How to invest in stocks: a beginner's guide to investing

Read through all the steps to get a sense of the general investment approach. Then, think about how you’ll implement them, creating your own personalised investment approach.

This is a step many people skip, but it is important as it sets the stage for the investing steps that follow. Write down why you want to invest and what you hope to achieve with that investing. What is the end goal?

“Making money” isn’t specific enough. What is that money for? How much do you need? When do you need it? Do you want to trade often or seldom? How much time do you have for research?

Think not only of monetary goals but how much time investing will take up and how much time it may free up if done well (for example, more investment income from dividends or share price gains, could mean working fewer hours).

Consider what type of investor you want to be. If you don’t know yet, read through the rest of the article for ideas, and you can always come back to this step later.

These questions allow you to create an investment plan​ to meet those goals.

Consider how much capital you are willing to invest as well as how much of your weekly or monthly income you’re willing to contribute to your investment account.

If you’re contributing money to your investments each month, a percentage can work well. This way, if the income fluctuates, the dollar amount of contributions moves up or down as well.

A fixed dollar amount can also work well. This too may require adjusting if the income rises or falls.

Investing as much as possible is tempting as your money is put to work instead of just sitting in your savings account, but make a budget and see how much is affordable. It may be worth keeping money aside for emergencies, as well as planned expenses over the next year. You may wish to redo this budget yearly, or as often as required, to ensure the contributions are still a good fit.

Each investor has a different risk tolerance, and each asset has its own risk profile. Some people are fine investing in stocks that swing around wildly, while others have a hard time stomaching a 10% drop in their investments. This defines your risk tolerance.

Do you prefer assets that are more stable: smaller potential profits, but also smaller declines? Do you prefer to try to make as much as possible in the short-term? Possibly investing in riskier stocks and ETFs that could have large price swings or drawdowns.

Sometimes, investors don’t know their risk tolerance until they have a bit of experience. They think they want to own volatile stocks and ETFs with high returns, but when a price drop or correction​ arrives, they find it hard to sleep at night. They worry about their positions and may potentially sell too early at a loss.

When considering risk tolerance, the sleep rule is often used: never invest in anything that negatively affects your sleep. If it does, it means the position is risking too much for your personal tolerance.

Investing in stocks means buying shares in individual companies or ETFs that contain a basket of stocks. The performance of individual stocks is mostly reliant on how that company performs, and to a lesser extent, how the stock market performs.

The “stock market” is measured by benchmark indexes. Indexes track a basket of stocks and, therefore, provide a barometer of how most stocks are performing. There are many indexes tracking different segments of the stock market, such as large companies, small companies, oil and gas stocks, gold stocks and so on.

Popular indexes include the FTSE 100 for UK stocks and the S&P 500 for US stocks. These indexes can’t be purchased directly, but there are exchange-traded funds (ETFs) that track these various indices. These ETFs can be purchased as investments. Investors need to choose whether they’ll invest in ETFs, individual stocks, or both.

Index ETFs rise and fall based on the movement of many stocks. Therefore, their movement isn’t reliant on the performance of only one company.

Each stock and ETF has its own risk profile. To see how risky an asset is, look at its beta. Above one typically means the asset is more volatile than the broader market, while under one is considered less volatile.

This is where people often get stuck, as there are many different investment strategies​. This is why step 1 – set your investment goal – of this article is important. It helps define what you want out of our investments and gets you thinking about how you want to trade. Here are some ideas for how to do that:

Once a strategy has been defined, it is now time to learn how to pick stocks or ETFs that align with that strategy. For more detail on stock picking, read our full guide on how to pick stocks​.

With investing, every trade taken is a compromise because that money could be invested elsewhere. Therefore, typically, investors opt for only selecting the best candidates according to their strategy.

While there is not one single best stock or ETF for everyone, there is for each strategy. Take a growth investor, for example. If there are at least 10 stocks at a given time, which are forecasted to grow earnings by 50% per year over the next five years, then there is little reason to buy a stock with only 5% growth. If an investor wanted more than 10 stocks to buy, they choose the next strongest and then next.

Similarly, with a value strategy, an investor may look for stocks that are stable or growing but that are trading at a low valuation based on discounted cash flows or P/E. They opt for the best stocks that combine these factors.

Technical traders may look for breakouts in the strongest stocks, or fundamental traders may look for companies in the best financial position (strong cash position, low debt, high cash flow and so on).

For passive investors, their only job is to select a few funds that match their long-term goals. For most, this will be diversified index funds, typically tracking the S&P 500, FTSE 100, Nasdaq 100, or popular indexes from other countries. More niche exposure can be gained by purchasing an ETF in the desired sector.

With this step, also consider asset allocation​ – this is how many stocks or ETFs are to be held in the account and how much capital is allocated to each one.

One common way that an investor might find new individual stocks to invest in, is by using a stock screener to filter for companies that match the parameters of their chosen strategy.

An investing platform is where trades are placed. The platform sends the trades to the exchange for execution, then the trades can be monitored and altered within the platform. Depositing funds is required to start investing.

Before picking an investing platform, figure out what you want from it:

There are several fees to be aware of when investing, including:

There are a few things to understand before making an investment .

For every investment, there is a bid/ask spread​. The bid price is where others are willing to purchase the asset right now, and the ask or offer price is where people are willing to sell it. You have a choice. You can buy right now at the offer – called a market order – and get into that trade as there is someone willing to sell to you at that price. Or you can place a limit order and try to get a better price.

Set a limit order at any price you want, but someone must be willing to sell to you at that price. The price will need to move to your order price, so there is no guarantee the order will get you into the trade. One order type isn’t better than another; market order types get you in, but limit orders can be used to get a better price, but there is no guarantee you will get into the trade at a price selected.

With that in mind, here is how to place a trade on a typical investing platform:

Your investment positions will appear inside your trading account, along with details such as entry price, entry date, current price, and current profit/loss. Check on these positions at any time you wish, but how often you check on them should depend on your strategy. An active investor may want to regularly monitor these positions or at chosen intervals.

Passive investors don’t need to actively monitor their positions, especially if they have chosen a buy-and-hold.

It is easy to get addicted to watching the investments move. Try to set parameters around when you check performance. For passive investors, this would be infrequently, such as once a month or even every several months or more. For active investors, define when you’ll monitor your holdings, in alignment with the requirements of your strategy.

Define guidelines for when you should sell your holdings, such as: