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While it's not clear that everyone should, pretty much anyone can invest in stocks. If you have money to invest, a willingness to learn and the stomach for risk, you, too, can be a stock market investor. Before you open an account and start trading, though, here's a brief overview of what it takes to invest in stocks.
Can Anyone Invest in Stocks?
Yes, just about anyone can invest in stocks. The rise of online brokerages and the popularity of trading fractional (partial) shares of stock have made it easier than ever to get started, even if you don't have a lot of expertise or money to invest.
Who's investing in stocks now?
- Retirement savers often hold stock investments in their 401(k) or IRA portfolios, typically in mutual funds or exchange-traded funds (ETFs).
- Beginning investors who know little about the market and want some assistance can invest with the help of a professional advisor or robo-advisor.
- Active traders who want to invest in individual stocks can open taxable brokerage accounts or IRAs at a traditional or online brokerage firm and use them to buy and sell.
- Cautious investors who don't want to risk too much money can start small and take advantage of fractional shares that make it easy to control how much (or how little) you buy.
- Even minors under the age of 18 can own stocks, though they typically must use custodial accounts managed by a parent or other adult to invest.
How to Invest in Stocks
Although there's a lot to learn as a beginning investor, these basic steps will help you get started with investing.
1. Choose Your Path
When you're ready to try investing, you have different paths to choose from:
- Participating in your employer's 401(k) gives you a limited set of investing options that don't require a lot of individual initiative. Typical offerings include mutual funds or ETFs that invest in stocks and a variety of other investments.
- Hiring a professional investment advisor can get you individualized help evaluating, trading and monitoring an investment portfolio. A financial advisor will cost you money, however, and advisors often work best for investors who have a significant amount of money to invest.
- Choosing a robo-advisor is less expensive and may be more suitable for beginning investors. A robo-advisor is an automated investment platform that creates and maintains a portfolio of investments based on your goals, timeline and risk tolerance.
- Opening a brokerage account on your own lets you buy and sell individual stocks and funds yourself. You'll have a lot of freedom to pick investments, but using a brokerage account may come with a steep learning curve.
2. Decide on Stocks vs. Funds
Though you can invest in a mix of individual stocks and funds, it's important to know the difference between the two. Stocks are ownership shares in individual companies. Funds, such as mutual funds and ETFs, invest in a range of stocks or other investments so that a single share represents multiple holdings.
3. Define Your Goals
Are you saving toward big goals such as retirement or a home purchase? Or are you looking to supplement your wages with a little nonessential income? Deciding whether your investing goals are long term and lofty or short term and simple can help you determine your risk tolerance and investing style.
Of course, you can set both long-term goals and shorter-term objectives. Maybe your goal is to create a pool of money that helps you build wealth and cover (or defray) large expenses over your lifetime, but your short-term objective is to open an account using your tax refund and invest it in stocks and mutual funds to get started.
4. Start Investing
Once you have an account and a game plan, you're ready to begin investing. Don't be afraid to start small; you can always add to your investment fund with regular contributions—and, of course, the money you make on gains.
Tips on Investing in the Stock Market for Beginners
Diversify as You Go
Diversifying your investments helps to reduce your risk. Simply put, if one investment suffers a setback or fails, your other investments can help buoy your holdings. Diversifying may also improve your odds of picking a winner.
One way to build diversification into your portfolio is to invest in mutual funds and ETFs that spread your investment dollars over multiple stocks, bonds and other investments, versus investing in individual company stocks. You can even choose funds that follow a specific stock index, invest primarily in international companies, focus on ESG investing and more.
Don't Overlook Passive Investing
As the term implies, passive investing involves less buying and selling, which can save you money on capital gains taxes—and save you the work (and guesswork) of constantly executing and monitoring trades. It's also called a buy-and-hold strategy.
A classic example of passive investing is putting your money in index funds. An ETF that invests in the S&P 500, a stock index that includes 500 of the largest companies in the U.S., for example, does relatively little buying and selling, but allows investors to gain from the index's profits and appreciation in value over time.
Plan for Taxes
Stocks themselves are not taxable, but when you sell a stock for more than you paid for it, you must pay capital gains tax on the difference. If your stocks pay you dividends, you must pay regular income taxes on the amount you're paid.
When capital gains and dividends leave you owing $1,000 or more at tax time, you may need to make quarterly estimated tax payments to avoid paying penalties. You may be able to reduce your taxable gains by "tax loss harvesting," or selling some of your stocks at a loss in order to offset some of your gains.
Try Using Your IRA or a 529
Another way to avoid paying taxes on your stock dividends and gains is to consider holding stock investments in an IRA or tax-advantaged 529 educational plan. Any dividends you earn and capital gains you make on sales are non-taxable in an IRA—at least in the current year (or, if you have a 529 or Roth IRA, ever). Especially if you're planning to do a fair amount of active trading, postponing (or avoiding) capital gains taxes can save you a good amount of money.
The Bottom Line
The pros and cons of investing in stocks are significant on both sides. On the one hand, there's money to be made. The average return for the S&P 500 has been roughly 10% annually since its inception in 1957, and many individual stocks have seen even greater returns. Then again, plenty of stocks have failed or faltered, and even major indexes like the S&P 500 can fluctuate.
Enlisting the help of an advisor or robo-advisor; checking out retirement plan funds, mutual funds or passively invested ETFs; learning the ins and outs of trading individual stocks; and keeping track of your progress over time can help you grow your skills and become a more informed investor.