How to Invest in the Stock Market

Investing is one way to give your wealth a chance to grow over the long haul. That’s where the stock market comes in. 

The stock market is just a series of stock market exchanges where shares of publicly held companies are bought and sold. An investor in the stock market buys into publicly traded companies. There are several factors that can influence a stock's prices, but generally if these companies do well financially, the share prices may increase and the investor can earn a profit. 

But investing is never a sure thing, and stocks are considered especially risky. All kinds of things can affect stock prices, from earnings reports to economic issues to industry news. Losses are always possible. Understanding how to invest in the stock market can help you make informed decisions that support your financial goals.

1. Set your investing goals

Before exploring how to invest in the stock market, ask yourself why you’re doing it in the first place. This begins with clarifying your investment goals. Every person is different, but retirement is a common goal for most investors. That’s because equity investing, or buying stocks, while risky, can be an instrumental part of building your nest egg. 

You might hope to use investment earnings to fund other financial goals. That might be putting your kids through college, starting a business, buying a home, or simply padding your savings account.

2. Determine your risk tolerance

Investing is risky by design, but some investments carry more risk than others. Stocks fall into this category. 

That’s why diversifying your investment portfolio can be so important. Diversification can spread out investment risk and help you better navigate market volatility. 

Having bonds in the mix is one way investors look to add diversification and stability to their portfolios. When you buy a bond, you’re loaning money to the organization that issued it, usually a government entity or organization that's obligated to repay you down the line (with interest). Historically, bond returns haven't been as rewarding as stock investing, but the risk can be much lower.

So how do you determine your own risk tolerance? Age is one factor. If you’re building your nest egg and are 30 years out from retirement, you’ve got a long way to go — and that gap will probably influence your investment choices. Going heavier on stocks and lighter on bonds may feel right given your longer timeline. As you inch closer to retirement, you might dial things back to be more conservative. 

There are other things to consider, too —for example, Acorns will recommend a portfolio for you based on additional factors like your investment goals, the amount of money you want to invest, and when you're hoping to reach your investment goals. If you’d like to be more aggressive or more conservative, you can change your risk yourself. 

3. Choose an investment account

Once you’re clear on your goals and risk tolerance, it’s time to choose an investment account. 

Retirement accounts

Retirement accounts are a simple way to begin investing in the market. If you’re making contributions to a 401(k), You're likely already investing in the stock market, be sure to double check how your investments are being allocated. 

Another option to consider is an individual retirement account (IRA). You can open a traditional IRA or Roth IRA on your own, fund it yourself, and select your investments. Qualified accounts typically have eligibility requirements and contribution limits, please consult a tax or financial advisor with questions regarding your personal situation prior to making any investment decisions.

Brokerage accounts

You can open a self-directed brokerage account with a brokerage firm and fund it by transferring money from your bank account. You choose the investments you want, then the firm executes the transactions on your behalf. This can give you control over your investment choices. 

Unlike qualified retirement accounts like 401(k) plans and traditional IRAs, there are no contribution limits — and you can withdraw your money whenever you like. However, you may need to pay taxes 

Robo-advisors

Platforms like Acorns Invest make automated investing easy. After answering a questionnaire about your risk tolerance and goals, we'll recommend an expert-built portfolio for you.

4. Pick your investment types

The question now comes down to choosing your investments. The stock market is a place to buy and sell individual stocks, but that isn’t your only option. You can also focus on a long-term, passive investing strategy with investment types such as ETFs or index funds 

5. Manage your investments

There are a few ways to approach your portfolio management, but for a passive investing strategy, you may want to consider mixing in ETFs, index funds, and other securities from different asset classes (or find a company that will do it for you, like with the expert-built, diversified portfolios you get with Acorns Invest). 

This diversification can help smooth the ride as the market moves up and down. If some of your stock values dip, you’ll hopefully have other investments to make up the difference.

6. Stick with it

It’s important to stay the course during bouts of market volatility. Short-term swings are a normal part of investing. Reacting emotionally and selling your investments during market lows could mean missing out when things pick back up again. In other words, try to stick to your long-term plan.

Your original asset allocation will likely drift as the values of your securities change. Rebalancing can help you get back on track. It involves revisiting your portfolio and making tweaks so that it continues to reflect your desired allocation. If left alone, it could become either too aggressive or too conservative. Rebalancing annually is one rule of thumb, though some experts suggest doing it every six months or once a quarter.

There are lots of different ways to invest in the stock market. The most important thing is being intentional and making investment choices that support your goals and timeline.