wealth over time. This beginner’s guide takes you through the essential steps to invest in stocks. Whether you have thousands set aside or can invest a more modest $25 a week, let’s get you started.
KEY TAKEAWAYS
- Investing in stocks and letting your money work for you is one way to grow your wealth.
- Investing involves a chance of losses. However, there are ways to lower your risk, though you can’t eliminate it altogether.
- New investors have never had so many resources for expert advice.
- Following these eight essential steps, you’ll learn how to set clear investment goals, choose the right stocks, and understand the basics of stock investing.
![A businessperson points at a stock chart on a computer screen while another follows along.](https://www.investopedia.com/thmb/m6i4rWzf6xwdcYAaqMG2VijlzuI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc():format(webp)/GettyImages-1751834114-dbed438a5a604136994315d8d8f93e91.jpg)
8-Step Guide to Investing in Stocks
Step 1: Set Clear Investment Goals
Begin by specifying your financial objectives. Clear goals will guide your investment decisions and help you stay focused. Consider both short-term and long-term goals, as they will affect your investment strategy.
You might have short-term goals like saving for a home or a vacation or have long-term objectives like securing a comfortable retirement or funding a child’s education. Your objectives depend on your life stage and ambitions. Younger investors tend to focus more on growth and long-term wealth accumulation, while those closer to retirement typically prefer generating income and capital preservation. The more precise you are, the better.
Tips for Setting Investment Goals:
- Be precise about your objectives: Instead of vague goals like “save for retirement,” aim for specific targets like “accumulate $500,000 in my retirement fund by age 50.”
- Determine your investment horizon: Assess how long you have to achieve each goal. Longer time horizons often allow for more aggressive investment strategies, while shorter ones may require more conservative approaches. The longer you give yourself, the less conservative you’ll need to be early on.
- Evaluate your finances: Be realistic about how much you can put toward your investment goals, considering your savings, regular income, and any other financial resources.
- Rank your goals: Most of us balance several goals at once, and we have to prioritize saving for a home down payment, paying for a wedding next year, or preparing for retirement based on urgency and importance. For example, saving for a down payment on a house might take precedence over planning a vacation.
- Adapt as life changes: The phrase financial planning is best taken as a verb, not a noun. It’s an ongoing process that should evolve with your needs and aspirations. You might fall in love or out of it, have many children or none of them, or realize your life’s work means moving cross country. Regularly review and adjust your goals as your life circumstances change.
The first step in any venture is the biggest, but by setting clear and precise investment goals, you’ll lay a strong foundation for building your investments. This clarity will help you navigate the stock market with confidence and purpose.
Step 2: Determine How Much You Can Afford To Invest
Pinpointing how much you can afford to put in stocks requires a clear-eyed assessment of your finances. This step helps ensure that you are investing responsibly without endangering your financial stability.
Tips for Determining Your Investment Amount:
- Review your income sources: Begin by listing all your sources of income. Check if your employer offers investment options with tax benefits or matching funds to amplify your investments.
- Establish an emergency fund: Ensure you have a solid financial foundation before investing. Solid does not mean perfect. This fund should cover a few months’ worth of major expenses, such as mortgage or rent payments and other essential bills.
- Pay off high-interest debts: Financial planners typically recommend paying down high-interest debts, such as credit card balances. The returns from investing in stocks are unlikely to outweigh the costs of high interest accumulating on these debts. Thus, scrutinize each of your debts similarly, weighing the interest payments against potential investment returns. Likely, your debts will have to come first.
- Create a budget: Based on your financial assessment, decide how much money you can comfortably invest in stocks. You also want to know if you’re starting with a lump sum or smaller amounts put in over time. Your budget should ensure that you are not dipping into funds you need for expenses.
Don’t worry if your funds are less than you would wish. You wouldn’t berate yourself for not being ready for a race on your first day of training; so, too, with investing. This is a marathon, not a sprint, and the journey is still ahead.
Two crucial points:
- Only invest money you can afford to lose.
- Never put yourself in a financially vulnerable position for the sake of investing.
Taking these seriously is what separates investing from gambling.
Step 3: Determine Your Tolerance for Risk
Understanding your risk tolerance is a cornerstone of investing. It helps you align your comfort level with the inherent uncertainties of the stock market and financial goals.
Tips for Assessing Your Risk Tolerance
- Self-assessment: Reflect on your comfort level with the ups and downs of the stock market. Are you willing to accept higher risks for potentially greater returns, or do you prefer stability even if that means potentially less in the end?
- Consider your time horizon: Your risk tolerance often depends on your investment timeline. Longer horizons allow for more risk since you have time to recover from potential losses. Shorter timelines typically require more conservative investments.
- Gauge your financial cushion: Assess your finances, including your savings, emergency fund, and other investments. A solid financial cushion can help you take on more risk.
- Align investments with risk levels: Choose stocks and other investments that align with your risk tolerance. Examples:
- Lower risk: Dividend stocks and bonds.
- Moderate risk: Midcap and large-capitalization stocks, index funds, and exchange-traded funds.
- High risk: Small-cap stocks, growth stocks, and sector-specific investments.
- Adjust over time: Your risk tolerance may change as your finances and goals evolve. Regularly reassess your risk tolerance and adjust your investment strategy accordingly.
By accurately determining your risk tolerance, you can build a portfolio that reflects your financial goals and personal comfort level, helping you navigate the stock market with more peace of mind.
Step 4: Determine Your Investing Style
Your investing style is crucial in how you approach stock investments. Whether you prefer a hands-on approach or a more passive strategy, understanding your style helps you choose the right investment methods and tools.
Everyone has a different relationship with money. Some prefer an active role, meticulously pouring over every last cell on their portfolio’s spreadsheets, while others opt for a set-it-and-forget-it approach. They trust their investments will grow over time if they just leave them alone.
Your style might evolve, but you’ll need to start somewhere, even if your choice isn’t set in stone.
Tips for Identifying Your Investing Style:
Begin with a self-reflection on whether you enjoy researching and analyzing stocks or prefer a more detached approach. Here are your main choices:
1. DYI investing: If you grasp how stocks work and have the confidence to head out with minimal guidance into the market, managing the trades yourself is one option. Even DIY, there are more and less active approaches:
- Active: You use your brokerage account to access various investments, including stocks, bonds, and other assets, and trade as you wish. You’ll set your goals and choose when to buy and sell.
- Passive: You use your brokerage account to buy shares in index ETFs and mutual funds. You still control which funds you purchase, but fund managers do the trading for you.