How to Invest in the Stock Market for Beginners

By W D Adkins

  • Overview

    Perhaps you've had a savings account for some time. That's good, but the interest rate is low. Certificates of Deposit pay more, to be sure. But if you want to see your savings grow faster, or you want more income than interest on a CD provides, you have to step outside insured bank deposits and accept some risk. You'll need to learn how stock transactions work, how to select solid companies to invest in, and how to avoid risky stock investing techniques until you have more experience and knowledge.

    • Step 1

      Learn what a stock investment is. When you buy shares of stock in a company you acquire part ownership. If the company does well the stock is likely to go up in value. It may pay dividends, although many good companies reinvest profits instead in order to grow. Keep in mind there is always some risk. Even the best company can suffer setbacks and you can see the value of your stock fall. That's the risk you accept in return for the opportunity to invest.

    • Step 2

      Choose your initial investment strategy. You may want to focus on low-risk stocks with high dividends to provide immediate income or you may wish to make your equity grow. You'll want different stocks depending on your goals. Be realistic about your level of knowledge and the time you can devote to research stocks. If these are limited, consider a broker-managed investment program or a mutual fund. Either gives you the benefit of professional investment management.

    • Step 3

      Open a brokerage account. Banks offer brokerage accounts that have moderate fees. For the beginner, a full service brokerage is a good choice because, although they are more expensive, they offer investment counseling and research tools that can help you. When you are confident of your ability to research and choose stocks on your own, you'll probably want a discount broker, since they charge much lower transaction fees.

    • Step 4

      Search for possible investments by reading financial publications like the Wall Street Journal, Kiplinger's, Fortune, and trade journals of industries you are interested in. Limit yourself to one or two industries so you can get an in-depth understanding of the issues facing the industry.

    • Step 5

      Investigate any company thoroughly before you invest in the stock market. Go to the company's online Investor Relations page and download or order a copy of their annual report. Look at their growth and earnings for the past 5 years and how their stock has performed. Pay particular attention to the balance sheet. This will give you a snapshot of the company's current condition. Check independent analysts as well.

    • Step 6

      Purchase shares in a company when you find one that has a good record of performance with stock that has done as well or better than its industry average and whose current condition shows it is positioned to continue that good performance. Once you've mad e a stock purchase, monitor the stock's performance and the company on a regular basis.
    • Skill: Moderately Challenging
    • Ingredients:
    • Brokerage account
    • Tip: If you are new to investing in the stock market, you should avoid the riskier techniques that are available, such as buying stocks on margin, short selling, and trading stock options. Wait until you have some experience in the market before you attempt these strategies.

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