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If you want to learn how to make money from stocks, you’re in the right place. This article will tell you everything you need to know to get started investing in stocks. There is no fancy jargon here – just the essential principles you need to understand to invest your money. This is a comprehensive guide on how to make money in the stock market for beginners. Let’s get started!
Basics of Stock Investing
How do stocks work? It’s pretty simple, actually. Imagine the ownership of a company is a pie. If you cut the pie down the middle, two owners each own 50% of the company. Cut it in half again. Now there are four owners that each own 25%.
The slice of a company that someone owns is a share of stock. Companies are split up into millions (and sometimes billions) of shares.
When you buy a share of stock, you’re purchasing a fraction of a company. When you own a fraction of a company, you’re entitled to a piece of the profits! You can profit from stock ownership in two different ways
First, companies can pay out dividends to shareholders (those who own shares of stocks). Dividends are profit distributions made by the company.
But when you own stock, you also have the opportunity to participate in the stock’s upside. For example, assume you purchased a share of stock for $10. If the company performs well, other investors may think the stock is worth more than $10. They’ll start paying more for the stock, resulting in the stock price increasing. So, if the stock price rises from $10 to $12, your ownership share is now worth $2 more (a 20% return!).
It is the combination of dividends and share price appreciation that creates wealth for stock investors.
Decide What Kind of Investor You Are
As you’re learning how to invest in the stock market as a beginner, you’ll need to decide what kind of investor you want to be.
There are a few different options, but there are only two which I endorse.
1) Invest in Index Funds You Select
The first option is for someone who wants a bit more control over their portfolio. With this option, you’ll choose index funds that align with your goals and investing beliefs.
An index fund is a basket of stocks (or bonds) that allows you to purchase a group of investments through one fund.
For example, one option is to purchase an S&P 500 index fund. By buying one S&P 500 index fund, you’re purchasing all of the stocks in the S&P 500. In a nutshell, you’re getting the diversification of 500 stocks all through one fund.
The idea with an index fund is that it will track some sort of index. For example, with an S&P 500 index fund, returns will nearly match that of the aggregate of all 500 stocks in the S&P.
There are all sorts of index funds from which to choose. There are index funds for large companies (large cap), small companies (small cap), domestic companies, international companies, and much more.
If you go down the path of selecting your own index funds, it’ll take a little more work, but it is the lowest-cost way to invest (if you choose your investments wisely). I’ve written an article all about choosing funds to help you get started.
2) Use a Robo-advisory Service to Choose Your Investments for You
If you don’t want to do the work of selecting index funds, another option is to use a robo-advisory service like M1 Finance. These services can help choose appropriate index funds for your portfolio based on your investment objectives and risk tolerance.
Most robo-advisory services charge a small fee (M1 doesn’t), but it is worthwhile if you wish to have a hands-free index portfolio.
What Type of Investor Shouldn’t You Be
You’ll note I have left out both selecting individual stocks or hiring someone to manage your stock portfolio. This is intentional.
When it comes to choosing individual stocks, the truth is this. You will not do better than the stock market as a whole by selecting stocks yourself. History has proven this over and over and over. No one, and I do mean no one (okay, maybe except Warren Buffett), can choose stocks more effectively than a monkey throwing darts. Seasoned professionals consistently fail to outperform the market.
Second, do not pay someone else to manage your money. Typically, a money manager will take a fee (say 1% of assets under management) to do so. 1% doesn’t sound like much. But if your stock market return is 5% and they take 1%, you’ve now paid 20% of your returns to some so-called expert. But won’t they earn you better returns than you could make by yourself? No. See above – no one chooses stocks more effectively than a monkey throwing darts at a dartboard.
Once you’re clear on what type of investor you want to be, it’s essential to decide on your objectives. Do you want to invest for retirement? Do you have a long horizon or a short one? What’s your risk tolerance? These sorts of questions can help guide your approach to investing in stocks.
Choose an Investing Platform
Next on this journey of how to make money in the stock market for beginners, you’ll want to know how to open a brokerage account. Your brokerage account is where you will invest your money. They’re the middlemen that take your money and help you use it to buy shares of stock.
Depending on the type of investor you want to be, there are numerous types of brokerage options.
My favorite, by far, is M1 Finance. M1 Finance is the most flexible brokerage option around, as you can invest in individual index funds (or even individual stocks, if you insist), or you can invest through their robo-advisory service (called M1 Pies).
M1 charges no commission fees, and its robo-advisory service is free. This, coupled with an industry-leading mobile app and integration with other parts of your financial life, make it a no-brainer.
However, I also want to mention two other types of accounts. 401(k) and IRA accounts are tax-advantaged retirement accounts. The 401(k) is through your employer, while you must set up the IRA. These accounts give you tax benefits in exchange for investing in your retirement, and that’s why I urge people to max these out before investing in a taxable brokerage account.
M1 Finance offers Traditional, Roth, and SEP IRA accounts, so if you don’t yet have a retirement account, they’re worth considering.
Once you decide where to open a brokerage account, it’s as simple as filling in basic personal information and moving funds into the account. Once you do that, you’re ready to go!
How Much You Need to Get Started
When you begin investing, you may be wondering how much you need to get started. While account minimums vary by brokerage firm, the threshold is usually low.
For example, with M1 Finance, you need $100 to start with an individual taxable account or $500 to get started with a retirement account.
While this bar is pretty low, some alternatives require even smaller opening deposits, such as Acorns. If you’re looking for a hands-off way to get started with next to nothing, Acorns is worth checking out.
The truth is, you can make money in the stock market with little money. The market is becoming more and more accessible, especially with the rise in investment apps and new trading options like fractional shares (allowing you to buy part of a share of stock).
Whether you have $100 to invest or $100,000, the most important thing is to get started. Stock investing, when done correctly, is a get-rich slow kind of game, so it’s important to start early.
Learn the Differences Between Stocks & Funds
Once your account is open, you’ll need to start making your investments. Before you can do that, though, I want to break down some terminology about the types of investments you can select.
First, as mentioned above, stocks are small slices of ownership in individual companies.
However, you’ll also likely stumble across the words mutual fund and ETF (exchange-traded fund). Mutual funds and ETFs are just fancy ways of saying that you’re buying a basket of securities. For example, a mutual fund may contain five different stocks. By purchasing the mutual fund, you’re buying five stocks all within one fund. If you want to learn more about mutual funds, check out the book Common Sense on Mutual Funds – it is a fabulous read.
ETFs are the same in principle, though they have some nuances. ETFs are traded throughout the day (and offer minute-by-minute liquidity), whereas the price of a mutual fund is adjusted at the end of each trading day.
It’s not worth getting bogged down in the differences between mutual funds and ETFs. For practical purposes, think of them as being the same. When you start investing, mutual funds and ETFs offer the best way to gain portfolio diversification with the ease of managing your portfolio.
I also discussed index funds above. Index funds, as mentioned, aim to track some form of broad market index. All index funds are either mutual funds or ETFs. All mutual funds/ETFs, however, are not index funds.
This is a fundamental distinction. There are bad mutual funds/ETFs (ones that charge high fees, have bad managers, etc.). So, when you’re looking for mutual funds/ETFs, make sure you’re looking for low-fee index funds.
Choose Your Investments
You’re now ready to choose your investments. If you’ve elected to go down the path of making your own investment decisions, you’ll want to choose a selection of index funds. While there is no perfect portfolio, some types of index funds to consider include:
- Domestic large-cap (think S&P 500 index fund)
- Domestic small-cap
- International stock
- Domestic bond (I realize this is a post about stocks, but you’ll likely want to consider bonds for some piece of your portfolio)
It is possible to gain sufficient diversification with just a couple of index funds. For example, some people own an S&P 500 index fund and a total bond market index – and that’s it. With just two funds, it is possible to gain tremendous diversification.
As you select your portfolio, make sure you’re getting diversification and choose investments for the long-term. There’s no need to change index funds regularly – select those that meet your goals and keep adding to them.
If you’ve gone down the robo-advisor path, things are even more accessible. Simply fill out your portfolio goals, risk tolerance, etc., and the brokerage will provide a portfolio that meets your investing needs. It is that easy.
Manage Your Portfolio
Learning how to make money in the stock market for beginners doesn’t end with your first investments, though.
Once you’ve made your initial investments, you’ll need to learn how to manage your portfolio.
There are only two more steps to take to make money in the stock market as a beginner.
Once you’ve decided on your proper portfolio mix, you’ll want to bring your portfolio back in line with that mix. For example, if you’ve decided on 80% stocks and 20% bonds, that mix will change over time due to overperformance/underperformance of assets. When that happens, you’ll want to make adjustments to your portfolio to realign it to the 80/20 mix.
There are two ways you can reconcile this. First, you can add more money to the “underperformer.” Second, you can sell some of the “overperformer” to move money to the “underperformer.”
Rebalancing helps to reduce risk and has historically improved risk-adjusted returns.
For more on rebalancing and why it’s important, check out this ASF guide to portfolio rebalancing.
2) Keep Investing
Second, keep investing. Once you’ve selected index funds for your portfolio, the most important thing is to keep going. Can you make a lot of money in stocks? Yes. But only if you invest as much as you can afford over a long period.
While investing more throughout your life is essential, staying invested is equally important. The secret to doing well in stocks is to be greedy when others are fearful and fearful when others are greedy.
Said differently, when stocks go down in value (i.e., the market as a whole), you can buy stocks on sale. When stocks go up in value, they get more expensive. Stocks get less risky when they go down in price, not more.
The only way (yes, the only way) to make money in stocks is to buy low and sell high. The only way to ensure you do that is to invest consistently over a long period. Don’t try to time the market. Just keep plowing in money.
I understand the temptation to sell when you’re fearful, bored, or watching everyone else sell. But the herd mentality and following your emotions is a bad combination when it comes to stocks.
One final tip to help you stay invested is don’t look at your portfolio too frequently. If you’re buying the whole market via index funds, in the long run, you will win. So, ignore the day-to-day moves, and keep buying more!
Lastly, continued education is a fundamental tenant of success if you want to become a better investor. The best investors and businesspeople read a lot. If you want to learn more about investing, below are some of my favorite books to check out:
- Common Sense on Mutual Funds
- A Random Walk Down Wall Street
- All About Asset Allocation
- How a Second Grader Beats Wall Street
Frequently Asked Questions
Before we go, let’s tackle a few frequently asked questions.
When is the best time to sell stocks?
Never. The best holding period is forever.
If you’re buying individual stocks, it may make sense to let them go a bit earlier if the company isn’t doing well, but if you’re buying broad index funds, keep them as long as you possibly can (and add to them).
How do I invest in stocks online?
In the old days, you’d have to call your broker to make requests to buy or sell assets. Now, though, nearly every brokerage offers online trading. All you need to do is set up an online brokerage account through someone like M1 Finance to get started.
What are the best stock investing apps?
There are countless options. Some of my favorites are below:
- No trade commissions
- Total flexibility to invest in individual stocks or index funds
- Robo-advisory service to help you pick a portfolio that meets your needs
- Extremely easy to get started
- Robo-advisor service that helps you find a portfolio that meets your needs
- Possible to invest “spare change” that can grow into a lot over time
- Similar to Acorns but also allows you to purchase individual stocks and funds
- Can get started with just $5
- A bit of a middle ground between the fully automated Acorns and a full brokerage like M1
How to Make Money in the Stock Market for Beginners: Summary
Making money from stocks is easy. All you have to do is open a brokerage account, choose a diversified set of investments, and add to it over time.
Beginners can make money in the stock market. It doesn’t matter how much money you have to get started. All that matters is that do.
So, open a brokerage account today, and start investing in your financial future.