Stocks For Dummies: Guide To Buying Your First Stock

stocks for dummies guide first stock frugal investor dummy

The latest data shows that a mere 50 percent of Americans currently own stocks and bonds.

It is understandable that a lot of people are wary of buying stocks, especially after the financial crash over a decade ago and the current market crash with an impending recession. 

However, there are still a lot of benefits that come with investing in the stock market. And investing in stocks is more important than ever with inflation so high and savings account returns so low.

Are you considering buying stocks? Are you unsure of how to invest in stock or where to begin buying? Do you feel like a dummy when you read and hear about the stock market?

If you answered "yes" to either of these questions, here is a basic "stocks for dummies" guide to help you get started.

All the information you need to start investing in the stock market for dummies is explained down below so you don't end up feeling like an investment dummy!

What Are Stocks And What Is The Stock Market?

Before we go any further into this topic, we need to make sure you have a solid understanding of what stocks are. In simplest terms, when you purchase stock, you're purchasing legal ownership in a particular company. 

Purchasing stock allows you to earn money based, often based on that company's performance. When you earn money from stock, it comes to you in two different ways.

The first way to profit from stocks is from appreciation. If a stock's price appreciates (increases), you can sell the stock and earn a profit. You can also hold onto it and wait for it to continue increasing in value.

The second way to earn money from stocks is through dividends. If a stock pays dividends (not all of them do), you will receive payments from the company's revenue on a regular basis (usually once per quarter). 

It just requires smarts and strategy to pick the right stocks. You can choose stocks yourself or get stock picks from a service like Motley Fool Stock Advisor.

Mutual Funds In The Market

When you first dive into the investing world, you'll hear a lot of terminologies thrown around, including words like "mutual funds" and "ETFs". There are so many different types of mutual funds out there that it could make even a journeyman investor's head spin and feel like a dummy.

It's easy to feel like a dummy or intimidated when you hear words like this and don't know what they mean. They're not as complicated as some people would have you believe, though.

Mutual funds allow you to purchase small pieces of several different stocks with one transaction. 

Examples of mutual funds are index funds and exchange-traded funds (ETFs for short).

When you invest in mutual funds, you own small pieces of several different companies. You can also combine several different funds to create a more well-rounded (or diversified) portfolio with a lower risk profile.

Investing In Individual Stocks

Another option is to purchase individual stocks. With individual stocks, you are investing in a specific company. 

Individual stocks tend to be riskier than mutual funds. However, the payout from them can often be quite a bit larger.

Most investors build their portfolio primarily around mutual funds, with a few individual stocks mixed in. 

And if you want to get frugal and crazy, you can add in some penny stocks to your portfolio as well.

What to Do Before You Invest In The Market

Before you decide to start investing it's important to take stock (no pun intended) of your current financial situation.

You can improve your finances in a dramatic way with wise investments. Before you start down that path, though, make sure you've checked the following boxes:

  • Pay off your high-interest debt: This should be your first priority before you start spending money on stocks
  • Build an emergency fund: Make sure you have some money saved for an emergency — don't expect to become rich off of your investments overnight
  • Set a budget: It also helps to set an investment budget for yourself so you know how much you're willing to spend (and willing to potentially lose)

If you build a diversified portfolio, the likelihood that you'll lose a ton of money in your investments goes down quite a bit. However, it still is a good idea to set aside a specific dollar amount for investment purposes before you begin. 

So if you're an entrepreneur or a business, you want to make sure you can budget as much as possible to have more investment capital. Utilize free online invoice templates for your company to help save money for additional stock investment resources. 

Getting Started In The Stock Market

Now that we've covered some basics, it's time to dive a little deeper and help you understand how to actually start investing. If you're ready to take the plunge, here are the steps you need to follow:

Choose How You Want to Invest In The Market

One of the first decisions you need to make has to do with the way you're going to invest your money. That is the "stock market for dummies 101" information.

Some people like to be hands-on and make all their investment decisions for themselves. They know which businesses they want to invest in and have a good idea of what they want their investment journey to look like.

For these people, it's best to find a brokerage and a stockbroker who can help them get started.

Many people don't have the time or knowledge needed to handle their own investment accounts. If you're in this boat, you may want to consider working with a robo-advisor.

A robo-advisor is an online service that manages your investments for you for a small fee. Most major brokerages also offer a robo-advisor option to help you invest your money in a mostly hands-off way that still aligns with your goals.

Open A Stock Investment Account

Once you've made a decision about the type of investor you want to be, your next step is to open an investment account. You can do this with a stockbroker directly, or you can do it online using a robo-advisor.

Before you open an account, take note of the fees associated with it (most charge a very small percentage of the assets that are being managed). Pay attention to the account minimums and trade fees, too.

Start Small In The Stock Market

When you're first getting started, it's best to keep your investments small. Focus mainly on mutual funds to build a diverse, low-risk portfolio.

If you do want to invest in individual stocks, you may want to start with stocks under $1. With penny stocks you won't have invested too much and won't experience any significant losses if the business underperforms. 

Monitor Your Stock And Fund Investments

Be sure to keep an eye on your stock investments, too. You don't need to become obsessive and check them every day (this can end up being maddening for most people), but you should still watch and see how they're performing. This will help you know when it's a good time to hold or sell them.

Put Your "Stocks for Dummies" Knowledge to the Test

It is easy to feel like a dummy or be intimidated by the stock market, especially if you have never invested before. Now that you have your "stocks for dummies" guide at your fingertips, though, you can start buying stocks or stock certificates with confidence.

Keep this stocks for dummies information in mind and it will be much easier for you to start investing (and making smart investment decisions). You might even learn how to day trade for a living when you become more advanced with stocks and other securities!

Do you want to learn more about investing or money market management? If so, check out the Investing section of our site today for additional advice so you avoid being a dummy with stocks!

New Frugal Finance Blog Posts & Articles