How To Invest In Stocks: A Step-By-Step Guide

how to invest in stocks guide investing stock exchange

At first, trading stocks can seem like an overwhelming and risky process. Trading stocks means investing your hard-earned money with no guarantee of a profit. And with the volatile nature of the stock market, it's hard to know which stocks to invest in without risking financial ruin.

The good news is that investing in stocks can be safe and profitable with the right knowledge. Smart investments in the stock market can help you increase your income, help you grow your wealth over time, and give you financial freedom.

In this article, we'll go over how to invest in stocks and the things you need to do to get yourself on the road to financial freedom. 


1. Assess Your Financial Situation

Before you start investing in stocks, you need to take a look at your finances. This will help you figure out how much money you can put towards investments and how that fits into your current budget. 

You'll need to take a look at your current debt, your income, and your monthly budget as well. Make sure you have the funds to make your payments and provide capital for investments. You can review your monthly budget and identify areas where you can spend less to help save money for an investment account. 

You should also take into consideration any current financial obligations. For example, if you just had a baby or you recently bought a house, you'll need to make sure you have the financial stability to take on an investment account. 


2. Determine Your Investment Goals

Once you've figured out your financial situation, you need to determine your investment goals. Making your investment goals will help you figure out how much time you need to dedicate to trading and what type of trading you want to do. 

Passive, Long-Term Income

If you are looking for passive, steady income, long-term, low-risk investments will be best for you. Stock mutual funds, known as exchange-traded funds or EFTs, are a great option for investors looking for steady income from long-term investments. 

EFTs are stocks that allow you to buy a small portion of a bunch of companies. For example, if you buy an index fund that is benchmarked to the Standard and Poor 500, you are betting on the growth of all the companies within the S&P 500. If the market value of those companies generally increase, the index value increases, and you make a profit. 

These stocks are a diversified, low-risk investment. Because you are investing in a wide range of companies, you are invested in multiple industries. This means if one industry takes a hit and others do well, your investment won't be significantly impacted. It also means less volatility, which means you will make money more gradually and any losses will be mitigated. 

This means that you won't outperform other investors, but it also means you won't underperform and lose all of your money.

Active, Short-Term Income

If you want to actively trade stocks and are looking for more immediate income, you'll want to start trading individual stocks. These are more volatile and prone to rapid gains and losses, but they also allow investors to make more money. 

Buying individual stocks means buying a portion of a single company, traded in shares. The market price of these shares can change rapidly and dramatically, with huge gains and losses in a single day. 

This volatility means that investors can make money and lose money much faster. For example, if you buy an individual stock and the share price doubles, you double your original investment. On the other hand, if the price falls dramatically, you could lose everything you've invested.

The volatility of these stocks means you'll have to stay constantly updated. Make sure to check out stock market news to make those large gains and avoid major loses. 

Choose Your Online Broker

Once you've figured out your investment goals and strategy, you can choose an online broker. These online brokers allow you to buy and sell stocks in a variety of markets. If you plan on buying EFTs, you can use a cheaper online broker like Betterment. They don't charge fees for transactions, and the service will meet the needs of long-term investors.

If you plan on buying individual stocks, you'll need a full-service online broker, such as ETrade and Ameritrade. These online brokers allow you to buy most types of stocks and bonds, and also offer services like interactive charts and expert analysis. 

Which Is Better?

While there are advantages to investing in both types of funds, the truth is that investing in both EFTs and individual stocks will deliver the best results. 

For beginners, it's recommended that you use 90% of your investment capital to invest in EFTs. The remaining 10% should be invested in individual stocks of your choosing. 

With 90% of your investments in EFTs, you can earn steady, long-term gains, and it protects your investment account from large market shifts. And with 10% in individual stocks, you have the freedom to choose stocks you are confident in and make fast returns on your investment. In a worst-case scenario, if your individual stocks don't perform well, you still have 90% of your capital invested in low-risk stocks. 


Invest in Stocks 

Since 90% of your stocks will be invested in EFTs, you need to learn how to pick individual stocks for the remaining 10% of your portfolio. While everyone has their method for picking stocks, following these general rules will guide you in the right direction. 

Don't Overload, Diversify Your Investments

One of the biggest mistakes new investors make is overloading a single stock. They believe in a certain stock so much that they invest almost all of their money in it. This can lead to huge losses when the share price plummets. 

Buying small portions of many different stocks will ensure that sudden changes in the market don't clean you out. Buy stocks in different industries to diversify and protect yourself from volatility.

Buy Stocks Based on The Floor and Ceiling of The Stock

Many investing gurus will tell you to buy low and sell high. While that advice is generally correct, cheap stocks aren't always good and expensive stocks aren't always bad. 

Finding the "floor" and "ceiling" of the stock will help you figure out where the stock is going. The floor of the stock refers to the lowest price the stock consistently reaches before it bounces back. The ceiling of the stock refers to the highest price the stock consistently reaches before it falls. You can use the interactive chart tool found online or provided by your online broker to find each of these. 

If a stock is near the floor of the stock, you can safely assume the price will go up, and you should buy it. If the stock is near the ceiling, you should sell it because it is likely the price will soon fall. 


The Path to Financial Freedom Awaits

Now that you have learned how to invest in stocks you can start safely earning extra income and building toward a life of financial freedom. Make sure to keep doing research on trading stocks to learn more techniques and become a smarter investor.

If you would like to learn more about smart investing or how to start investing, browse the rest of our blog for more investing tips.

Bootstrap Business Blog Newest Posts From Mike Schiemer, Guest Posts, & Blog Outreach Services