How to Invest in Stocks: 12-Step Beginners Guide to Stock Investing

Looking to invest in the stock market? Follow these steps for beginners to get started!

In This Investment Guide: 

1. What are Your Investing Goals? 
2. What Types of Investments to Avoid as a Beginner? 
3. What Tools do I Need to Begin Investing? 
4. How Much do I Need to Invest in Stocks? 
5. What Investment Account Should I Open? 
6. How do I Open a Retirement Account? 
7. How do I Choose the Best Stocks for Me? 
8. What are Low-Cost Index Funds, and Why Should I Invest in Them? 
9. What is Dollar-Cost Averaging? 
10. What is Compounding Interest, and Why Does it Matter? 
11. How do I Automate My Investing and Stay Disciplined? 
12. What is a Simple Investment Strategy for Low-Cost Index Funds?

What are Your Investing Goals?

This is important to be clear here. Randomly saying a number doesn’t clarify what you need to do to reach the goal. 

Working backward to get that number is a better strategy. What you are doing is reverse engineering your realistic financial goals. 

I see most people getting this wrong by not figuring their number out by accounting for aggressive inflation. Some may say, “but inflation isn’t happening,” or “the CPI (Consumer Price Index) is at 2-3% a year”. 

I look at it like this. If I am wrong, great, but at least I will have thought ahead, adjusted for a hyper-inflationary scenario, so I am not caught by surprise. The last thing you want is to be 70+ in with a fixed income and a hyperinflation scenario. It is probably reasonable to think about it like this. Whatever you think the number is after going through the exercise, DOUBLE it at minimum. 

If you focus on a smaller amount of money to retire on, there is less margin for error. Unexpected things in life happen, i.e., divorces, illnesses. So you must spend some time on this. It is better to build a more extensive moat around your retirement for the unexpected things that life could AND usually does throw at you. 

When thinking about this FINANCIAL SECURITY number, many things will be essential to consider: 

• What is your current yearly lifestyle spend? 
• Would you be ok replacing that exact income throughout retirement? 
• If not, what is the monthly minimum net number you would feel comfortable with? 
• What things could you do to increase your income by 10-20% a year? 
• If prices of your top expenses doubled, would this be enough to live on without stressing? 
• Are there less expensive places you would like to live around the US or the world that would make your retirement money go further? 

So what are the ways to increase your income? Well, they probably go further than you think, as it is not ONLY getting paid more. The good news is there are multiple avenues to accomplish this. 

A few ways to increase your income are: 

1. Is by getting a raise in your current job or acquiring more clients in your company
2. By investing in assets such as stocks in a focused manner over time 
3. Decreasing your expenses on items that do not add to your lifestyle, i.e., eating out, coffee out, unhealthy snacks, etc. 
4. Geo-arbitrage, which is living in a much less expensive area than you currently live (i.e., Manhattan vs. Florida)

What Types of Investments to Avoid as a Beginner? 

Some types of investments are better once the experience is gained down the road. Especially when you go down the rabbit hole of frequent day trading. This goes for commodities and individual stocks. These are two things with a fair amount of volatility if the goal is trading in and out of them often.  

Unless you will do this as a full-time job, something like this is just a bad idea.   

In the beginning, you want to be able to control your emotions. Trading in and out is speculation. Investing off of the latest media news is speculation. 

A better play is a strategy where you DOLLAR COST AVERAGE and AUTOMATE your investing. This is where low-cost index funds come into play. 

What Tools do I Need to Begin Investing? 

The tools you will need to start investing in the beginning, are simple. You need: 

1. A small monthly available budget to invest
2. An online brokerage account like Schwab, Vanguard, or Etrade 
3. A retirement account like an IRA or Roth IRA, or SEP 

Now let’s dive into how much you need to invest in stocks. The answer may surprise you!

How much do you need to invest in stocks? 

We will talk about low-cost index funds in a bit. These vehicles allow you to invest in the top 500 companies with a minimal monthly cost. 

The monthly cost is actually up to you with online brokerages like Schwab. You can set up an account for free and begin investing.  

These types of investment vehicles have leveled the playing field for the little guys. Now you can own a small piece of the top 500 companies through fractional shares vs. having to buy a FULL individual share that you may not be able to afford. 

So what does this do? One, it takes the time-suck of trading and speculating out of the equation. Two, it curbs the emotional rollercoaster of investing. Three, it prevents the high transaction costs of trading. Four, it automates the process. Finally, it is built-in diversification. 

What Investment Account Should I Open? 

First of all, what type of retirement account should you open? Well, that depends. 

Do you want the tax break NOW or at the END of your working career days. 

Let’s look at a simple breakdown of the types of retirement accounts: 

Simple IRA (Growth is taxable): This means that you will get the tax break on your income in the CURRENT TAX year. That said, in 20, 30, 40 years, when you retire after 59 ½, you will have to pay tax on the distributions. 

Roth IRA (Growth is NOT taxable): You do not take tax benefits in the current year, but you are not taxed at retirement age. If possible, this is my preferred method. Why? Because you let after-tax dollars on a SMALL amount grow to a large amount over time and then can take it out tax-free. 

SEP (Simplified Employee Pension Plan) retirement account: This is like a traditional IRA account, but for business owners. Contributions to a SEP are tax-deductible. The investments grow tax-deferred until retirement, then they are taxed as income. This is ideal for small business owners as it is a much higher dollar amount than a Simple IRA for an individual. 

Now let’s dive into how to open a retirement account. 

How do I Open a Retirement Account? 

Firstly, you will want to choose what online brokerage you will like to work with to set up your retirement account. 

Here are a few of my favorites: 

• Charles Schwab
• Etrade
• Vanguard 

After you choose an online brokerage, the next step is signing up with them. The nice thing about these platforms is they also give you access for FREE to retirement planning tools and resources. It is never bad to learn as much as possible through a reputable platform as you continue on your investing journey. 

Once signed up, you will then choose which retirement account you would like to start. These platforms are super user-friendly and will walk you through step by step, depending on which one you pick. You can for sure do this all on your own in a matter of minutes, BUT if you get stuck, their support is top-notch, so you will not be left in the dark. 

How do I Choose the Best Stocks for Me? 

If just beginning, I would lean on not doing anything with individual stocks to start out. Instead, I would go with a more tested way, which are low-cost index funds which I will discuss next. 

The first thing is that you will want to do your research on an online brokerage platform. There are many out there. We like Schwab, Etrade, and Vanguard. The platforms are easy to use. You can do a TON of research and analyze charts endlessly if that is your thing. 

What are Low-Cost Index Funds, and Why Should I Invest in Them? 

Low-cost index funds are a way to invest over a long period of time and win by NOT timing the market. The ones that I personally use mirror the S&P 500. Why is this important? It is important because the S&P 500 represents the most dominant 500 companies that are more reliable than just a random company to invest in on a guess. 

Without doing this for a living full time, you want to look into stocks with potentially high returns over time that have the lowest risk per that return. THAT is what I feel low-cost Index funds are. 

Many people talk a lot about returns and “compounding interest” (we will get to this later), but rarely is it talked about that compounding works in BOTH directions. What that means is this, if your money compounds at 7% a year, that is understood by most. 

However, look at these 2 scenarios: 

Investment portfolio 1:

• Initial investment: $10,000 Investment
• Future planned contributions per year: $5,000
• Rate of return: 7%
• Time horizon: 30 years
• Investment Vehicle: Schwab SWPPX low-cost index fund with an expense ratio of .02%
• Ending value (net with fees): $579,153.08
• Ending value (gross): $581,487.76
• Cost of fees: $2,334.68

Investment portfolio 2: 

• Cost: $10,000 Investment
• Future planned contributions per year: $5,000
• Returns: 7%
• Time: 30 years
• Investment Vehicle: Employer 401k with expense ratio of 2%
• Ending value (net with fees): $356,215.12
• Ending value (gross): $581,487.76
• Cost of fees: $225,272.64

So what happened? The amount invested was the same. The returns are the same. The duration invested is the same. The answer is COMPOUNDING EXPENSES. So yes, they both experienced compound interest in a positive direction. However, the expenses compounded too. 

This one of the reasons we like low-cost index funds so much. The reason why the expenses are different is the way they operate. With a low-cost index fund, the fund managers do NOT need to trade in and out of stocks all the time, so the management fee is lower than a mutual fund where the manager is actively trading in and out more often. Not to mention there are VERY few “money managers” that beat the S&P 500 over a long time horizon. 

What is Dollar-Cost Averaging? 

Dollar-cost averaging is a powerful tool I use to automate investing, stay disciplined, and avoid “timing the market.” Most people who time the market fail. One of the main reasons is an emotional connection to the market. It goes up, there is a huge fear of loss, and they chase the pump. If it goes down, they panic and sell. 

Mindset is EVERYTHING. If you are going to trade in and out of stocks and have a hard time controlling your emotions, starting at all may not be a good thing. If you can keep it under control and use simple processes and systems laid out to keep emotions in check, then you are back in the game. 

What is Compounding Interest, and Why Does it Matter? 

It’s been said that compound interest is the eighth wonder of the world. Bold statement? Yes, but made by some of the greats, so who am I to judge. 

So what exactly is compound interest? The simple answer is it makes your money grow faster over time. Let’s take a closer look. 

Say your original investment grows at 7%, but that 7% you earned on that investment stacks on top of the initial amount. Then you are earning 7% on a slightly higher amount. That same scenario happening over a long period of time is what it is and why compounding interest is so powerful. 

Let’s take a look at this in 2 portfolios: 

Investment Portfolio 1: 

• Initial deposit: $100,000
• Contributions: $0
• Investment time span: 30 years
• Estimated rate of return: 7%
• Compound frequency: One time
• Total: $107,000

Investment Portfolio 2:

• Initial deposit: $100,000
• Contributions: $0
• Investment time span: 30 years
• Estimated rate of return: 7%
• Compound frequency: Annually
• Total: $761,226

The second portfolio displays the power of compounding interest over time. 

How do I Automate My Investing and Stay Disciplined? 

Investing has a lot to do with simply staying disciplined, but not through daily willpower. So….how do you take willpower out of it? 

Simple…AUTOMATION. Well, it is simple, but not EASY. Let me clarify. It is not easy without systems that keep emotions at bay. 

Above, we spoke about DCA (dollar-cost averaging), and here, in turn, comes the magic. Dollar-cost averaging into quality assets will take the guesswork out of the ups and downs of the market and trying to time it. 

Automation can be done within your online brokerage accounts. You choose the low-cost index funds that make sense for your portfolio and simply set up the automation within your account. 

You can automate weekly, bi-weekly, monthly, or quarterly. I like to do it bi-weekly, but it doesn’t matter as much as the automation setup itself. 

Now, let’s pull it all together in a simplistic view. 

What is a Simple Investment Strategy for Low-Cost Index Funds? 

• Step 1: Choose your preferred online brokerage account
• Step 2: Choose your preferred retirement investment vehicle 
• Step 3: Choose your preferred low-cost index fund
• Step 4: Choose an amount that you feel comfortable investing a month
• Step 5: Automate that investment within the online brokerage firm
• Step 6: Don’t look at it every day and obsess; just take a long-term view. 

Much of this may seem a little complicated at first, as everything new often does. Don’t be intimidated by any of the steps (they really are easy). Just take one at a time and begin. As time goes on, you will see how easy investing in stocks can be!

Best of luck in your investing journey!!!