Investing in stocks can be a solid way to build wealth over time, but it can also carry significant risk. Stocks are shares in a company, and their prices can fluctuate dramatically over the course of a day or even a week. If you haven’t researched a stock before buying it, you can easily lose money. A well-diversified portfolio can help you minimize risk and increase your potential for growth over time.
Stocks make money through dividends (a share of a company’s profits) and capital appreciation (an increase in the stock price). While higher potential returns often come with increased risk, if you have a long-term investment horizon, stocks can be a good choice for beginner investors.
You can buy individual stocks directly from a company or through a broker, which is a financial services firm that buys and sells shares for a fee. You can also invest in a fund that holds a variety of stocks, known as a stock mutual fund or an ETF. These funds may be less risky and easier for beginners to manage, as you don’t have to choose every stock individually.
There are many different types of stocks, and each one has its own unique characteristics. For example, growth stocks are companies that are expected to grow at a fast pace. Value stocks, on the other hand, have low price-to-earnings ratios and may be undervalued by the market. Blue-chip stocks are shares in large, established companies that have a strong history of performance.
While you may have an idea of what types of stocks you want to invest in, it’s important to research each individual company before purchasing any shares. Look for information on the company’s past performance, its current profitability and its strategic plan. You can find this information in annual reports and other publications such as investor guides and the Securities and Exchange Commission’s EDGAR website.
You should also consider your financial goals when investing in stocks. How much do you need to save for retirement, for example? Then, decide how much you can afford to lose in the short term if your investments go down. You should have a separate emergency savings account that can cover expenses for three to six months if your stock investments lose value.
Depending on your needs, you may want to choose passive or active investing strategies. Passive investors stick with a buy-and-hold strategy and don’t trade frequently, while active investors are more likely to try to beat the market.
While you can invest in individual stocks, it’s usually better for beginner investors to focus on diversified products such as stock mutual funds and ETFs. Creating a portfolio of individual stocks is time-consuming and requires a lot of research, which can be too difficult for a new investor to do on their own. Additionally, a stock index fund gives you a small stake in hundreds of America’s best companies for a relatively low cost. These are ideal for beginners who don’t have the time or the skills to pick individual stocks.