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# A beginner’s guide to investing in the stock market



Coryanne Hicks is an investing expert. Before becoming a journalist, Coryanne was a licensed financial professional with Fidelity Investments. She has written white papers and expert guidebooks for major investment industry players, and her work has appeared in U.S. News and World Report, Kiplinger, and Business Insider.

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Getting started investing can seem intimidating. Here's how to begin.

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Investing can be one of the more complex concepts in personal finance. But it’s also one of the key cornerstones to financial independence and wealth building. While it might seem intimidating—from the alphabet soup of terms, such as individual retirement accounts (IRAs) and 401(k)s, to keeping track of the latest market movements—understanding the basics can boost your confidence and help you feel comfortable getting started.

## How to start investing

On a high level, investing is the process of determining where you want to go on your financial journey and matching those goals to the right investments to help you get there. This includes understanding your relationship with risk and managing it over time.

Once you understand what you want, you just have to jump in. You can decide to invest on your own or with the professional guidance of a financial planner. Below we discuss in detail each of the key steps to help you get started with investing.

On a high level, investing is the process of determining where you want to go on your financial journey and matching those goals to the right investments to help you get there. This includes understanding your relationship with risk and managing it over time.

Once you understand what you want, you have to jump in. You can decide to invest on your own or with the professional guidance of a financial planner. Below we discuss in detail each of the key steps to help you get started with investing.

### 1. Decide your investment goals

Before you open an account and begin comparing your investment options, you should first consider your overarching goals. Are you looking to invest for the long term or will you need your funds within the next few years? Do you want your portfolio to generate income or are you more focused on growth? Knowing the answer to questions like these will narrow down the number of investment options available and simplify the investing process.

“Consider what your ultimate goal is for this money—is it for retirement, a down payment on a house in the next five years, or something else?” says Lauren Niestradt, Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), and portfolio manager at Truepoint Wealth Counsel.

Understanding your goals and their timelines will help determine the amount of risk you can afford to take and which investing accounts should be prioritized.

For example, if your goal is to invest your money for retirement, you’ll want to choose a tax-advantaged vehicle, such as an IRA or a 401(k), if your employer offers one. But you may not want to put all your money earmarked for investing into a 401(k), because you can’t access that money until you turn 59 1/2, or you will get hit with penalty fees (with a few exceptions).

You also don’t want to invest your emergency fund, which is savings to cover three to six months’ worth of expenses and unexpected costs, in a brokerage account because it’s not easy to access money if you need it quickly. Plus, if you need that cash when the market is facing a downturn, you might end up losing money when you’re forced to sell low.

You can use a combination of accounts to invest in for your goals. Some investors like to open one account for each goal so they can track their progress easily. However, you can also combine multiple goals in one account or use multiple accounts for one goal. It’s all about finding the system that works best for you.

### 2. Select investment vehicles

After determining your goals, you need to decide which investment vehicles—sometimes referred to as investing accounts—to use. Keep in mind that multiple accounts can work together to accomplish a single objective. Regardless of the number of accounts you have, you want to view your portfolio as a whole when making investment decisions so that you don’t end up with too much of your money in the same investments.

As mentioned above, retirement investing is best done in an IRA or 401(k). Experts generally advise starting in your 401(k) and supplementing with an IRA if you have more money to save.

If you use an IRA, you’ll need to choose between a traditional IRA or Roth IRA. Traditional IRAs let you contribute pretax money, which you’ll then pay taxes on when you withdraw in retirement. This means you get a tax deduction this year but may pay more taxes in retirement. But this could end up saving you money overall if your tax bracket is lower in retirement than it is today.

Roth IRAs are funded with after-tax dollars. So, you don’t get to take a tax deduction for your contributions this year but, in return, you can withdraw the funds tax-free in retirement. This makes Roth IRAs powerful retirement savings vehicles—there aren’t many times in life you can avoid taxes—but not everyone can use a Roth. The IRS imposes income limits that dictate how much you can contribute each year based on your modified adjusted gross income (MAGI).

If you’re investing for a goal other than retirement and looking to take a more hands-on approach to building your portfolio, a brokerage account is the place to start. Brokerage accounts give you the ability to buy and sell stocks, mutual funds, and exchange-traded funds (ETFs). They offer a lot of flexibility, as there’s no income limit or cap on how much you can invest and no rules about when you can withdraw the funds. The drawback is that you do not have the same tax advantages as retirement accounts.

There are several financial firms that offer brokerage accounts, such as Charles Schwab, Fidelity, Vanguard, and TD Ameritrade. Working with a traditional brokerage usually comes with the benefits of having more account types to choose from, such as IRAs or custodial accounts for minors, and the option to speak with someone on the phone and, in some cases, in person if you have questions.

But there are disadvantages: Some traditional brokerages may be a bit slower to incorporate new features or niche investment options, such as cryptocurrencies. For example, fintech companies, such as Robinhood and M1 Finance offered fractional shares to investors years before traditional brokerages did.

Another brokerage account option is a robo-advisor, which is best for those who have clear, straightforward investing goals and don’t want to deal with the day-to-day tasks of managing their investments. The advantages of using robo-advisors include lower fees compared to a human financial advisor and automatic rebalancing to name a few.

A potential drawback to robo-advisors is their cookie-cutter approach. They generally have a suite of prebuilt portfolios and questionnaires they use to apply those portfolios. These can be a good fit if your needs align with the average investor profile. But if you have more complex financial goals and prefer more customized investing options, a robo-advisor may not be the best fit.   One important thing to note: Opening a brokerage account and depositing money is not investing. It is a common mistake for new investors to assume that opening an account and adding money is enough. However, you need to purchase your own investments to complete the process.

### 3. Calculate how much money you want to invest

As you decide which investment accounts you want to open, you should also consider the amount of money you’ll be investing in each account type.

How much you put into each account will be determined by your investment goal outlined in the first step—as well as the amount of time you have until you plan to reach that goal. This is known as the time horizon. There may also be limits on how much you can invest in certain accounts. For example, retirement accounts, such as 401(k)s and IRAs, have contribution limits, which are set by the IRS each year.

Decide on a percentage of your income that you can dedicate to building your portfolio: The general rule of thumb for retirement goals is to invest at least 15% of your income each year, but if you started investing later in your career or want to retire early you may want to consider investing a higher percentage. Keep in mind that 15% also accounts for any matches you receive from your employer. This means that you could contribute 10% of your W-2 income with a 5% match from your employer to reach a total of 15% to hit this benchmark.

If you live paycheck to paycheck, 15% might seem like a crazy amount to invest. Don’t panic: It’s OK to start small, even 1%. The important thing is to get started so your money will grow over time. You can always increase your contributions down the line. Some 401(k) plans offer automatic annual contribution increases to help you do that.

Plan how you’d like to invest your money: A common question that arises is whether you should invest your money all at once—or in equal amounts over time, more commonly known as dollar cost averaging (DCA). Both options have their advantages and disadvantages.

“For medium to long-term goals, dollar cost averaging is a valuable strategy to ensure that you’re investing consistently toward a goal and hopefully benefiting from purchases at both higher and lower trading prices. As they say, it’s not about timing the market, but time in the market,” says Tara Falcone, CFA, CFP, founder and CEO of Reason, a goal-based investing app. DCA, even in small amounts, can be an effective investing tactic.

But DCA has its downsides: Because historically the market rises over time, you’re more likely to see a higher return if you had invested a lump sum at the beginning.

“ The data show that investing the sum all at one time is better than dollar cost averaging. By investing the money all at once, you get to your target allocation immediately and, thus, have a higher expected return than if you kept a portion in cash,” says Lauren M. Niestradt, CFP, CFA, and senior portfolio manager at Truepoint Wealth Counsel. Your target allocation refers to the mix of stocks, bonds, and other assets you should own based on your goals and risk tolerance (more on this below) as well as how long you plan to invest.

Because most people do not have large amounts of cash to put into the market at one time, DCA tends to be the default option. And with investing, it’s better to jump in and not waste time than to wait for the perfect moment (when the market is right or when all your financial ducks are in a row) that will probably never come.

If you decide to invest with a lump sum, it is still beneficial to continue adding to your investments regularly. Doing so gives your portfolio more opportunities to continue to grow.

### 4. Measure your risk tolerance

Risk tolerance describes the level of risk an investor is willing to take for the potential of a higher return. Your risk tolerance is one of the most important factors that will affect which assets you add to your portfolio.

“Before deciding on what level of portfolio risk an investor wants to target, they first need to assess the comfort level with risk, or volatility,” says Niestradt. “Does it make them nervous to invest when they see the S&P 500 drop over 24% as it (did in 2022)?” she adds. These questions are important as there’s no point in investing if you panic every time your portfolio loses value and sell everything. This will only result in you losing money when the goal is to grow your wealth over time.

Certain assets tend to be more volatile—meaning they’re more likely to rise or fall suddenly—than others. For instance, stocks are more volatile and thus riskier than bonds because stock prices rise and fall more frequently than bond prices. But stocks also rise in value more than bonds over time. This is the risk-return trade-off in investing: the more risk you take, the greater your potential long-term return.

One way to gauge your risk tolerance is to take a risk tolerance questionnaire. These are typically a short set of survey questions that will help you understand what your risk tolerance is based on the responses you select. Someone with a more conservative tolerance may have more of their portfolio in bonds and cash compared to stocks; someone with a more aggressive tolerance may have a higher portion of their portfolio in stocks.

As you are evaluating your risk tolerance keep in mind that it is different from risk capacity. Your risk tolerance measures your willingness to accept risk for a higher return. It is essentially an estimate of how you would react emotionally to losses and volatility. Meanwhile, risk capacity is defined as the amount of risk you’re able to afford to take.

Risk capacity considers the factors that impact your financial ability to take risks and would include things, such as job status, caretaking duties, and how much time you have to reach that goal. Because these other priorities can be capital intensive, your ability to take on risk must fit within those parameters.

For example, someone with a source of regular income and minimal expenses may be able to afford greater risk than someone who works in the gig economy where paychecks can be more variable.

Your overall assets can also impact your risk capacity. Someone with more savings can afford to take greater risks with their investments because they have more money to fall back on if things don’t go as they’d hoped in the market.

Similarly, the more time you have to reach a goal, the higher your risk capacity may be because you’ll be able to wait out any market downturns. If you know you’ll need your funds within the next five years, on the other hand, you can’t afford to take as much risk. This is because you won’t be able to wait for your money to recover from a market downturn if one happens between now and when you need your money.

One way to think of risk with investing is that you should take on as much risk as you can bear—your risk capacity—but not more than you can tolerate—your risk tolerance. It won’t do you any good to invest more aggressively than you can comfortably tolerate if it leads to panic selling.

### 5. Consider what kind of investor you want to be

There is no one-size-fits-all approach to investing. The type of investor you want to be is directly tied to your risk tolerance and capacity as some strategies may require a more aggressive approach. It is also tied to your investing goals and time horizon. There are two major categories that investors fall into: Short-term investing (also referred to as trading) and long-term investing.

The lure of short-term investing is the potential to replace your current income with revenue made through buying and selling your investments. The drawback is it can be both difficult and risky to see profits consistently because of how quickly the market can move and how unexpected news and announcements can impact an investment in the short term.

Additionally, short-term profits from investments are generally taxed at a higher rate than long-term investments. The IRS defines a short-term gain or loss as an asset that was bought and sold in one year or less. Long-term capital gains and losses occur when the asset is held for more than one year.

#### Short-term investing strategies

There are two types of short-term investing strategies:

- Day trading: An investment style that enters and exits an investment between market hours. Day trading is notoriously difficult, especially for new investors and, over time, has not yielded positive results for the majority of those who have tried.
- Swing trading: Investors who take this approach are looking to buy and sell an investment after a few days or months to achieve a profit. The goal is to take advantage of significant swings around seasonal events or trading patterns.

#### Long-term investing strategies

Long-term investing, on the other end of the spectrum, comes with the upside of allowing more time for compounding interest and more margin for error when the market experiences volatility. One of the drawbacks of long-term investing is that it can become more difficult to catch up with your goals if you’ve delayed your investing efforts.

There are a few different long-term investment strategies to consider. You don’t have to follow only one. It’s OK to try a few different strategies:

- Index investing: This method is perhaps the most popular among long-term investors, in part, because firms, such as Vanguard, pioneered index funds in the 1970s, and it’s never really fallen out of fashion. This strategy involves investing your money in entire segments of the market, such as the S&P 500. Investors with this style tend to take on less risk than those who buy individual stocks but often see higher returns when compared to active investing strategies. This is evidenced by the fact that only 12% of funds outperformed the S&P 500 over the past 15 years. Index funds tend to charge low fees as well, so you’ll get even more out of your investments.
- Value investing: This strategy seeks to identify stocks that are seen as undervalued by the stock market. Warren Buffett is a big proponent of this investment philosophy.
- Growth investing: On the other side of the fence from value investors are growth investors. They look for stocks that are the most likely to increase in value and hopefully beat the overall market in the process. Because of the perceived growth potential of these stocks, you may end up paying a premium for them. This is why growth investing is often viewed as the opposite of value investing—where you try to buy stocks at a discount—but, in reality, you can use both strategies simultaneously, if you want.
- ESG investing : ESG stands for environmental, social, and governance. The Environmental category considers how a company’s actions impact nature. The social category is a measure of how employees are treated and the diversity breakdown of those in leadership roles. The governance category tracks how a company is running and what policies it advocates for. Investors who choose this style of investing try to pick stocks or funds that rank highly for their efforts to become better corporate citizens.
- Dividend investing: Dividend investors are those who buy investments for the purpose of generating a regular income stream. Dividends are regular (but not guaranteed) payments from companies that are shared with investors, usually on a quarterly basis. Dividend investing in some cases can require significant capital to generate a modest income.

### 6. Build your portfolio

Once you’ve determined your goals, assessed your willingness to take risks, decided how much money you have to invest, and what type of investor you want to be, it is finally time to build out your portfolio. Building a portfolio is the process of selecting a combination of assets that are best suited to help you reach your goals.

“I recommend a goal-based investing approach because it allows you to create separate portfolio ‘buckets’ for your investing goals, each of which has a unique goal amount, time horizon, and risk tolerance associated with it,” says Falcone.

This approach to building your portfolio allows you to view your investments through the context of what you’re trying to achieve, which can be a good motivator to keep going. Your first step is to select the right type of account for the goal you’re looking to accomplish.

“Decide what type of account [you] should invest in, whether it should be a brokerage account, IRA, or Roth IRA. There are limitations on how much you can put in an IRA or Roth IRA in a given tax year, so you may need to open more than one type of account,” says Niestradt. With the right account or buckets, you can then begin selecting your investments.

Below is a list of common investments to include in your portfolio:

- Stocks: This is an asset representing ownership in an individual company. If the company does well the value tends to rise, but the opposite is also true if the company falters. Investors often use stocks to help their portfolio value increase because stocks tend to have the highest long-term return. However, dividend investors may also use stocks for income, as discussed above.
- Bonds: These are loans made to a company or government with the promise of repayment plus interest payments. Bonds can provide a steady stream of income but historically do not offer returns as high as the stock market.
- Mutual funds: These assets are investments that are built to pool the collective funds of its shareholders to invest in a collection of stocks and/or bonds. Investors can own large swaths of the market with one fund vs. attempting to buy stocks one by one. Mutual funds can either be actively or passively managed. Actively managed funds are run by a team of fund managers who are actively trying to beat the broader market, while passively managed funds track an index, such as the S&P 500. You will usually pay more for an actively managed fund through a higher expense ratio, so make sure the returns are worth the higher price vs. an index fund.
- ETFs: ETFs are very similar to mutual funds and offer the same benefits but typically with lower fees. They also provide more opportunities for trading since ETFs trade throughout the day, such as stocks, while mutual funds trade only at market close through the fund manager.

### 7. Monitor and rebalance your portfolio over time

Once you’ve selected your investments, you’ll want to monitor and rebalance your portfolio a few times per year because the original investments that you selected will shift due to market fluctuations.  This can cause them to no longer be in the proportions you intended when you set the proportion of stocks to bonds and other assets in your portfolio, known as your asset allocation.

For example, if you decide to have 70% of your money in stocks and 30% in bonds this could become 80% stocks to 20% if the stock market grows at a faster pace than bonds. This is known as portfolio drift and if gone unchecked may result in you taking on more risk than intended, which could impact your returns.

Rebalancing is the process of reallocating those funds to match your targeted allocation. A general rule of thumb is to rebalance any time your portfolio has drifted more than 5% from its initial allocation. One advantage of robo-advisors is that this rebalancing process is done for you automatically.

You’ll also want to tread carefully when looking at your investments following a big drop in the market. This can lead investors to make rash decisions and sell their assets when the stock market has a bad week, month, or year, potentially losing money on their initial investment and missing out on the opportunity to buy stocks when they are essentially at a discount.

## Other key things to know about investing as a beginner

The process of investing does not need to be complex. A best practice is to avoid investment decisions rooted in speculation, panic, or fear as these feelings can often lead to significant losses and higher risk. The important thing for new investors is to take things slow and strive for consistency.

“I would recommend looking for low-cost, broadly diversified ETFs as the easiest way to get started in building their portfolio,” says Niestradt. When in doubt, refer to your investing goals as your North Star to keep your emotions and your portfolio on track, and remember that investing is a process that happens over time and not overnight.

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#### About the contributors



Coryanne Hicks is an investing expert. Before becoming a journalist, Coryanne was a licensed financial professional with Fidelity Investments. She has written white papers and expert guidebooks for major investment industry players, and her work has appeared in U.S. News and World Report, Kiplinger, and Business Insider.



EDITORIAL DISCLOSURE : The advice, opinions, or rankings contained in this article are solely those of the Fortune Recommends ™ editorial team. This content has not been reviewed or endorsed by any of our affiliate partners or other third parties.

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