Historically, equity investments have outperformed many other assets, making them an effective tool for those looking to grow their wealth. Our guide will help you understand how to start your investment journey by learning how to buy stocks.
Different ways to invest in stocks
You can choose any of the following approaches or use all three. The way you buy stocksdepends on your investment objectives and how actively you want to participate in managing your portfolio.
Invest in individual stocks. If you want to research and read about markets and companies, buying individual stocks is a good way to start investing. Although the share prices of some companies seem quite high, you may want to consider buying stocksif you are just starting out and only have a small amount of money.
Invest in an equity ETF. Exchange-traded funds (ETFs) buy a lot of individual stocks to track the underlying index. When you invest in an ETF, it’s like buying stocks in a very broad range of companies that belong to the same sector or make up a stock index, such as the S&P 500. ETFs are traded on exchanges like stocks, but they offer greater diversification than owning individual stocks.
Invest in equity funds. Mutual funds share some similarities with ETFs, but they also have important differences. Managers of actively managed mutual funds select a range of stocks and try to outperform a benchmark index. When you buy stocks in equity funds, your profits come from dividends, interest income and capital gains. Low-cost index funds are mutual funds that operate more like ETFs.
Remember, there is no right or wrong way to invest in stocks. Finding the best mix of individual stocks, ETFs and mutual funds may take some trial and error as you learn to invest and build your portfolio.
Choose how to invest in stocks
There are many different accounts and platforms you can use to buy stocks. You can buy stocks yourself through an online broker or hire a financial advisor or robo-advisor to buy them for you. The best method is the one that matches the amount of effort and guidance you want to put into managing your investments.
Open a brokerage account. Once you have learned the basics of investing, you can open an online brokerage account and buy stocks. A brokerage account gives you an edge in selecting and buying stocks.
Hire a financial advisor. For more advice and guidance on buying stocks and achieving other financial goals, consider hiring a financial advisor. A financial advisor will help you set your financial goals and will buy and manage your investments, including stock purchases, on your behalf. Financial advisors charge a fee, which can be a fixed annual fee, a per-transaction fee or a percentage of the assets under management.
Choose a robo-advisor. Robo-advisors are an easy and very cheap way to invest in stocks. Most robo-advisors invest your money in various ETF portfolios, buy the assets and manage the portfolio for you. They are usually cheaper than financial advisors, but you rarely have access to a live person to answer questions and guide you through your choices.
Use a direct stock purchase plan. If you prefer to invest in just a few stocks, many top companies offer plans that allow you to buy their stocks directly. Many plans offer free transactions, but they may charge other fees when you sell or transfer your stocks.
Remember that no matter which method you choose to invest in stocks, you will likely pay a fee at some point for buying or selling stocks or managing your account. Pay attention to the fees and expense ratios for both mutual funds and ETFs. Don’t be afraid to ask for a fee schedule or speak to a customer service representative at an online broker or robo-advisor who can advise you on fees you may incur as a client.
Accounts to Invest in Stocks
Several types of accounts can be used to buy stocks. The options described above offer some or all of these different types of investment accounts, although some pension accounts are only available through your employer.
Retirement accounts: the two most common types of retirement accounts are 401(k) accounts and Individual Retirement Accounts (IRAs). The most common types of IRAs are Individual Retirement Accounts (IRAs), which are only available through your employer, while anyone can open an IRA through an online broker or robo-advisor. These accounts often offer tax benefits that encourage saving for retirement, but they also come with annual contribution limits. Other types of retirement accounts include 401(b)s, SEP-IRAs and stand-alone 401(k)s.
Taxable investment accounts. The retirement accounts described above are generally subject to certain tax rules for your investments and have contribution limits. Income from equity investments made in taxable investment accounts is treated as ordinary income and is not subject to special tax. In addition, there are no restrictions on contributions.
Education savings accounts: if you are saving money for education, education savings accounts allow you to invest in stocks, usually through mutual funds and target portfolios. These accounts include 529 savings plans and Coverdell Education Savings Accounts.
Depending on how you want to invest in stocks, you can set up investment accounts either through a broker (online or through your financial adviser), through your bank (Coverdell ESAs) or your employer (employer-sponsored plans).