1. Consider Your Investing Style
There’s several different methods and approaches to investing in the stock market. Everyone’s situation and circumstance my be different so what works for you may not work for someone else.
You may be interested in choosing stocks and stock funds for yourself. Or, if you already know the stock-buying game and just need a brokerage, see our round-up of the best online stock brokers.
If you are the type of person that has a fair amount of knowledge about stocks, but would like someone else to manage the process of investing in stocks for you, you would employ a stock broker. You and your broker will invest your money based on pre-determined goals.
2. Choose between stocks and stock mutual funds
For most people, stock market investing means choosing among these two investment types:
Stock (also called equity) mutual funds or exchange-traded funds. These mutual funds let you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs track an index; for example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it. When you invest in a fund, you also own small pieces of those companies. You can put several funds together to build a diversified portfolio.
Individual stocks. If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment.
The upside of stock mutual funds is that they are inherently diversified, which lessens your risk. But they’re unlikely to rise in meteoric fashion as some individual stocks might. The upside of individual stocks is that a wise pick can pay off handsomely, but the odds that any individual stock will make you rich are exceedingly slim.
For the vast majority of investors — particularly those who are investing their retirement savings — building a portfolio composed primarily of mutual funds is the clear choice.
» Still unsure which is right for you? See stocks vs. mutual funds
3. Set a budget
This step in the process can often times be multi-faceted.
How much money do I need to start investing in stocks? The amount of money you need to buy an individual stock depends on how expensive the shares are. (Share prices range from just a few dollars to six figures.) If you want mutual funds and have a small budget, an exchange-traded fund (ETF) may be your best bet. Mutual funds have minimums of $1,000 or more, but ETFs trade like a stock, which means you purchase them for a share price (potentially $10 or less on the low end).
How much money should I invest in stocks? If you’re investing through funds — have we mentioned this is our preference? — you can allocate a fairly large portion of your portfolio toward stock funds, especially if you have a long time horizon. A 30-year-old investing for retirement might have 80% of his or her portfolio in stock funds; the rest would be in bond funds. Individual stocks are another story. We’d recommend keeping these to 10% or less of your investment portfolio.
» Got a small amount of cash to put to work? Here’s how to invest $500
4. Open an account
If you’re participating in a workplace retirement plan such as a 401(k), you may already be invested in stocks, likely through mutual funds.
If you don’t have a 401(k) or you find its investment choices lacking, you can use an online broker to buy stocks, funds and a variety of other investments. With a broker, you can open an individual retirement account, also known as an IRA — here are our top picks for IRA accounts — or you can open a taxable brokerage account if you’re already saving adequately for retirement.
We have a step-by-step guide to opening a brokerage account if you need a deep dive. You’ll want to evaluate brokers based on factors like costs (trading commissions, account fees), investment selection (look for a good selection of commission-free ETFs if you favor funds) and investor research and tools.
Below are three strong options from our analysis of the best one stock brokers: Ally Invest (a winner in the low cost category), Merrill Edge (a top pick in the research category) and E-Trade (a winner for investment selection):