For a financial mechanism that’s been around since near the start of America’s life as a country, the stock market is pretty intriguing. Mysterious, even. Some might even call it alluring and seductive, although that makes it sound a little too romantic. But we understand why one might think that way.
All that mystique also makes the stock market a little terrifying for some to get involved. It shouldn’t be. The wonderful thing about the stock market is that, as complex as it is, it’s easy to get started. Sure, it takes time to develop total mastery and fluency in the science of stock trading. But getting started can happen anytime. The sooner you do so, the sooner you’ll understand how the stock market works.
For those ready to launch their stock investment experience, there are a few steps to take to get on track.
There are several ways to approach and interact with the stock market. Part of its appeal is that it caters to both active and passive investors. The stock market is open to all people: those who make multiple trades over a week (or even a day) and those who “set it and forget it” for a while.
So, if you’re a beginner in the stock market, the first step is to decide who you are or want to be as an investor. This has a lot to do with your long-term financial goals. If you were to talk to a financial advisor about getting into stocks, that’d be the first question they’d ask you: “What are your goals?”
Most people frame their answers to that question in the long term. They want to save enough money for their retirement, or pay for their children’s college tuition, or fund a major purchase in a few years. But short-term goals — money you want to accrue within two years — are just as valid.
Having a goal in mind helps you understand the kind of investor you might want to be. Those with long-term goals may decide to play it safe by investing in a large, iconic company that’s dominated the market and shown consistent growth for decades. Those looking for a quick profit may take the riskier, more speculative route of investing in smaller companies poised to make sudden gains.
Whatever you decide, you’re not locked into one type of investing approach or the other. It’s always wise to consider blending your strategies, leaving some of your investments in “safe” stocks while reserving a percentage for more adventurous stock prospects.
Set an investment limit
In theory, one can enter the stock market for as little as a dollar. Of course, if you did that, you’d have to limit your expectations. It’s more sensible to set aside a considerably higher sum of money.
The amount you invest depends on what amount you’re comfortable parting with for an extended time. Many advisors suggest not investing money you’ll need in the next five years, which can be a vague figure. A simpler way of putting it is not to invest more money than you can afford to lose.
But to start with, a beginning investor should have some sort of limit that won’t bust their bank account. A $200 limit is a popular suggestion. If you can invest more without getting overly nervous, $1,000 is a great number to start with. Whatever limit you choose, stick to it. For now.
Understand what the stock market is
You may, of course, choose to do this step before you open a brokerage account. If you plan to manage your portfolio as most modern investors do, research will be a daily routine. The sooner you get accustomed to learning, the better prepared you’ll be.
That said, here’s a thumbnail explanation of the stock market:
The stock market is a network of exchanges, like the New York Stock Exchange and NASDAQ, by which investors buy and sell securities. A “security” simply means a financial investment you make with the expectation of generating profit. When you invest in stocks, bonds, gold, an IRA, or a money market fund, you’re purchasing security.
Stocks are securities exchanged as “shares.” When you buy a share, you’re purchasing part ownership (“equity”) of the company offering the share. Before you get too excited, know that most companies offer millions or even billions of common stock shares to the public.
Your investment is a financial stake that corresponds to a company’s assets and growth. This means the stock price is subject to change, which it does pretty much every day. An increase in stock value represents the amount you earn after you’ve purchased the stock.
Companies offer stock shares to raise funds (“capital”) to run and grow their businesses. Capital is applied toward operating expenses, office leases, research and development, manufacturing, hiring employees — anything a company needs to establish itself and stay in business. Selling stock shares is just one of the many ways (such as borrowing money and lining up private investors) companies raise capital.
Stockholders are particularly important to companies for the simple reason that they support a huge part of their business. So, they have a personal stake in keeping shareholders happy — in other words, giving them decent returns on their initial investments.
Open a brokerage account
Whatever kind of investment strategy you choose, you’ll need an account with an investment brokerage.
In the very distant past (well, the 1990s and before), common people who invested in stocks usually transacted through professional stock advisers and brokers who took their orders over the phone. As with just about every other part of society, the internet changed that. Now, most stock market transactions go through online brokerages and trading apps.
Long-time investment firms like Fidelity, Merrill, Charles Schwab, and TD Ameritrade offer online investment accounts. Brokerages like E*TRADE and Robinhood were specifically built for online traders. Most brokerages have done away with account balance minimums and per-trade commission fees, but it’s always worth making sure that’s the case with the brokerage you choose.
Opening a financial services account is extremely simple and shouldn’t take much more than 15 minutes of your time. All the above-mentioned sites have relatively easy sign-up steps. Although you probably won’t need to make a deposit the moment you open the account, you’ll need to put money in there when you want to start trading.
An ever-dwindling number of investors prefer to open managed brokerage accounts, to which they simply add money and let outside managers make their investment decisions. But with more people willing to learn the ropes of stock investment themselves — and more resources to do so — managed accounts are no longer the norm. Most digital brokerages employ robo-advisors for account holders who need a little direction.
Learn a few key definitions
The complexities of the stock market are such that it’s impossible to summarize all the vital information in one post. But you don’t need to know all those concepts to begin investing. As you mature as a stockholder, you’ll want to keep up and commit yourself to learn as you go. To get started, though, you need just a few basics:
These are, essentially, marketplaces where stock shares are bought and sold. We’ve already mentioned the New York Stock Exchange (NYSE) and NASDAQ; they’re the two dominant stock exchanges in the world. There are a few others in places like Tokyo, London, Shanghai, Hong Kong, Toronto, and other international cities. But the NYSE is the largest by far.
An index is a means by which overall stock market growth is measured. Each index lists a group of stocks that analysts track as a rough guide to how well certain segments of the stock market’s doing as a whole. You’ve heard of the Dow Jones Industrial Average (DJIA) — that’s an index of the 30 large companies that are tracked to gauge the performance of the entire stock market as a whole. When somebody says the stock market’s booming or crashing, they’re usually talking about whether the Dow Jones went up or down. The Standard & Poor (S&P) 500 index tracks 500 companies.
Other indices measure the stock market performance of certain industries, market segments, or market shares. The NASDAQ composite focuses on technology stocks. S&P has several indices covering other market sectors, like healthcare, real estate, consumer goods, and more.
Market capitalization is a description of how large or small a company is, measured by how many outstanding shares they have to sell, multiplied by the price of those shares. “Large-cap” companies — usually ones that have been around for an exceptionally long time — have market caps over $10 billion. “Small-cap” companies are newer, with market caps between $300 million and $2 billion. “Mid-cap” companies are everything in between.
Companies on the stock market are arranged into 11 categories that define their business:
- Materials (raw, natural resource companies, such as mining, logging, and chemical)
- Industrials (manufactured goods)
- Financials (banks, brokerages)
- Energy (oil, natural gas, and coal)
- Consumer discretionary (goods people only buy occasionally, like cars, vacations, clothes, and restaurant food)
- Consumer staples (goods people buy all the time, like groceries)
- Information technology (software, hardware, semiconductors, computers)
- Communication (telecom, media, and entertainment companies)
- Real estate
- Health care (biotech and pharmaceuticals)
- Utilities (water, gas, electric)
Choosing what stock to buy is either the most fun or most excruciating part of investing in the stock market. You have thousands of companies to choose from, with different market caps and different focuses. You’re either excited or daunted by the possibilities.
Beginning investors benefit from setting down a couple of parameters for their first stock purchase:
- Pick a company you know and understand. When reviewing a business you’re thinking of buying stock in, the first question should be, “Do I understand what this company actually does?” You can probably explain what companies like Apple, Amazon, Walmart, McDonald’s, General Motors, Disney, and other big ones do pretty quickly. You may have enough knowledge in a certain area to how some large, lesser-known companies — say, NVIDIA, Abbvie, or the Danaher Corporation — make their money. If you can’t explain what the company does, you don’t want to make it your first investment.
- Pick a large-cap stock. Huge, gigantic, major companies are rarely exciting, at least when it comes to stock market fluctuations. But they’re good for absolute beginners. They provide stable, dependable base investments from which you can expect decent, steady growth. A first stock purchase in a company like Microsoft, Berkshire Hathaway, Johnson & Johnson, VISA, and other big names can be a secure nest egg. It gives you a solid foundation to make more speculative stock trades as your investment experience grows.
Many first-time investors are completely in the dark about the companies they’re considering for stock purchases. This is, therefore, an appropriate time to introduce a concept that you’ll be using the entire time you hold stock shares: research. You’ll always want to keep tabs on the market while you’re active in the stock market, even if you wind up holding a majority of your investments for prolonged periods, so it’s ideal to start getting used to certain research tools right at the beginning of your adventure in the stock exchange.
Stock screeners are excellent tools for conducting qualitative research. Sites like Stock Rover and Finviz list every available public stock and enable you to filter them according to multiple criteria, such as market cap, stock price, price-to-earnings ratio, and tons of other variables you may or may not need. Most screeners give you more features for a subscription fee, but many offer all the info you’ll need for free.
Look a few steps ahead
Assuming you’ve settled on a first stock, you’ll want to buy however many shares you’ve decided you can afford. You’ll have two main options for buying them with whatever brokerage you use:
- Market order – Buy the stock immediately at whatever price it’s currently offered.
- Limit order – Buy the stock when it reaches the price point you specify.
The big advantage to buying at current market value, especially with online brokerages, is that the transaction completes immediately if it’s done during regular NYSE business hours (9:30 to 4:00 Eastern time on business days). Limit orders are good for after-hours trading because you’ll spend exactly what you want to without worrying about price fluctuations that may increase the cost of a market order.
With most companies, especially large-cap, the stock price won’t rise or fall too dramatically unless there’s a major disruption in the stock market. For them, a market order is probably safe, especially during the daytime. But be alert and watch carefully no matter what.
Once you’ve made your first stock purchase, turn an eye toward the future of your stock portfolio. Every single financial pro will tell you that diversification is a key to stock market success. Over time you’ll want to spread your stock investments around. You won’t want to keep all your funds in one company, and it’s also wise to invest in more than just one or two business sectors (in other words, don’t buy all tech stocks — get some healthcare, real estate, consumer goods, and other sectors as well).
Put a Gorilla in charge of your investments
As you grow more comfortable in the stock exchange, you’ll have several options for methods to increase your stock portfolio’s value. Gorilla Trades has helped thousands of shareholders profit, with a proven method for identifying and trading stocks to maximize earnings. When you’re ready to go deeper with your portfolio, sign up for Gorilla Trades’ expert advice.