How to invest in stocks as a beginner
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Thinking about putting some of your money into stocks? Investing in stocks is a great way to build long-term wealth and make your money work for you. However, the stock market can be a sometimes confusing and daunting place, especially if you’re a beginner. Knowing which stocks to buy and how to monitor and measure your returns takes both research and practice.
With that in mind, let’s dive into what stocks are, how they work, and how to get started investing as a beginner.
What is a stock?
Essentially, a stock is a piece of a company that you can buy and sell. When you own a company’s stock, you own a piece of the company.
A stock is the actual asset in which you invest, whereas a share refers to the unit of measurement for that asset. People who have invested in a company and stand to benefit from future profits are called shareholders.
Stock is sold on an exchange. There are stock exchanges all over the world, but the majority of investors in the U.S. buy and sell stock on the New York Stock Exchange (NYSE), which is the largest exchange in the country.
The stock market refers to all the activity that happens on stock exchanges collectively.
How stocks work
Stock prices reflect the perceived value of a company, as well as its actual growth or decline. Growing companies usually look better to investors because their stock values will probably increase over time.
There's a higher demand for companies that are doing well, which can raise their stock prices. When a company struggles, its share price generally goes down.
Making money off stocks
Owning stock is an investment, not liquid cash. This means you cannot spend the money you invest into stocks on expenses, shopping, or other everyday needs.
Stock investments may take years to make a return on your money, if they do at all. Make no mistake—investing is a risk. But, you can offset some of this risk by learning as much as you can about both the market and the companies you invest in.
You’re never guaranteed to break even, let alone get a return on your investment. That being said, investing also offers a great opportunity to get a significant return on your money under the right circumstances.
There are two ways to make money off stocks you've purchased.
If a stock you own increases in value and goes up in price, you can sell it for a profit.
As a shareholder, you may be entitled to dividends. Dividends are profits that you earn based on the percentage of your ownership of a company through your stocks, and are generally received at the end of each financial quarter.
6 steps on how to invest in stocks
Ready to invest? After doing your due diligence, start with money you’re comfortable investing, at least until you get the swing of things. You’ll need some initial cash to spend and your bank account information handy.
Here's what’s next.
1. Choose an online brokerage and open an account
Stockbrokers act as middlemen between companies selling shares and investors buying them.
In the past, investors hired stockbrokers to do buying and selling for them. Now, most brokerage services can be done online without paying a professional to advise and manage your collection of stocks, also known as a portfolio.
Find a manageable investment minimum.
Brokerages often require an investment to get started, although there are many that don’t.
Check commissions costs and management fees.
Brokerage services charge you fees for actions you take in your account. Commissions costs charge you per trade or share sold, and management fees are charged annually as a cost to run the account. Make sure to compare the fees and costs before choosing your brokerage.
Look for promotions.
Like banks, brokerage services run sign-up specials like cash bonuses or periods of free portfolio management.
To set up your account and get started, you'll need to provide ID and connect a form of payment.
2. Decide what you want to buy
Next, you'll need to choose the stock you want to buy. It may be helpful to read public earnings reports and recent news to see if you can judge a company’s growth potential.
Also, consider the industry, how the company makes money, as well as the age and relative stability of the business. Choose companies you feel good about investing in and understand—after all, you're buying a little piece of their future.
3. Choose how much to spend
Stock prices can range from under $50 to thousands of dollars apiece. Don’t feel pressure to spend a lot. You can start by buying just a single share and going from there.
As we said before, start with an amount you’re comfortable with and can stand to lose. Once you get the swing of things, you can determine whether or no you want to invest more.
4. Place your order
When you’re ready to purchase a stock, you’ll be asked for your order type.
Starting out, it may be helpful to use market orders. A market order means you want to buy or sell a stock immediately at the best available price.
5. Set goals and wait for results
Your investments will perform best if left alone for several years, but you can set goals for your money in the meantime. Your brokerage service will routinely report details on your stock portfolio, including which stocks make high returns.
Many new investors utilize a robo-advisor, which is basically a computer program that automatically conducts and optimizes trades based on market conditions. One benefit of a robo-advisor is that you know it’s always keeping your money working, or at least staying on top of what’s going on in the market.
6. Get your money and pay taxes
Selling stock is about minimizing losses and improving returns. It’s a best practice to hold new stock for about five years before assessing whether to sell.
If you do decide to sell, your brokerage initiates a regulated three-day waiting period, then you’ll generally receive funds via direct deposit (if connected to your broker).
If you made money on the sale, you’re required to pay capital gains tax, or a percentage of your total profit. The amount you’ll pay depends on your income bracket.
Investing in stocks can be overwhelming when you’re starting out. It’s important to keep in mind that investing is always a risk, so never invest more than you can stand to lose. And remember, more research will never hurt you. Even if you’re a beginner, having an active interest in smart investing clearly represents the desire to better your financial future, so in that regard, props to you!
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