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How to Start Investing in Stocks

By Krystal Etienne · September 29, 2021 · 9 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How to Start Investing in Stocks

Stocks are units, or shares, of ownership in a company. To start investing in stocks, you would find a company that you like and think might grow in value — and then purchase its stock. If the price of the stock rises, you could sell your shares and potentially make a profit — or not, if it doesn’t.

Of course, when it comes to investing for beginners you need to learn some basics in order to invest in stocks and do it well.

Thanks to technology — and handy step-by-step guides like this one — you can get started by using an app or online brokerage account, and learn as you go. It has never been easier to build investing confidence as you gain experience.

Here, a step-by-step guide for those who want to start investing in stocks now.

How to Choose an Investing Account

How to start investing in stocks? There are different ways that might make sense for you, depending on your comfort level and your goals.

A brokerage firm. The first option is through a brokerage account. A brokerage account gives you a platform on which to buy and sell securities. Brokerage firms will typically charge a fee for the service either in the form of a per-trade fee or a per-security commission. A brokerage often offers additional services such as investment advice, portfolio management, as well as banking. Typically, full-service brokerages offer more services but at higher overall costs, while discount brokerages maintain scaled-down services with lower overall costs.

An online brokerage. If you feel confident or curious enough about how to start investing to try it on your own, opening an account with an online broker could be a great place to start. Many online brokers offer the convenience of an app, which can make investing simpler and more streamlined.

A robo-advisor. If you’re interested in investing, but you’d like some help setting up a basic portfolio, opening a robo-advisor account might work for you. A robo account uses a sophisticated computer algorithm to help you pick investments, and then manage them. These automated accounts generally don’t offer individual stocks, but rather a mix of funds (more on stocks vs. funds below). Nonetheless, it’s a way to become more familiar with the investing world.

A retirement account. Whether you have access to an employer-sponsored account like a 401(k) or you’ve set up a traditional or Roth IRA, a retirement account is typically held at a bank or financial institution that may offer you a range of investment choices, including individual stocks. You may also have access to tutorials, advisors or other resources that can help you learn more about how to start investing in these accounts.

No matter where you decide to open your investment account, be sure to ask if there are any investment fees associated with the account. Although investment costs can be quite low — and you can trade stocks without paying a commission — any investment fee can add up over time and ultimately reduce the amount you may earn from your investments.

How to Start Investing in Stocks: Know Your Options

Investing for beginners is really about understanding a few fundamentals. While stocks are shares in a single company, funds are set up like baskets or big investment portfolios that contain dozens or even hundreds of different stocks or other securities (e.g. bonds, commodities). When you think about how to start investing in stocks, remember that stocks and funds each offer their own potential advantages and disadvantages.

1. Understanding Stocks

In general, the whole reason for investing is to earn money. In investor lingo, investment earnings can be called gains, profits, or returns. Most people use the word “returns” to mean a gain, but there is also such a thing as “negative returns,” which refers to losses.

Rate of return refers to the net gain or loss of an investment over a certain time period, expressed as a percentage of the investment’s initial cost.

With stocks, you can earn money in two ways: price appreciation and dividends. Price appreciation is when the price (the value) of a stock increases over time. For example, if a stock’s value increases from $10 to $12, that’s a $2 or 20% profit.

How to get into stocks? There are two types of stocks: common stocks and preferred stocks. Common stocks are what you’re probably thinking of when you consider investing in the stock market. It’s essentially a piece of a company referred to as a “share” that gives you voting rights within that company (usually one vote per share), and may provide dividends as the company grows.

Dividends are a form of profit sharing. When a company pays dividends, it’s usually a quarterly or monthly cash distribution or payment (although in some cases you might earn additional company stock). You can learn more about dividend-paying stocks here, but the advantage is that these regular payouts could provide you with some income.

Preferred stocks, on the other hand, don’t come with voting rights. However, shareholders of preferred stocks are the first to receive dividend payouts.

If you choose to invest in individual stocks and they pay out a dividend, you will need to decide how you would like to handle the dividend.

One option is to simply transform the dividends into cash and use it to supplement your income. This strategy is generally used by older investors rather than younger ones.

You could also use the dividends to purchase different security or additional shares of the security that generated it.

If you choose the latter, you may want to utilize a Dividend Reinvestment Program (DRIP). A DRIP allows you to repurchase shares (including fractions of shares) as dividends are generated. Utilizing a DRIP is typically commission-free and ensures that you are fully invested in the stock. Most brokerages offer DRIP services.

Another way to invest in stock is by purchasing directly through the company itself or through its designated transfer agent. This will allow you to hold the shares in your name (rather than the name of a brokerage, also known as a “street name”). But you can expect higher costs and less convenience. Most publicly traded companies list their transfer agent on the “investor relations” section of their website.

2. How to Buy Individual Stocks

This method requires a fairly significant amount of research into individual stocks themselves. If you go this route, you might want to do a deep dive into a company’s inner workings to understand the company’s overall valuation and the price the stock is currently trading at.

Even though we’re talking about investing for beginners, you might want to get comfortable reading a company’s balance sheet and other financial statements. All public companies are required to file this information with the Securities and Exchange Commission (SEC), so you won’t have trouble finding them.

One of the most basic metrics for understanding a stock’s value as compared to company profits is its price-to-earnings (PE) ratio. Others include the price-to-sales (PS) ratio and the price/earnings-to-growth (PEG) ratio, which may be helpful for companies that have little to no profits but are expanding their businesses quickly.

If there’s a company whose share price is out of an investor’s reach, one possibility is to invest via fractional shares, which is like buying a slice of a company’s stock instead of the whole share.

One advantage of owning individual stocks is that you can get direct exposure to a company you believe has the potential to grow. The downside, of course, is that investing doesn’t come with any guarantees, and the value of your stock could also decline.

4. Investing in Funds

When you’re thinking about how to get into stocks, another option is to purchase an investment fund such as a mutual fund or exchange-traded fund (ETF). A fund is a basket of various assets, like stocks or bonds, that can offer a more stable and simplified investment experience at a lower cost.

While there are some structural differences, mutual funds and ETFs serve a similar purpose — to help investors achieve diversified exposure to a particular market sector, like the biggest companies in the U.S. or green energy companies or consumer goods.

Because funds contain a multitude of stocks, the value of the funds you buy tends to rise and fall according to the securities it holds in its portfolio. So when you buy a share of a fund, like a share of stock, the value (price) will go up or down.

Index funds, in particular, have become increasingly popular because of their low-cost structure and for generally outperforming their actively managed counterparts. An index fund, whether an index mutual fund or an index ETF, is designed to invest in an index that tracks a certain part of the market.

For example, an S&P 500 index fund invests in 500 of the largest companies in the United States — and thus reflects the constituents of the S&P 500 index itself. With the purchase of just this one fund, an investor is likely to see returns that mirror the 500 companies in the index in aggregate.

A benefit to investing in stocks via funds is that you can avoid some of the risk of being invested in individual stocks that may not perform well. Additionally, index funds may be a more affordable way to invest in the stock market.

While most index funds do carry an annual management fee (called an expense ratio), this can be quite low compared to managed mutual funds.

Whether investing in individual stocks or funds, you may want to think about the level of diversification that feels right for you. There is no consensus about the right way to diversify investments. For one person, proper diversification could mean owning 20 stocks. For another, it could mean owning the “whole” market via a handful of mutual funds.

Just remember that anytime your investments are focused on narrower areas of the market, such as owning only a handful of individual stocks or only investing in certain industries (e.g. healthcare, telecomm, pharmaceuticals), you may be taking on additional risk. But with that risk may come the potential for added reward.

FAQs

Are stocks a good investment for beginners?

Investing for beginners can seem overwhelming, and because of this stocks can be a great starting point. Other asset classes, like bonds or commodities, can be quite complicated even starting out. But investing in stocks can be as straightforward as opening an account, selecting the company you’re interested in, and buying one or more shares.

These days, as noted above, you can also invest in fractional shares of company stocks. This allows you to purchase part of a share, if the cost of a full share is too high.

As you gain experience investing in stocks, you’ll be able to make use of more complex trading strategies, like options trading — or you may want to venture into different market sectors, or international stocks.

How should I decide where to invest my money?

It depends on your individual circumstances, but here are some factors to consider as you decide where to invest:

• Are you more confident online, navigating a DIY website or app, or do you think you might want some personal help? Make sure you pick a platform that has the services you want, and the same goes for a human advisor.

• What are the fees involved? As we mentioned above, there are many affordable options for investors today, so that’s an important question to ask, as investing costs impact your returns.

• How is the investing experience? You want to feel comfortable making trades, and that there are resources to help answer any questions.

• Does the platform give you access to the types of investments you want (e.g. ETFs, individual stocks, fractional shares, municipal bonds, crypto).

Can I invest if I don’t have much money?

Yes! In fact, these days it’s much easier to invest even if you only have a few bucks at a time.

Low trading fees. Look for investing apps and brokerages that offer low or no trading fees or commissions.

Fractional shares. These allow you to invest smaller amounts in a stock you like.

Invest in your 401(k). An employer-sponsored plan allows you to invest relatively small amounts, and the funds are deducted from your paycheck pre-tax, which effectively gives you more money to invest. If your employer also offers a matching contribution, that’s like getting free money.

What stocks should I invest in?

Again, this is a highly personal choice. But as noted earlier, doing research into the companies you’re considering is very important. The old saying to “invest in what you know” isn’t necessarily the best advice. You might love Company X, and you might use their products frequently, but your own preferences won’t help you analyze the company’s assets and liabilities and get a clear picture of how well Company X is really doing.

Is stock trading for beginners?

Absolutely. Sometimes the word “trading” can bring to mind certain high-stakes, fast-paced environments, where Wall Street traders are brokering big deals. While that world exists, so does the world of individual traders, many of whom are beginners like you. Anyone can start with a little money and a willingness to learn, and that can open up new opportunities.

The Takeaway

Investing in the stock market historically has been a way that some individuals could build personal wealth, and these days it’s never been easier for new investors who are thinking about how to get into stocks to get started. Whether you choose to work with a financial advisor or use an online broker or app, there are a number of ways to find a method that makes stock investing easy, fun, and potentially profitable. Of course, there are no guarantees, so that’s why it’s smart to take a step-by-step approach, start small if you prefer, do some research using the many resources available, and see what comes as you gain experience and confidence.

Investors can open an account with SoFi Invest® and start to buy and sell individual stocks, ETFs or fractional shares while paying commission. For those who are interested in investing in stocks through a more hands-off approach, the Automated Investing service builds, manages and rebalances portfolios at no SoFi management costs. Plus, SoFi Members have access to complimentary financial advisors who can answer questions for no additional fees.

Start investing with your SoFi Invest account today.


SoFi Invest®
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