How To Invest in Stocks
Key Takeaways
- Investing in stocks can allow you to build wealth over time by carefully and strategically buying a diverse portfolio of assets and adding to them regularly.
- Automating your investments and using dollar-cost averaging can help reduce risk, build discipline and take the emotion out of investing.
- The most successful investors typically remain diversified, choose low-fee funds and stick to their plans rather than chasing trends or panic selling during market dips.
Investing in stocks smartly is one of the most effective ways to build wealth over the long term whether you’re looking to grow your retirement savings or build passive income. With a little education and a plan, beginners can start investing with more confidence — no Wall Street experience required. From choosing the right investment account to deciding between individual stocks, exchange-traded funds and index funds, the MarketWatch Guides team will show you how to get started, manage risk and invest strategically.
What Is Stock Investing?
Stock investing is buying shares of a company in the hope your money will grow. Companies sell shares (also known as stocks or equities), which are small percentages of ownership in a company, to raise money to grow their businesses. As shares of ownership, stocks can give you voting rights and rights to a company’s earnings.
You can buy individual shares of a company or invest in funds — such as mutual, index or exchange-traded funds — that give you ownership of many different company stocks. If a company grows and succeeds, your shares will increase in value. If the company doesn’t do well, your shares may decrease in value, and you could lose some or all of your initial investment.
The stock market is a collection of brick-and-mortar and online places where people buy and sell stocks and other investments. Famous stock exchanges include the New York Stock Exchange, the Nasdaq and the London Stock Exchange.
Different Ways To Invest in Stocks
There are several approaches to building a stock portfolio, and each is suited to different investing styles, goals and experience levels.
Individual Stocks
Investing in individual company stocks can provide more control over your investments. While individual stocks can increase in value much more than mutual funds, they can also decrease much more. This is because individual stocks represent the value of a single company, while mutual funds spread risk across a basket of companies, smoothing out volatility. For this reason, many experts recommend diversifying the number and type of individual stocks you own, or for automatic diversification, investing in mutual funds. Holding stocks in different industries can protect against large losses in a specific field.
Investing in individual stocks is best for people who have a lot of time and investing knowledge. This strategy tends to be more labor intensive since you should research each company to make sure it’s financially sound and monitor its performance.
Exchange-Traded Funds
An exchange-traded fund is a collection of stocks, bonds and other assets that pools money from many investors into one portfolio that tracks the performance of a benchmark such as the Nasdaq. Some actively managed ETFs have professional fund managers who trade these assets to attempt to outperform the benchmark. ETFs are traded throughout the day, so their prices can fluctuate.
ETFs charge a fee known as an expense ratio, or the total cost of managing and running the funds, but these fees tend to be lower than mutual funds’ fees. The average expense ratio for an actively managed ETF was 0.44% in 2024, according to Investment Company Institute’s Trends in the Expenses and Fees of Funds report. So if you owned an ETF with that expense ratio, you’d pay $44 for every $10,000 invested. However, investing in ETFs requires less ongoing research than investing in individual stocks, as they’re diversified by design, so you won’t need to monitor their performance as carefully. They’re a good choice if you want to be a less hands-on investor.
Mutual Funds
A mutual fund, like an ETF, is a collection of stocks, bonds and other securities that pools many investors’ money in a portfolio that’s overseen by a portfolio manager. The main difference between mutual funds and ETFs is that while ETFs can have fluctuating prices as they’re traded throughout the day, mutual fund prices are set at the end of the trading day, so there’s less price fluctuation.
Like ETFs, mutual funds have expense ratios, which tend to be higher because mutual funds are often actively managed. According to the Investment Company Institute, the average expense ratio for hybrid mutual funds (which contain multiple asset types) was 1.2% in 2024. Mutual funds also require less ongoing research and monitoring than individual stocks, since they’re diversified by design. They can be a good choice if you’re interested in potentially outperforming the market while still being a relatively hands-off investor.
Index Funds
An index fund is a popular type of passively managed ETF or mutual fund that follows certain benchmarks, such as the S&P 500. Passively managed funds replicate the returns of certain benchmarks so they don’t need professional managers to oversee trading. Index funds purchase the stocks of every company in their benchmark index, and they’re automatically rebalanced. Because index funds aren’t actively managed, they tend to have very low fees (0.03% to 0.07%), but some brokerages offer index funds with no fees.
Index funds are good choices if you’re interested in a long-term investment strategy you can contribute to regularly and not need to check very often.
How To Choose the Right Investment Account
Choosing the right account can be as important as the types of investments you make. Different accounts offer different benefits, such as investment options and tax savings.
Taxable Brokerage Accounts
Taxable brokerage accounts are investment accounts you fund with after-tax dollars. These accounts offer an array of investment options, including individual stocks, mutual funds, index funds and ETFs. You can buy and sell stocks in these accounts at any time, making them super flexible, but you’ll be required to pay taxes on any gains for the year you sell.
In the U.S., if you keep an investment for a year or less, you’ll pay a short-term capital gains tax, usually equal to your ordinary income tax rate. If you sell investments after a year, you’ll typically pay a long-term capital gains tax of 0%, 15% or 20%, depending on your income and tax filing status.
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Retirement Accounts
To encourage saving for retirement, the U.S. government offers tax breaks on some types of investment accounts. Most retirement plans fall into two categories — 401(k) plans (and similar alternatives, such as 403(b) and 457(b) accounts) and individual retirement accounts, also known as IRAs. Retirement accounts tend to have more limited investment options, primarily mutual funds, index funds and ETFs.
These retirement accounts offer traditional and Roth varieties, which affect when they’re taxed. With traditional accounts, you won’t pay taxes on the money you contribute, but you’ll pay ordinary income tax on withdrawals. If you have a Roth account, you’ll make contributions with aftertax dollars, but you won’t pay taxes when you withdraw your money.
In most cases (with the exception of 457(b) plans), you have to wait until you’re 59 1/2 years old to withdraw your funds without paying a 10% penalty to the Internal Revenue Service. Retirement accounts also have annual contribution limits.
Understand Your Risk Tolerance Before Investing
Before you start investing, it’s best to understand your risk tolerance, or how much volatility and potential short-term loss you’re comfortable with. You can do this by taking a risk tolerance quiz and thinking about how you normally respond to big changes in the market. But don’t take too long to get started.
“A common mistake is waiting too long to start — analysis paralysis can be paralyzing,” Jacqueline Schadeck, a certified financial planner and host of the PBS show “My Money Mentors,” told MarketWatch Guides. “Start small, learn as you go and don’t try to time the market perfectly.”
Investing in the stock market is inherently risky. Unlike a CD or a high-yield savings account, your stock market portfolio is likely to rise and fall over time, although with a long-enough time horizon and diversified holdings, it’s likely to increase in value.
Your risk tolerance will likely change based on your age and goals. If you have many decades to make up for a hit to your investments, you may be willing to choose a riskier portfolio, such as one made up entirely of stocks. If you’d have a very hard time if the market crashed, consider balancing stocks with a healthy selection of bonds to help decrease the amount your portfolio could drop.
Also, be honest with yourself about your ability to withstand a large market loss. If there’s a large drop in the market and your portfolio loses 25% or more, will you be disciplined enough to not sell your stocks and wait until the market recovers? If not, you may need to consider less volatile investments, such as bonds or real estate.
“Educate yourself first,” Schadeck said. “Read about how the stock market works and understand the risks involved. Then decide what strategy works best for you.”
Step-by-Step Guide To Making Your First Investment
While investing may seem overwhelming, you can get started in a few steps and learn as you go.
1. Choose a Brokerage
There are many types of brokerages, from full-service brokers such as Merrill Lynch to low-cost brokers such as Fidelity and Vanguard to fintechs such as Robinhood. Most brokerages allow you to open and fund your account online, and many have 24/7 customer service to answer any questions during the process. Research each brokerage to see what it charges in fees, what educational tools it provides and how easy it is to trade on its platform.
2. Fund Your Account
When you open a brokerage account, you’ll typically need to link your bank account by entering your bank’s routing number and your account number. Some brokerages may use a secure third-party service to verify your information instantly, while others may make small test deposits you’ll need to confirm. Once your bank account is linked, you can initiate a transfer to fund your brokerage account, either as a one-time deposit or a recurring transfer.
3. Make Your First Trade
To buy a stock, mutual fund, index fund or ETF, log in to your brokerage account, search for the investment by name or ticker symbol and click the “buy” button. You’ll choose how many shares to purchase and select an order type — market order or limit order. A market order buys the asset immediately at the current market price. A limit order lets you set a maximum price you’re willing to pay, with the order only executing if the asset drops to that price. After confirming the details, submit your order and monitor your account to see when the transaction has been completed.
Tips for Successful Long-Term Investing
Long-term success in the stock market is very often more about discipline and strategy than luck. If you want your portfolio to grow over time, you’ll need to build good habits, avoid burnout or fear during market dips and stay focused on your long-term goals (decades, not months).
Invest Regularly
Investing in the market regularly can help you build good financial habits, reduce the impact of price volatility and reduce your average cost per share. This is called dollar-cost averaging, and it’s the act of investing a certain amount of money at regular intervals (such as each month, quarter or year) instead of investing a lump sum.
Diversify Your Portfolio
Make sure your portfolio has stocks or funds from a range of sectors (such as technology and health care), locations (such as the U.S. and international markets) and asset types (such as stocks, bonds and cash). Many experts recommend diversifying with around 30 to 40 individual stocks, although this is a very general rule of thumb. The more you’re able to diversify, the better protected you’ll be if there’s a drop in the market.
Rebalance Periodically
Rebalancing your portfolio is important as markets change. If you’ve decided on a 70/20/10 portfolio balance of 70% domestic index funds, 20% international index funds and 10% bond funds, you’ll need to buy and sell periodically as the market rises and falls to maintain those percentages. At the end of each year, look at your portfolio and sell any funds that create a higher percentage in one type of investment and use those proceeds to buy funds in investments whose percentages have dropped.
Robo-advisers manage your investments automatically, using algorithms to rebalance your portfolio based on your preferences. Some are managed entirely by a machine, while others have some human interaction. If you’re a new investor and want a more actively traded portfolio than with ETFs, mutual funds or index funds, then a robo-adviser might be right for you.
Avoid Common Investing Mistakes
Here are a few common investing mistakes to avoid:
Trying To Time the Market
It’s impossible to predict when a stock will be at its lowest or highest point. A Charles Schwab study showed that a person who invested their money immediately fared better over the long term than an investor who tried to time their investments.
Panic Selling
Avoid making emotional investing decisions, such as selling your stock in a panic if the market dips. Instead, stick to your investing guidelines. Markets drop and rise, and to reap the benefits of a market increase, you have to stay in the market.
Chasing Hot Stocks
When stocks become “hot,” it’s very likely they’re overpriced. Also, it’s important to have more than one company and investment type to spread your risk out. Instead of buying the latest hot stock, consider investing in ETFs or index funds as a more stable strategy.
Ignoring Fees
You may be so amazed at a fund’s five-year returns that you don’t notice it has a 2.5% expense ratio. Fees cut into your returns and can drastically decrease your earnings. Look for low-cost or no-cost index funds for some of the best values.
“Expense ratios matter because they directly reduce your returns. While low fees shouldn’t be the only factor, they’re an important part of evaluating the overall cost and value of an index fund. Every investor should be fee-conscious.
Expert insight from Jacqueline Schadeck
FAQ: How To Invest in Stocks
Most brokerages, especially self-directed ones, no longer require a minimum amount to start investing in stocks. Minimum investments for robo-advised funds are more common, typically falling within the range of $50 to $1,000.
Research the historical performance of the stock or fund you’re thinking of buying, as far back as you can, although it’s important to note that past performance is not a guarantee of future performance. Look at a company’s financials, including its yearly earnings, amount of debt and prospects for growth. Also, consider a fund’s expense ratio since a higher one can drastically cut into your returns.
How often you should check your investments depends on the makeup of your portfolio. If you’re a hands-off investor using index funds or a robo-adviser, checking quarterly or twice a year may be enough. However, if you hold individual stocks or have a more active strategy, try weekly or twice-weekly reviews. Avoid checking your investments daily, since short-term volatility is normal and shouldn’t drive your decisions.
The basic reason people invest in stocks is to increase their money over time. The stock market tends to beat the historical returns of many other investments, such as certificates of deposit and bonds. For example, since the S&P 500 index fund’s inception in 1957, it has returned over 10% per year before inflation (or over 6% per year after inflation). Treasury bonds have returned about 5% while CDs have returned just under 3% before inflation over the last 30 years.
People also invest in stocks because it’s relatively quick and easy. With robo-advisers and the internet, you can set up automatic trades or buy and sell on an app. Plus, investing in stocks is relatively hands-off, especially if you’re a long-term investor.
*Data accurate at time of publication.
*The content provided in this article is for informational purposes only and should not be construed as financial, investment or tax advice. You should consult a licensed financial adviser or tax professional before making any investment decisions. All investments carry risks, including the possible loss of principal. Past performance is not indicative of future results.