How to Start Investing in Stocks: A Beginner's Guide



Investopedia uses cookies to provide you with a great user experience. By using Investopedia, you accept our use of cookies. x Education General Dictionary Economics Corporate Finance Roth IRA Stocks Mutual Funds ETFs 401(k) Investing/Trading Investing Essentials Fundamental Analysis Portfolio Management Trading Essentials Technical Analysis Risk Management Markets News Company News Markets News Trading News Political News Trends Popular Stocks Apple (AAPL) Tesla (TSLA) Amazon (AMZN) AMD (AMD) Facebook (FB) Netflix (NFLX) Simulator Simulator Create an Account Join a Game My Simulator My Game Create a Game Your Money Personal Finance Wealth Management Budgeting/Saving Banking Credit Cards Home Ownership Retirement Planning Taxes Insurance Reviews & Ratings Best Online Brokers Best Savings Accounts Best Home Warranties Best Credit Cards Best Personal Loans Best Student Loans Best Life Insurance Best Auto Insurance Advisors Your Practice Practice Management Continuing Education Financial Advisor Careers Investopedia 100 Wealth Management Portfolio Construction Financial Planning Academy Popular Courses Investing for Beginners Become a Day Trader Trading for Beginners Technical Analysis Courses by Topic All Courses Trading Courses Investing Courses Financial Professional Courses Investing Affluent Millennial Investing Survey How to Invest with Confidence Investing Essentials Portfolio Management Financial Technology & Automated Investing Fundamental Analysis Alternative Investments Sustainable Investing Stocks Mutual Funds ETFs Bonds Commodities Markets Cryptocurrency Brokers Laws & Regulations See All Investopedia Investing

How to Start Investing in Stocks: A Beginner s Guide

FACEBOOK TWITTER LINKEDIN By Chad Langager Updated Apr 7, 2020 Table of Contents Expand What Kind of Investor Are You? Online Brokers Robo-advisors Investing Through Your Employer Minimums to Open an Account Commissions and Fees Mutual Fund Loads (Fees) Diversify and Reduce Risks The Bottom Line

Investing is a way to set aside money while you are busy with life and have that money work for you so that you can fully reap the rewards of your labor in the future. Investing is a means to a happier ending. Legendary investor Warren Buffett defines investing as "…the process of laying out money now to receive more money in the future."   The goal of investing is to put your money to work in one or more types of investment vehicles in the hopes of growing your money over time.

Let s say that  you have $1,000 set aside , and you re ready to enter the world of investing. Or maybe you only have $10 extra a week, and you d like to get into investing. In this article, we ll walk you through getting started as an investor and show you how to maximize your returns while minimizing your costs.

Key Takeaways

Investing is defined as the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. Unlike consuming, investing earmarks money for the future, hoping that it will grow over time. Investing, however, also comes with the risk for losses. Investing in the stock market is the most common way for beginners to gain investment experience.

What Kind of Investor Are You?

Before you commit your money, you need to answer the question, what kind of investor am I? When opening a brokerage account, an online broker like Charles Schwab or Fidelity will ask you about your investment goals and how much risk you re willing to take on.

Some investors want to take an active hand in managing their money s growth, and some prefer to "set it and forget it." More "traditional" online brokers, like the two mentioned above, allow you to invest in stocks, bonds, exchange traded funds (ETFs), index funds, and mutual funds. 

Online Brokers

Brokers are either full-service or discount. Full-service brokers, as the name implies, give the full range of traditional brokerage services, including financial advice for retirement, healthcare, and everything related to money. They usually only deal with higher-net-worth clients, and they can charge substantial fees, including a percent of your transactions, a percent of your assets they manage, and sometimes a yearly membership fee. It s common to see minimum account sizes of $25,000 and up at full-service brokerages. Still, traditional brokers justify their high fees by giving advice detailed to your needs.

Discount brokers used to be the exception, but now they re the norm. Discount online brokers give you tools to select and place your own transactions, and many of them also offer a set-it-and-forget-it robo-advisory service too. As the space of financial services has progressed in the 21st century, online brokers have added more features, including educational materials on their sites and mobile apps.

In addition, although there are a number of discount brokers with no (or very low) minimum deposit restrictions, you may be faced with other restrictions, and certain fees are charged to accounts that don t have a minimum deposit. This is something an investor should take into account if they want to invest in stocks.

Robo-advisors

After the 2008 Financial Crisis, a new breed of investment advisor was born: the robo-advisor . Jon Stein and Eli Broverman of Betterment are often credited as the first in the space.   Their mission was to use technology to lower costs for investors and streamline investment advice.

Since Betterment launched, other robo-first companies have been founded, and even established online brokers like Charles Schwab have added robo-like advisory services. According to a report by Charles Schwab, 58% of Americans say they will use some sort of robo-advice by 2025.   If you want an algorithm to make investment decisions for you, including tax-loss harvesting and rebalancing, a robo-advisor may be for you. And as the success of index investing has shown, if your goal is long-term wealth building, you might do better with a robo-advisor.

Investing Through Your Employer

If you’re on a tight budget, try to invest just 1% of your salary into the retirement plan available to you at work. The truth is, you probably won t even miss a contribution that small.

Work-based retirement plans deduct your contributions from your paycheck before taxes are calculated, which will make the contribution even less painful. Once you re comfortable with a 1% contribution, maybe you can increase it as you get annual raises. You won t likely miss the additional contributions. If you have a 401(k) retirement account at work, you may already be investing in your future with allocations to mutual funds and even your own company s stock.

Minimums to Open an Account

Many financial institutions have minimum deposit requirements. In other words, they won t accept your account application unless you deposit a certain amount of money. Some firms won t even allow you to open an account with a sum as small as $1,000.

It pays to shop around some and to check out our broker reviews before deciding on where you want to open an account. We list minimum deposits at the top of each review. Some firms do not require minimum deposits. Others may often lower costs, like trading fees and account management fees, if you have a balance above a certain threshold. Still, others may give a certain number of commission-free trades for opening an account.

Commissions and Fees

As economists like to say, there s no free lunch . Though recently many brokers have been racing to lower or eliminate commissions on trades, and ETFs offer index investing to everyone who can trade with a bare-bones brokerage account, all brokers have to make money from their customers one way or another. 

In most cases, your broker will charge a commission every time that you trade stock, either through buying or selling. Trading fees range from the low end of $2 per trade but can be as high as $10 for some discount brokers. Some brokers charge no trade commissions at all, but they make up for it in other ways. There are no charitable organizations running brokerage services.

Depending on how often you trade, these fees can add up and affect your profitability. Investing in stocks can be very costly if you hop into and out of positions frequently, especially with a small amount of money available to invest.

Remember, a trade is an order to purchase or sell shares in one company. If you want to purchase five different stocks at the same time, this is seen as five separate trades, and you will be charged for each one.

Now, imagine that you decide to buy the stocks of those five companies with your $1,000. To do this, you will incur $50 in trading costs—assuming the fee is $10—which is equivalent to 5% of your $1,000. If you were to fully invest the $1,000, your account would be reduced to $950 after trading costs. This represents a 5% loss before your investments even have a chance to earn.

Should you sell these five stocks, you would once again incur the costs of the trades, which would be another $50. To make the round trip (buying and selling) on these five stocks would cost you $100, or 10% of your initial deposit amount of $1,000. If your investments do not earn enough to cover this, you have lost money by just entering and exiting positions.

If you plan to trade frequently, check out our list of brokers for cost-conscious traders .

Mutual Fund Loads (Fees)

Besides the trading fee to purchase a mutual fund , there are other cost associated with this type of investment. Mutual funds are professionally managed pools of investor funds that invest in a focused manner, such as large-cap U.S. stocks.

There are many fees an investor will incur when investing in mutual funds. One of the most important fees to consider is the management expense ratio (MER), which is charged by the management team each year, based on the number of assets in the fund. The MER ranges from 0.05% to 0.7% annually and varies depending on the type of fund. But the higher the MER, the more it impacts the fund s overall returns.

You may see a number of sales charges called loads when you buy mutual funds. Some are front-end loads, but you will also see no-load and back-end load funds. Be sure you understand whether a fund you are considering carries a sales load prior to buying it. Check out your broker s list of no-load funds and no-transaction-fee funds if you want to avoid these extra charges.

In terms of the beginning investor, the mutual fund fees are actually an advantage relative to the commissions on stocks. The reason for this is that the fees are the same, regardless of the amount you invest. Therefore, as long as you meet the minimum requirement to open an account, you can invest as little as $50 or $100 per month in a mutual fund. The term for this is called dollar cost averaging (DCA) , and it can be a great way to start investing.

Diversify and Reduce Risks

Diversification is considered to be the only free lunch in investing. In a nutshell, by investing in a range of assets, you reduce the risk of one investment s performance severely hurting the return of your overall investment. You could think of it as financial jargon for "don t put all of your eggs in one basket."

In terms of diversification, the greatest amount of difficulty in doing this will come from investments in stocks. As mentioned earlier, the costs of investing in a large number of stocks could be detrimental to the portfolio. With a $1,000 deposit, it is nearly impossible to have a well-diversified portfolio, so be aware that you may need to invest in one or two companies (at the most) to begin with. This will increase your risk.

This is where the major benefit of mutual funds or exchange-traded funds (ETFs) come into focus. Both types of securities tend to have a large number of stocks and other investments within the fund, which makes them more diversified than a single stock.

The Bottom Line

It is possible to invest if you are just starting out with a small amount of money. It s more complicated than just selecting the right investment (a feat that is difficult enough in itself) and you have to be aware of the restrictions that you face as a new investor.

You ll have to do your homework to find the minimum deposit requirements and then compare the commissions to other brokers. Chances are you won t be able to cost-effectively buy individual stocks and still be diversified with a small amount of money. You will also need to make a choice on which broker you would like to open an account with.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Forbes. " Warren Buffett: Why Stocks Beat Gold and Bonds ." Accessed Sept. 26, 2019.

The Wall Street Journal. " $10 Billion Robo-Adviser Betterment Flourishes as Chief Learns to Let Go ." Accessed Sept. 19, 2019.

Charles Schwab. " The Rise of Robo: Americans’ Perspectives and Predictions on the use of Digital Advice ," Page 3. Accessed Sept. 26, 2019.

Compare Accounts Advertiser Disclosure × The offers that appear in this table are from partnerships from which Investopedia receives compensation. Provider Name Description

Related Articles

Penny Stock Trading

I Have Only $500 To Invest. Am I Limited To Buying Only Penny Stocks?

Brokers

Best Online Brokers

Personal Finance

The Ultimate Guide to Financial Literacy

Brokers

Best Online Stock Brokers for Beginners

Brokers

Best IRA Accounts

Brokers

Best Brokers for ETFs

Partner Links

Related Terms

How Brokerage Companies Work A brokerage company's main responsibility is to be an intermediary that puts buyers and sellers together in order to facilitate a transaction. more Brokerage Account A brokerage account is an arrangement that allows an investor to deposit funds and place investment orders with a licensed brokerage firm. more Brokerage Fee Definition A brokerage fee is a fee charged by a broker to execute transactions or provide specialized services. more May Day Definition and History May Day refers to May 1, 1975, when brokerages changed from a fixed commission for securities transactions to a negotiated one. more Deep Discount Broker Definition A deep discount broker handles buys and sales of securities for customers on exchanges at even lower commission rates than regular discount brokers. more Do-It-Yourself (DIY) Investing Do-it-yourself (DIY) investing is an investment strategy where individual investors choose to build and manage their own investment portfolios. more About Us Terms of Use Dictionary Editorial Policy Advertise News Privacy Policy Contact Us Careers California Privacy Notice # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z Investopedia is part of the Dotdash publishing family.


Vestibulum venenatis

Fermentum nibh augue praesent a lacus at urna congue rutrum.

Etiam posuere

Praesent scelerisque

Vivamus fermentum nibh in augue praesent urna congue rutrum.

Etiam posuere

Donec dictum metus

Vivamus fermentum nibh in augue praesent urna congue rutrum.

Etiam posuere

Mauris vulputate dolor

Rutrum fermentum nibh in augue praesent urna congue rutrum.

Etiam posuere