Investing is an important part of any successful long-term financial plan, and for some, part of this plan may include knowing how to trade stocks. If that applies to you, and you’re new to investing, how to do that is likely confusing. We clear up any confusion, including how to get started and options for deciding which stocks to buy. Keep in mind that trading stocks is not for everyone and you should always consider your goals, risk tolerance and time horizon before making any investment.
What are stocks?
Stocks are shares of a public company’s assets and earnings. Buying them effectively makes you a part-owner of the company and gives you a vested interest in its success or failure. When the company does well, the value of your shares—and in turn, your overall investment portfolio—goes up. Unfortunately, the reverse is also true: When the company does poorly, so do your returns.
But numbers don’t tell the whole story. For example, a company might post net losses one year because it spent a lot of money on projects that promise to expand the business later, such as adding new buildings, equipment or people. So this year’s loss could actually mean big gains in the future and knowledge of that could help push stock prices up over time.
Plus, stock performance isn’t strictly about the numbers anyway. That’s because stock prices are ultimately determined by market forces, i.e. public demand or lack thereof. For example, even if a company is doing well in terms of profits, a bit of bad news that might not be directly related to the business—such as a scandal involving the CEO or some bad behavior by other employees—could prompt some investors to sell and send share prices down. So public perception of the company can be just as important as its actual financial well-being.
All that’s to say: Stocks are tricky business and can be challenging to assess, especially for regular investors who haven’t dedicated their careers to doing so.
Why invest in stocks?
Most investors need at least some stocks in their portfolio because they can be such rewarding investments. (Note that all investments come with risks that you must take into consideration.) Between 1926 and 2018, a portfolio built of 100 percent stocks offered a healthy average annual return of 10.1 percent, according to data from financial firm Vanguard. By comparison, a portfolio that was 100 percent bonds (a typically much safer investment choice than stocks) would have gained just 5.3 percent a year, on average, over the same time period.
Of course, the higher returns came after a much wilder ride: The all-stock portfolio suffered losses in 26 of these 93 years, dropping as much as 43.1 percent in 1931. Then, in 1933, it had its best year ever, gaining 54.2 percent. The bond portfolio enjoyed a smoother journey, losing in just 14 of the 93 years and only as much as 8.1 percent (in 1969). Its most winning year was in 1982 with a return of 32.6 percent.
And simply saving, while also very important, doesn’t produce much growth at all. In fact, the current annual percentage yield for a savings account is less than 1 percent, according to Bankrate, and one-, three-, and five-year certificates of deposit (CDs) offer average rates of just 1.87 to 1.97 percent. Meanwhile, the current inflation rate as of November 2019 is 2.05 percent, according to InflationData.com. That means money in savings is actually losing purchasing power at the moment.
So in order to keep up with and beat inflation, you have to invest. Just remember that while stocks offer the greatest potential for growth, they also come with big risks. Maintaining a well-diversified portfolio, including stocks, should help balance the potential risks and returns.
How to start investing in stocks
Before you invest in anything, you first have to think about what your financial goals are, along with your timeline for achieving them. Then you can build a well-diversified portfolio designed specifically to meet those goals. And don't forget that there are also different types of accounts for different goals.
Consider different types of investment accounts
What type of account is right for you will greatly depend on what your goals are. For example, if you’re investing for retirement, contributing to a 401(k) (or other employer-sponsored retirement plan, if one is available to you) is a good idea. In that case, your employer will have chosen the broker and investment options for you. An individual retirement account (IRA) is typically the next best option for retirement. (Acorns offers a choice of three different types of IRAs, in addition to a regular brokerage account.)
Or if you’re investing for education, you might want to go with a 529 plan, a tax-advantaged account that must be used to cover education costs. Picking the right account can score you some big tax breaks.
Open an investment account
Once you have a strategy in mind, you can open an account and get started with the actual trading. You have a lot of brokerages to choose from, so be sure to research all the details before you make your choice. One big point to consider is costs, including commissions collected for each trade (which can vary depending on asset type), other fees (such as annual and inactivity fees) and minimum balances. Keeping costs down is a big and simple way to keep returns up. (With Acorns, users can open an investment account and invest in a portfolio of funds with exposure to thousands of stocks and bonds for $1 per month. Acorns charges no commission fees.)
Fund your account and start investing
After you get all those logistics settled, and you fund your account, let the trading begin. That can be as easy as telling your broker to execute a trade for you or clicking a few buttons through your online broker’s site or app. (Keep in mind that some accounts that brokerage firms offer may have pre-selected portfolio mixes to choose from as well.)
You just need to specify the stock or stock fund, the number of shares you want to buy or the amount of money you have to invest in the stock, and the type of order you want to make. Your main choices are to use a market order (to buy the stock as soon as possible at the best available price) or a limit order (to set a maximum price you’re willing to pay). A limit order only goes through if the stock falls below the specified price within your selected timeframe.
Choosing which stocks to buy
Determining which stocks to invest in depends on your goals, risk tolerance and timeline. But it's a good idea to build a well-diversified portfolio.
Diversifying your portfolio
Diversifying your portfolio across asset classes, like stocks and bonds, is smart. But it should happen within the stock portion of your portfolio, too, with a nice mix of foreign and domestic stocks, as well as companies of different sizes and in different industries. So properly diversifying your stock allocation means a lot more work than skimming a list of recently winning stocks to buy.
Investing in stock funds
A better option for most people is to invest in mutual funds or exchange-traded funds (ETFs) that handle all the hard stock picking for you. Taking that route allows you to invest in hundreds or thousands of different stocks in one quick trade. (Acorns portfolios include a mix of ETFs with allocations designed to match a variety of risk tolerances.)
Whatever investments you decide to trade, you can rest assured that by simply getting started with investing, you’re taking a solid step toward achieving your financial goals.
Get started investing with as little as $5 with Acorns.
Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
Updated May 27, 2020