A Beginner’s Guide to Stock Investing (2022)

Compare the Best Robo Advisors
CompanyCategoryInvestopedia RatingAccount MinimumFees
WealthfrontBest Overall / Best Goal Planning4.8$5000.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers. 0.42%–0.46% for 529 plans
BettermentBest Beginners / Best Cash Management4.5$00.25% (annual) for digital plan, 0.40% (annual) for the premium plan
Interactive AdvisorsBest SRI / Best Portfolio Construction4.2$100 to $50,0000.08-1.5% per year, depending on advisor and portfolio chosen
M1 FinanceBest Low Costs / Best Sophisticated Investors4.2$100 ($500 minimum for retirement accounts)0%
Personal CapitalBest Portfolio Management4.2$100,0000.89% to 0.49%
Merrill Guided InvestingBest Education4.4$10000.45% annually, of assets under management, assessed monthly. With advisor - 0.85% Discounts available for Bank of America Preferred Rewards participants
E*TRADEBest Mobile3.9$5000.30%

Since Betterment launched, other robo-first companies have been founded, and even established online brokers like Charles Schwab have added robo-like advisory services. According to a report by Charles Schwab, 58% of Americans say they will use some sort of robo advice by 2025. If you want an algorithm to make investment decisions for you, including tax-loss harvesting and rebalancing, then a roboadvisormay be for you. Also, as the success of index investing has shown, you might do better with a roboadvisor if your goal islong-term wealth building.

Investing Through Your Employer

If you’re on a tight budget, try to invest just 1% of your salary into the retirement plan available to you at work. The truth is you probably won’t even miss a contribution that small.

Work-based retirement plans deduct your contributions from your paycheck before taxes are calculated, which will make the contribution even less painful. When you’re comfortable with a 1% contribution, maybe you can increase it as you get annual raises. You’re unlikely to miss the additional contributions. If you have a 401(k) retirement account at work, then you may be investing in your future already with allocations to mutual funds and even your own company’s stock.

Minimums to Open an Account

Manyfinancial institutions have minimum deposit requirements. In other words, they won’t accept your account application unless you deposit a certain amount of money. Some firms won’t even allow you to open an account with a sum as small as $1,000.

It pays to shop around some and check out our broker reviews before deciding where you want to open an account. We list minimum deposits at the top of each review. Some firms do not require minimum deposits. Others may often reduce costs, such as trading fees and account management fees if you have a balance above a certain threshold.Still others may offer a certain number of commission-free trades for opening an account.

Commissions and Fees

As economists like to say, there ain’t no such thing as a free lunch. Though many brokers have been racing recently to lower or eliminatecommissions ontrades, and ETFsoffer index investing to everyone who can trade with a bare-bones brokerage account, all brokers have to make money from their customers one way or another.

In most cases, your broker will charge a commission every time you trade stock, either through buying or selling. Trading fees range from the low end of $2 per trade but can be as high as $10 for some discount brokers. Some brokers charge no trade commissions at all, but they make up for it in other ways. There are no charitable organizations running brokerage services.

Depending on how often you trade, these fees can add up and affect your profitability. Investing in stocks can be very costly if you hop into and out of positions frequently, especially with a smallamount of money available to invest.

Remember, a trade is an order to purchase or sell shares in one company. If you want to purchase five different stocks at the same time, this is seen as five separate trades, and you will be charged for each one.

Now, imagine that you decide to buy the stocks of those five companies with your $1,000. To do this, you will incur $50 in trading costs—assuming the fee is $10—which is equivalent to 5% of your $1,000. If you were to fully invest the $1,000, your account would be reduced to $950 after trading costs. This represents a 5% loss before your investments even have a chance to earn.

Should you sell these five stocks, you would once again incur the costs of the trades, which would be another $50. To make the round trip (buying and selling) on these five stocks would cost you $100, or 10% of your initial deposit amount of $1,000. If your investments do not earn enough to cover this, you have lost money just by entering and exiting positions.

If you plan to trade frequently, check out our list of brokers for cost-conscious traders.

Mutual Fund Loads

Besides the trading fee to purchase a mutual fund, there are other costs associated with this type of investment. Mutual funds are professionally managed pools of investor funds that invest in a focused manner, such as large-cap U.S. stocks.

An investor will incur many fees when investing in mutual funds. One of the most important fees to consider is the management expense ratio (MER), which is charged by the management team each year based on the number of assets in the fund. The MER ranges from 0.05% to 0.7% annually and varies depending on the type of fund. But the higher the MER, the more it affects the fund’s overall returns.

You may see a number of sales charges called loads when you buy mutual funds. Some are front-end loads, but you will also see no-load and back-end load funds. Be sure that you understand whether a fund that you are considering carries a sales load prior to buying it. Check out your broker’s list of no-load funds and no-transaction-fee funds if you want to avoid these extra charges.

For the beginning investor, mutual fund fees are actually an advantage compared to commissions on stocks. This is because the fees are the same regardless of the amount that you invest. Therefore, as long as you meetthe minimum requirement to open an account, you can invest as little as $50 or $100 per month in a mutual fund. The term for this is called dollar-cost averaging (DCA), and it can be a great way to start investing.

Diversify and Reduce Risks

Diversification is considered to be the only free lunch in investing. In a nutshell, by investing in a range of assets, you reduce the risk of one investment’s performance severely hurting the return of your overall investment. You could think of it as financial jargon for “Don’t put all of your eggs in one basket.”

In terms of diversification, the greatest difficulty in doing this will come from investments in stocks. As mentioned earlier, the costs of investing in a large number of stocks could be detrimental to the portfolio. With a $1,000 deposit, it is nearly impossible to have a well-diversified portfolio, so be aware that you may need to invest in one or two companies (at the most) in the first place. This will increase your risk.

This is where the major benefit of mutual funds or ETFs comesinto focus. Both types of securitiestend to have a large number of stocks and other investments within their funds, which makes them more diversified than a single stock.

Stock Market Simulators

People new to investing who wish to gain experience trading without risking their money in the process may find that a stock market simulator is a valuable tool. There are a wide variety of trading simulators available, including those with and without fees. Investopedia's simulator is entirely free to use.

Stock market simulators offer users imaginary, virtual money to "invest" in a portfolio of stocks, options, ETFs, or other securities. These simulators typically track price movements of investments and, depending on the simulator, other notable considerations such as trading fees or dividend payouts. Investors make virtual "trades" as if they were investing real money. Through this process, simulator users have the opportunity to learn about the ins and outs of investing—and to experience the consequences of their virtual investment decisions—without running the risk of putting their own money on the line. Some simulators even allow users to compete against other participants, providing an additional incentive to invest thoughtfully.

What is the Difference Between a Full-Service and a Discount Broker?

Full-service brokers provide a broad array of financial services, including offering financial advice for retirement, healthcare, and a host of investment products. They have traditionally catered to high-net-worth individuals and often require significant investments. Discount brokers have much lower thresholds for access, but also tend to offer a more streamlined set of services. Discount brokers allow users to place individual trades and also increasingly offer educational tools and other resources.

What Are the Risks of Investing?

Investing is a commitment of resources now toward a future financial goal. There are many levels of risk, with certain asset classes and investment products inherently much riskier than others. However, essentially all investing comes with at least some degree of risk: it is always possible that the value of your investment will not increase over time. For this reason, a key consideration for investors is how to manage their risk in order to achieve their financial goals, whether they are short- or long-term.

How Do Commissions and Fees Work?

Most brokers charge customers a commission for every trade. These tend to range anywhere up to about $10 per trade. Because of the cost of commissions, investors generally find it prudent to limit the total number of trades that they make to avoid spending extra money on fees. Certain other types of investments, such as exchange-traded funds, carry fees in order to cover the costs of fund management.

The Bottom Line

It is possible to invest if you are just starting out with a small amount of money. It’s more complicated than just selecting the right investment (a feat that is difficult enough in itself), and you have to be aware of the restrictions that you face as a new investor.

You’ll have to do your homework to find the minimum deposit requirements and then compare the commissions to those of other brokers. Chances are that you won’t be able to cost-effectively buy individual stocks and still diversify with a small amount of money. You will also need to choose the broker with which you would like to open an account.

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