How to Invest in Stocks

Looking to invest in the stock market? Here's our 8-Step Guide to get started.

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If you've never invested in the stock market before, it can be an intimidating process. Stocks are not like savings accounts, money market funds, or certificates of deposit, in that their principal value can both rise and fall. If you don't have sufficient knowledge of investing — or emotional control — you can lose most or even all of your investment capital. That's why learning the basics of how to invest in stocks is so important. If you want to get into investing but don't feel like an expert, here's our guide to getting started investing.

Step 1. Understand Why You Want to Start Investing

Why to investIt's helpful to consider your goals and ask yourself why you want to start investing:

  1. Are these investment accounts for your retirement?
  2. Is this money for a shorter-term goal, more like 5–6 years away?
  3. Will anyone else have access to this money?

Using these three questions as the starting point of your investing will help shape the decisions you need to make next. And they require no knowledge of the stock market! These are highly personal questions that each investor needs to answer for themselves. There's no right answer, just the correct answer for your life and goals.

Investing in stocks makes the most sense for the longer term. You generally don't want to invest money that you need in fewer than five years, as there is a risk of losing that money in a downturn.

Step 2. Organize Your Finances

Refinance MortgageBefore you get into investing of any kind, you first have to make sure that your overall financial situation is in a position to accommodate the new activity. Your financial baggage includes everything from income to debt, to your household budget. You can organize your finances for free with our favorite personal finance app, Personal Capital.

When determining your goals, you should take a specific consideration to the following:

  • Employment – make sure that both your job and your income are secure enough to allow you to begin investing.
  • Debt – if you have a significant amount of outstanding credit, you may want to pay some debt down before you begin investing; you should never invest money you can't afford to lose, and that's the position you'll be in if you have too much debt.
  • Family situation – if you just welcomed a baby into the world, you may need all of your available income to help with the new arrival; family situations should be stable before you begin investing.
  • Your household budget – you should have some room in your budget to direct cash into your investment ventures.

Put Some Money to the Side

Before you put any of your money at risk, you should first have some put away that will not be subject to any risk whatsoever. A cash reserve equal to at least three months' living expenses should be the minimum, and it should sit in nothing riskier than certificates of deposit or money market accounts.

The purpose of the cash reserve is twofold:

  1. Act as an emergency fund in the event of a temporary income disruption or other financial emergencies
  2. Keep you from panicking should your risk-type investments take a sudden dive.

Step 3. Understand Which Kind of Investor You Are 

Understand Which Kind of Investor You Are Before you start investing your money, you need to decide which type of investor you are. Knowing this will help you determine what kinds of investments are best for you, as well as what types of services you should use. There are a few things to think about when it comes to deciding on your investing style.

  • DIY — Do you like doing research on companies and following the stock market daily, or does it stress you out? If you find you like a hands-on approach to investing, then you're probably a DIY investor.
  • Passive Investor — On the other hand, if you find investing stressful, then you might want to consider passive investing, such as investing with a robo advisor.
  • Use a Financial Advisor — You can also decide between choosing stocks and other assets on your own, or you can employ the services of a financial advisor to help you determine the best investment strategy that meets your needs. You can use the services of Paladin Registry to find top-rated advisors.

Know Your Risk Tolerance

All investing has a certain level of risk. Some investments are riskier than others. The higher the growth potential there is, the higher the risk.  If you're okay with taking higher risk, then that determines what you invest in. For example, if you're OK with high-risk investments, then you might mostly invest in stocks. But if you're close to retirement or don't want to take much risk on losing your investment value, then you will probably want to invest mostly in bonds.

Step 4. Choose Between Passive Investing and Active Investing

Active Passive InvestingRegardless of whether or not you want to invest your money for retirement or want to invest it in using towards another financial goal, like paying for your kid's college, there are several options available. Below we break down the top investing options if you're investing $100,000.

Passive Investing With a Robo Advisor

For those looking for a more hands-off way to invest, consider passively investing in the stock market. Putting your money into a mutual fund or index fund is a great way to jumpstart any investment portfolio!

Robo advisors use algorithms to help create the ideal portfolio mix for your needs and risk tolerance, usually by investing in exchange-traded funds (ETFs). Usually, you don't get to pick and choose individual stocks or funds — the robo advisor does it all for you. You can truly “set it and forget it.”

We really like Vanguard Digital Advisor®. It has some of the world's largest exchange-traded funds. You can invest directly into them with their robo advice service for an annual advisory fee of about 0.15% – one of the cheapest in the industry. The only downside is that you have to invest a minimum of $3,000 to get started.

Active Stock Investing – Trade Individual Stocks with Online Broker

Set Up an Online Brokerage AccountAs is obvious from the name, active stock investing is much more hands-on than passive investing. This type of investing is best for people who are interested in following the stock market trends and reports and buying and selling within their portfolios to reflect market changes they think will bring them more money.

With active investing, there's the chance that you can turn that $100,000 into much more money much faster than you can with passive investing. It will also take more work. And of course, there's never a guarantee in the stock market!

Finding an online discount stock broker can be a confusing and complex decision. To a novice, each broker can appear to be the same. In reality, differences can be nuanced, but can significantly affect your decision.  To narrow your decision, it comes down to asking yourself these questions:

  1. Do the broker's ideals match my investment strategy?
  2. What are the broker's trading fees?
  3. Does the brokerage offer banking services?
  4. Do they offer investment advisory services?
  5. Does the broker offer any research tools?
  6. What can I invest in with this broker?
  7. What type of customer service options do they have?

Our recommended brokers are TD Ameritrade, Ally Invest and E*TRADE. Here's a quick comparison between the three:

HighlightsE*TRADEAlly InvestTD Ameritrade
Min. Investment$0$0$0
Stock Trades$0/trade$0/trade$0/trade
Options Trades$0/trade + $0.65/contract ($0.50/contract for 30+ trades/quarter)$0.50/contract$0.65/contract
Mutual Funds
Virtual Trading

Do They Offer Investment Advisory Services?

Some individuals prefer to go it alone when investing, though many want the advice of a financial advisor — or at least the option for a financial advisor to review your investment planning. If this is the case, does the broker you're looking to use offer investment advisors? If not, it is possible to find an independent fee-only investment advisor external to your broker.

Another option is to work with an online broker that offers virtual trading — that is, trading securities on paper only. This provides you with a valuable opportunity to test out investing strategies before actually committing your own money. Several online brokers offer this service, including TD Ameritrade.

Does The Broker Offer any Research Tools?

For the DIY investor, does the broker offer any research tools to help analyze and pick stocks? Do they link up to services like Morningstar for mutual fund recommendations?

If you're a technical trader, you want to find out if they have graphing tools you need? For some of the lower-cost brokers, they fall a little short on this end. But for most, this is fine because many third-party commercial and free services are more powerful than what's available within your broker.

Step 5. Understand What You Want to Invest In

Investing for Retirement Should be Your Top Priority

Invest for RetirementOnce you have a well-stocked emergency fund set up, the best place to begin investing is in a retirement account. This retirement account can be a 401(k) plan (or its equivalent) through your employer, or an Individual Retirement Account (IRA) if there is no employer plan.

Retirement accounts are an excellent start because they represent long-term investing. Besides, they are tax-sheltered — and can produce immediate tax savings — and are typically funded through payroll deductions. You can think of them as patient capital, where you have decades to accumulate and grow your money.

One of the best aspects of a retirement account is that you can build up money in the plan without actually investing any money until you're ready to do so. You can keep it all in a money market account within the plan until you feel comfortable adding stocks and funds to the plan.

You can also set up an Individual Retirement Account. There are two types of IRAs:

  1. A traditional IRA includes the same benefits of a 401(k), but you are the one putting the money into your account, not your employer. You can deduct the money you contribute on your taxes because the funds are not taxed until you withdraw them when you retire.
  2. A Roth IRA is similar, except that you pay taxes on the money before you contribute. That means you won't owe any taxes when you retire and withdraw the funds. You can open a Roth IRA with a stock broker like E*TRADE.

There are a lot of different retirement accounts, and you may not be able to open and fund all of them. If you want to get professional assistance, consider using Personal Capital's retirement planner. We think it's one of the best retirement calculators out there — paid or free. Do some research on which account is best for you before you open any of them. You can start with our article that compares various retirement accounts.

Begin with Mutual Funds or Exchange Traded Funds (ETFs)

Mutual FundsWhen you begin investing, you'll be far better off with mutual funds and ETFs than plunging right into stocks. Funds are professionally managed, and this will remove the burden of stock selection from your plate. All you need to do is:

  1. Open an account with one of the many commission-free ETF trading apps available
  2. Determine how much money you want to put into a given fund or group of funds, and then you're free to get on with the rest of your life.

One of the advantages of mutual funds is that you also don't have to worry about diversification. Since each fund holds numerous stocks, diversification will already be built into the fund.

Stick to Index Funds

To make mutual fund investing even more hassle-free, stick with index funds. For example, index funds that track the Standard & Poor's 500 index are invested in the broad market, so your investment performance will track that index.

Use Dollar-Cost Averaging

How to invest 1000 dollarsDollar-cost averaging (DCA) is the process of buying into your investment positions gradually, rather than all at once. For example, rather than investing $5,000 in a single index fund, you can make periodic contributions of, say, $100 per month into the fund. Through DCA, you can smooth your cost basis by buying at market low points.  This allows you to buy into the fund at all different times and continuously. This also eliminates the “when” question, as in when to invest in a given security or fund.

Even better for you, dollar-cost averaging works beautifully with payroll contributions and is a natural fit with mutual funds and ETFs.

Step 6. Get Some Investment Education

Learn InvestmentsWe could have made this step number three, with the intention that you have some understanding of investing before doing anything at all. Fortunately, mutual funds and ETFs — with the help of index funds and dollar-cost averaging — helps you better understand investing. So you can begin investing immediately, even if you're a novice.

But if you want to move beyond funds, payroll contributions, and dollar-cost averaging — and into holding individual stocks — you'll need to learn all that you can about investing before you do.

While you are accumulating money for investments and piling them into mutual funds and ETFs, you should use this time to educate yourself about the game of investing. Read books, listen to CDs, read The Wall Street Journal, take a course or two at a brokerage firm or even a community college, join investment forums, and regularly visit investment websites, like

Vanguard is another excellent resource and possible investment platform to utilize. They currently offer an advisory service under Vanguard Personal Advisor Services for investors who interested in working with an advisor. Anyone can start with at least $50,000 to invest.  The fee for the service is only 0.3% and you'll be provided all of the 1 on 1 support you can imagine.

Come up with an investment strategy that works for you. Are you a risk-averse, conservative investor, or are you going to be aggressively trying to beat the market? Are you investing $5 and planning for the long term, or are you investing $1,000,000 and trying to secure wealth for generations?

To become a good investor, you'll need to surround yourself with investment experts and learn all that you can. The idea is to become “fluent” in investments before you begin investing with real money. It's always a good idea to learn how to read stock charts and use investment tracking tools. The more you know before you begin investing, the lower the amount of risk you'll be taking on.

Step 7. Take It Slow & Let Your Money Grow

Get Rich from StocksWhen you finally feel comfortable enough to begin investing in stocks, be sure that you do it gradually. You generally don't have the dollar-cost averaging feature when investing in individual stocks, so you'll have to develop your method for doing this on a gradual basis.

Since you will already have significant positions in mutual funds and ETFs, you can begin investing in stocks one at a time as you work toward building a portfolio. The fund positions should prevent overexposure to a single stock, as long as you make sure that your position in the stock represents only a small minority of your total portfolio (generally 10% or less).

Never overload in a single stock. When you are starting out, take a minimal position in one stock — generally 100 shares to take advantage of the best pricing — and then move into another stock. Repeat the process until you have several stock positions in your portfolio, in addition to your mutual funds and ETFs.

Don't Forget to Diversify

DiversifyIf you have set up a cash reserve, a retirement plan, and an investment account, and have begun stocking the retirement and investment accounts with mutual funds and ETFs, you've already taken a huge step toward diversifying your portfolio.

Adding individual stocks will further diversify your cash and fund holdings. But while you are building your portfolio, you'll also need to spread your capital out among various equity sectors.

For example, depending on your age and risk tolerance, you might want to have some of your portfolio invested in bonds, growth and income funds, and international funds. You may also want to consider high dividend stocks among your individual stock holdings. Income-earning securities tend to be less volatile than pure growth stocks, particularly in bear markets. You'll want to develop a balance between your growth assets and your income- or growth and income-holdings.

A good management firm such as Fisher Investments can help you maintain the proper diversification and allocation of your investment account.

Step 8. Secure Your Investments

Financial Information SecureAs cyberattacks become more common, it's important to secure your investments, including using a VPN like ExpressVPN when you use a broker account to purchase stocks.

A VPN encrypts your data, which means that no one can view your purchases online. Of course, it's also important to use a reputable broker that has an encrypted website. But having a VPN like NordVPN adds an extra layer of security. 

You should also be careful about sharing your personal information and keeping your passwords in a safe place, like a password manager. Use passwords that are hard to guess and don't contain any personal or easy-to-guess information such as birth dates or names.

Bottom Line: You Should Start Investing… NOW

Numbers don't lie, and the truth of the matter is this: The earlier you start investing, the better off you're likely to be. The longer you keep your money invested, the more time it has to grow. Earlier investors may then have a better chance of seeing a more significant overall return on their investments by the time they withdraw money from the market.

Take these steps, and you'll have the basic foundation to help you in getting started with investing in stocks. Just remember that, as we noted in our how to invest guide, investing is a process, not a destination, so you need to be learning and experimenting on an ongoing basis.

Vanguard Disclosure - For more information about Vanguard funds and ETFs, visit to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing. All investing is subject to risk, including the possible loss of the money you invest.

Vanguard Digital Advisor® services are provided by Vanguard Advisers, Inc. (“VAI”), a federally registered investment advisor. VAI is a subsidiary of VGI and an affiliate of VMC. Neither VAI nor its affiliates guarantee profits or protection from losses.

Vanguard Digital Advisor is an all-digital service that targets an annual net advisory fee of 0.15% across your enrolled accounts, although your actual fee will vary depending on the specific holdings in each enrolled account. To reach this target, Vanguard Digital Advisor starts with a 0.20% annual gross advisory fee to manage Vanguard Brokerage Accounts. However, we’ll credit you for the revenues that The Vanguard Group, Inc. (“VGI”), or its affiliates receive from the securities in your managed portfolio by Digital Advisor (i.e., at least that portion of the expense ratios of the Vanguard funds held in your portfolio that VGI or its affiliates receive). Your net advisory fee can also vary by enrolled account type. The combined annual cost of Vanguard Digital Advisor’s annual net advisory fee plus the expense ratios charged by the Vanguard funds in your managed portfolio will be 0.20% for Vanguard Brokerage Accounts. For more information, please review Form CRS and the Vanguard Digital Advisor brochure.

Vanguard Marketing Corporation, Distributor of the Vanguard Funds.


Vanguard Disclosure - Vanguard Personal Advisor Services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited purpose trust company.

The services provided to clients who elect to receive ongoing advice will vary based upon the amount of assets in a portfolio. Please review the Form CRS and Vanguard Personal Advisor Services Brochure for important details about the service, including its asset based service levels and fee breakpoints.

VAI is a subsidiary of VGI and an affiliate of VMC. Neither VAI nor its affiliates guarantee profits or protection from losses.

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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  1. Hello Kevin,

    your article is interessting to read. I agree with Step 8 and Step 9. But in my opinion is investment knowledge must have for a beginner and advanced too.

    Beginners should not start with investing , they should start with learning how to invest and how to value an investment.
    Also the understanding of an investment is necessary. If someone does not understand the underlying company, how it works and how it earns then he/she should not invest in it.

    At the moment you can really see on the market that many people want to be rich over night but this is impossible.
    I want to help people that they will do better investment decision and in my opinion we all can help this people to do the right thing and go the right way.

    Thank you for listening and stay healthy.

  2. Low-interest rates will adversely affect bond prices and bond yields in the year 2021. As the Central Bank makes decisions to revive the economy, short term securities, those with a maturity of fewer than 3 years are most likely to be affected.

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