How to start investing in stocks today

| Last Updated August 25, 2022

Stock market investor learning how to start investing in stocks

Learning how to start investing in stocks and build an investment portfolio can be quite a daunting task. Thankfully technological innovation has made the whole process far easier, especially for individuals with a smaller amount of capital.

When an individual makes up their mind to invest, they’ll have to decide what and where to put their hard-earned capital to work. And there are quite a lot of investment assets to choose from:

Each asset type has its own advantages and disadvantages, making them suitable for different people depending on their personal financial position and goals.

Historically stocks, while risky, have historically delivered the highest return over long periods of time. And this is why they’re so popular amongst most investors. In fact, around 55% of the US population invests in stocks. Here in the UK, that number is closer to 33%, as British investors tend to be more conservative.

With all that said, what is the process of learning how to start investing in stocks today?

RELATED: What are the best investments for beginners?

What are stocks, and how can I start investing in them?

Stocks can also be called shares or equities. These represent a tiny portion of ownership within an underlying company. As an owner, shareholders have a claim on the business’s profits or future earnings, which, in the long run, is what drives share prices up.

In other words, if a company performs well, the claim on earnings is larger, making shares more valuable. As the value increases, the demand for owning shares in the business increases, driving up the stock price. However, this also works in reverse. If a company underperforms and suffers losses, the claim on earnings is smaller, making shares less valuable.

A long-term investor seeks to buy shares in a business that will thrive for years or even decades to profit from the rise in share price as well as any dividends received in the meantime.

In the past stock, investors would receive a share certificate as proof of ownership. Today everything is done digitally through an investment platform provided by a trading broker. Therefore the first step to investing in stocks is to open a brokerage account.

There are lots of different types of share dealing accounts to choose from, each with its own fee structure. New investors need to spend time looking at the options and fee structures to pick which account is best for them.

It’s also worth exploring tax-efficient accounts like the Stocks and Shares ISA or Self-Invested Personal Pension (SIPP) for UK investors, or Roth IRA for US investors, to minimise or outright eliminate taxes on any profits.

In oversimplified terms, here is the typical process of learning how to start investing in stocks:

How long should I put my money into the stock market?

A common question from investors learning how to start investing in stocks is how long they should stay invested. And while it’s a simple question, there are countless potential answers. And with the stock market providing near endless liquidity, it’s possible to sell shares within seconds after purchasing them.

The correct investment length ultimately depends on the investment strategy being used. Day trading is a short-term strategy where stocks are bought and sold within a few days or sometimes even hours.

But long-term investors typically hold onto positions for at least 5-10 years or even longer. After all, why sell shares in a thriving company that should continue to prosper in the future?

While speaking on CNBC in March 2016, Warren Buffett said, “Money is made in investments by investing and by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now”.

As a quick reminder, Warren Buffett is arguably one of the world’s greatest investors, amusing a multi-billion-dollar fortune in the stock market starting with just a few couple hundred bucks. Therefore, I think following his advice is probably sensible.

But there are some occasions when selling early might be necessary. So before pulling out my money from the stock market, here are three things I consider first.

  • Is the reason I initially invested still valid?
  • Is there a fundamental change in management that I think will harm future performance?
  • Have I met my investment goal with this position?

Should I start investing in stocks today?

For long-term investors, time in the market is far more important than timing the market. Therefore many would argue that the best time to start investing in stocks is as soon as possible. After all, the sooner money is put to work, the sooner the benefits of compounding can manifest.

But before jumping into the deep end, investors need to make sure they can afford to invest. The stock market can be a volatile place. And even the most successful businesses in the world can be a poor investment decision if a stock is purchased at the wrong price. Not to mention that crashes and corrections, while rare, can seriously derail the wealth-building process.

During these volatile times, most investors fail to stay the course due to the powerful fear of loss. Even firms that most people agree can recover still end up being sold off in a panic.

That’s why there is a golden rule in investing that I believe should always be followed. Never invest money that is needed within the next five years. That way, if the worst comes to pass, I won’t be forced to sell at the worst possible time to meet living expenses.

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.