How To Invest In Stocks For Beginners

After digging myself out of a financial meltdown, I realized I needed to start investing for the long term in order to secure a good life for myself in the future. I read a few books on stock investing, but they really didn’t click for me at first; I needed something tangible to wrap my hands around for me to really get it. Here’s what I did.

First, I looked for a stock investment that would minimize my risk. This basically meant a mutual fund that invested in a lot of different sectors and had only minimal costs involved. By doing this, a downturn in one sector (like the 2000-2002 downturn in tech stocks and the 2006-? downturn in housing) won’t be disastrous for my investment. It also means that a strong upturn in one sector won’t cause me to skyrocket, but given that I knew little about stocks, I didn’t think I would be great at picking the right sector to be in.

Second, I found a list of solid mutual funds with a long history. I actually used the Money 70 list to start with (it was the Money 65 when I used it). I looked at the index funds on the list and tried to find one that matched what I could invest (a relatively low minimum investment) and that stuck in areas that I wanted to learn more about (domestic stocks, not international stocks, bonds, or real estate). That left me with four funds from Vanguard: the Vanguard 500, the Vanguard Total Stock Market Index, the Vanguard Mid Capitalization Index, and the Vanguard Small Cap Index.

At that point, I spent some time studying each of the funds. I looked at their histories and, since I didn’t want much risk at all for my first investment, I basically looked for how badly they weathered overall market downturns over their history. It turns out that I had some very good choices here, as they were all very good in terms of not collapsing during downturns.

However, I wanted to use these funds as a starting point for education, and so I decided to start with large companies and invested in the Vanguard 500. It had a very long history of positive growth and also had a ton of diversity.

I wasn’t done, though. After I invested, I started spending some time studying some of the individual stocks that make up the Vanguard 500 to see how they worked. I started going through the index and investigating the individual stocks that make it up, trying to learn more about how these stocks move. I looked at companies whose products I used daily and companies I’d never heard of.

What happened? I began to learn how stocks worked via the mutual fund: I was paid dividends and learned about capital gains tax and the like. I also began to learn a lot about individual stocks, as I put in the time to research the individual stocks I owned. Because of my ownership experience, I gave myself a reason to study individual stocks: I already owned them in a risk-protected way. This gave me motivation to understand individual stocks, and now I’m beginning to dabble my toes into individual stock investments.

If you want to get started in stock investing, index funds are a great way to go: minimized risk along with the excitement and self-motivation that comes with owning individual stocks.

If you enjoyed reading this, sign up for free updates!

Loading Disqus Comments ...
Loading Facebook Comments ...
  1. Quang says:

    Hey Trent, nice article… I haven’t had any stocks experience yet, mainly because I haven’t looked into how to get started yet. Great Tip, on using Mutual Funds to learn about Stocks… I always thought it had to be one or the other. Are you buying the funds through a 401k or a Roth IRA?

    Again thanks for the ideas-

  2. Shane says:

    Good stuff! You learn so much more by doing it than you can by reading about it.

    Everyone needs to jump into the shallow end once in a while and make their way to the deep end step-by-step

  3. Andy says:

    Hey, I also been wondering how to get started, I looked at mutual funds and I think they are the best way to get started but I been having a hard time on how to buy the stocks, I was thinking sharebuilder website, anyways how do you buy your stocks??

  4. Gordon says:

    I’m about to open a mutual fund account. I’m thinking about ING Direct since I already have a savings account there.

    Are their funds okay?

  5. sbarcelona says:

    Two books that really educated me on investing were ‘A Random Walk Down Wall Street” and ‘A Random Walk Guide to Investing’ by Burton Malkiel. The first book give a great history of the markets and investing. The second gives very practical tips on creating a sound financial foundation. His advice prompted me to start investing in broad index funds like Vanguard’s Total Stock Market Fund.

  6. Debbie says:

    Another good way to learn hands on, especially if you are tempted to buy and sell individual stocks, is to participate in some kind of investing contest. Then you are practicing with fake money! The only problem is that if you are in a boom the whole time or a bust the whole time, you will get the wrong impression of what the stock market is like.

    Also, you can fill out a fake income tax form with your fake earnings and losses to see what that’s like. Turns out you have to pay attention to when you buy and sell what, and how much they cost (including fees). It’s easier to fill out your taxes when you sell your stocks in the same sized blocks and you bought them in. (Funds are more complicated because they might be buying and selling continuously, but their forms give you good numbers.)

  7. db says:

    Gordon:

    The best advice anybody could give you is to pick up a few books on investing (Boglehead’s Guide to Investing and Jonathan Clement’s book on mutual fund investing are good starting points), and also spend some time researching on these sites:

    http://www.morningstar.com
    http://www.marketwatch.com

    Only you can learn for yourself whether your ING funds are a good choice for you. It’s to your advantage to take the time to learn how.

  8. Bren says:

    I buy ETF’s and Individual stocks , the ETF’s are out performing my 12 stocks.(I’m with Sharebuilder and they are good!)Stay with ETF’s or Stock Fund and maybe later on go with 2 or 3 stocks!

  9. Christina says:

    Thank you so much. I looked for ages for a website that would teach me what I need to know. I found you by chance by clicking a link on the NYT (I think) and I have been ‘studying’ ever since. I just finished paying off my mortgage, and wanted to invest, but felt overwhelmed by the information flow… I know much more now… I also like your 101 tips for money free weekend. We are stuck in a boring post somewhere on this big globe, and are thankful for your tips. Cheers, Christina

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>