Stocks for Dummies: A Quick Guide to Buying Your First Stocks

stocks for dummies guide first stock frugal investor

The latest data shows that a mere 52 percent of Americans currently own stocks and bonds.

It's understandable that a lot of people are wary of buying stocks, especially after the crash of 2008. 

However, there are still a lot of benefits that come with investing in the stock market.

Are you considering buying stocks? Are you unsure of how to invest or where to begin? 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's 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.


What Are Stocks?

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 is 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).


Mutual Funds

When you first dive into the investing world, you'll hear a lot of terminologies thrown around, including words like "mutual funds" and "ETFs".

It's easy to feel 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.


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. 


What to Do Before You Invest

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.


Getting Started

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

One of the first decisions you need to make has to do with the way you're going to invest your money.

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 an 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

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. That way, you won't have invested too much and won't experience any significant losses if the business underperforms. 


Monitor Your Investments

Be sure to keep an eye on your 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's easy to feel like a dummy or be intimidated by the stock market, especially if you've never invested before. Now that you have your "stocks for dummies" guide at your fingertips, though, you can start buying stocks with confidence.

Keep this information in mind and it'll be much easier for you to start investing (and making smart investment decisions). You might even learn how to day trade for a living!

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!

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