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Mar 12, 2020

Beginners Guide to Investing in Stocks

By Stash Team

We take the mystery out of investing in stocks.

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The stock market has been performing stongly for a decade, and that has sparked an interest in investing for millions of people. But investing in the stock market—and investing in single stocks, specifically—without a plan, strategy, or some basic knowledge about investing isn’t the best idea.

And because investing in stocks can be confusing and even intimidating, many people tend to avoid it entirely, missing out on potential returns. But platforms, like Stash, are trying to make it easy to get in on the market.

Investing in stocks doesn’t need to be scary. We’ll walk you through the process, step-by-step, so you can feel confident investing your money in the market.

Get started investing in stocks on Stash: Determine your investing style

The clothes you wear and the music you listen to are parts of your personal style. Likewise, people have their own investing styles.

And that’s the first step in our investing lesson: Determining your investing style. Without a defined investing style—which takes into account factors such as your risk tolerance and budget—you can’t properly set your goals and make the right investing decisions to reach them.

You can use Stash’s Portfolio Builder to create a portfolio according to your level of risk. 

Portfolio Builder has three risk levels, for conservative, moderate, and aggressive investors. Here’s what that means:

  • Conservative investors prefer stability, even if it means smaller gains—but still want some growth potential for their portfolio.
  • Moderate investors are looking to build stable portfolios, but are also willing to take on a little more risk in exchange for potentially higher long-term growth.
  • Aggressive investors are looking to maximize the long-term growth potential of their portfolio, even if that means sacrificing some stability and incurring bigger losses.

When you sign up for a Portfolio Builder portfolio, we’ll select one of three portfolios for you, based on the information you gave us about your risk tolerance when you signed up for Stash.

Thankfully, determining your investing style can actually be a simple process. But first, you have to understand the concept of risk, as every investment you make will have some sort of risk associated with it.

What is risk?

At its most basic level, risk is represented as the volatility of a stock. Stocks that gain value rapidly, but also see large drops in value over time, are considered more volatile and, therefore, riskier.

Your age and financial situation are the biggest and most important factors determining an investor’s risk tolerance.

Risk tolerance

Risk tolerance refers to the amount of risk you are willing to take when investing, and it has a huge influence on your investing style. Simply put, some investments are riskier than others, and may be more volatile, or see wilder swings in value. However, riskier investments can have bigger potential rewards.

You can think of risk as a spectrum. There’s a lot of gray area between just “risky” and “not risky,” in other words. And when you’re choosing investments, experts typically recommend that you try to balance your portfolio by investing in stocks that match your risk tolerance.

Determining your risk tolerance

Young investors, who have time on their side, generally have the luxury of taking on additional risk. For example, these investors may see some significant drops in the value of their investments during market downturns and recessions, but those drops have historically been countered by periods of growth.

Over a long period of time, the growth will hopefully outpace the losses and, as a result, investors should see a return on their investment. Young investors have time to wait out the rough patches.

Older investors, on the other hand, are generally more likely to be approaching their investing goals, and should probably take a more conservative approach. These investors will probably be looking to liquidate their investments sooner rather than later, and because of that, will be more wary of market downturns that can scuttle their plans.

And whether you’re young or old, if you have a savings or investment goal with a short horizon, you generally want to invest more conservatively.

Don’t overlook how your emotions can also play a role in determining risk tolerance. Some people, no matter what their age and investment goals, simply can’t stomach a large loss in the value of their investment portfolio. It can be stressful, and you may be prone to panic.

If you’re an investor who would lose sleep every time the market takes a turn, you may want to opt for a more conservative investing strategy, even if you’re relatively young.

Determine your budget for investing in stocks

Your budget is another factor in determining your investing style.

Generally speaking, you should think about developing an emergency savings fund before you start investing, worth about three to six months worth of your expenses. After that, you can consider investing.

A long-term goal, like saving for retirement, does not require a large budget in the beginning. In fact, investing small amounts over time is often considered the best way to save for retirement.

This is called dollar-cost averaging, and it can help smooth out the total cost of your investments over time, compared with investing a large sum all at once.

When determining how much you have in your investment budget, make sure it fits within the framework of a basic household budget—investing in stocks and other securities should only be one element of your overall budget.

Then, consider how much money you need to reach your overall goal, and from that, calculate how much you can afford to invest, and see how much you can set aside strictly for investments on a weekly or monthly basis. An easy way to get started is by playing around with a compound interest calculator.

You can also enable Auto-Stash, a feature that lets you automatically invest a set amount every week,  which can help put your dollar-cost averaging on autopilot.

Investing in stocks: The basics

There are many concepts related to investing and stock trading that you’ll learn over time, but as a beginner, you only need to know enough to get started.

And that begins with one of the most basic investments out there: Stocks.

What are stocks?

The most basic thing you need to understand about investing in stocks is what, exactly, a stock is. A stock, or share, is a small piece of ownership in a publicly traded company.

Companies issue stocks to raise funds that they can then reinvest in their business. So, a stock represents a piece of that company’s assets and earnings.

The value or price of a stock may rise or fall depending on a company’s performance. Investors, or shareholders, can then trade their shares on the stock market, anticipating increases or decreases in value. Though, it’s typically recommended that you “buy and hold”—or, invest, and hang on to your investments through market downturns within the context of a diversified portfolio.

A diversified portfolio means not only having a broad mix of stocks in a variety of industries and even globally, but it also should include a wide array of bonds, and exchange-traded funds, which allow investors to purchase a basket of securities in one investment.

Portfolio Builder can also help you create a diversified portfolio by investing your money in globally diversified funds, based on your risk preferences.

How to start buying stocks: Opening an investment account

Now that you know the basics, you’ll need to open a brokerage, or investment account in order to actually start trading.

With Stash, you can get started with any dollar amount* and start buying stocks and exchange-traded funds, or ETFs.

You’re not a beginner investor until you begin.

Get started with just $1 (or even less) on Stash.
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Written by

Stash Team

*For Securities priced over $1,000, purchase of fractional shares starts at $0.05.

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