Investing In Stocks for Beginners

INVESTING IN STOCKS HAS become increasingly more accessible with the emergence of fintech simplifying the process by allowing beginners to open an account through a website or mobile app.

Owning a stock represents your stake in a company as a common shareholder. Common stocks allow shareholders to vote on company issues, with most companies granting one vote per share. Several companies also offer stockholders dividend payouts. These payouts typically change based on the company's profitability.

Investors with equity exposure in their portfolio allow for the potential of asset appreciation. When your stocks increase in value, you capture market gains. Beginning investors should note there are two ways to secure profits from stock investing: dividend payments and selling shares when their market value goes up.

How to Invest In Stocks Using Robo Advisors

Investing in stocks can be done in many ways.

To take the do-it-yourself approach and manage your own investments, you can open a brokerage account. If you're unsure about where to start, consider opening an account with a robo advisor, who will do some of the heavy lifting at a lower cost. For investors who want more guidance with their retirement plans, turning to financial advisors might be a good solution.

The market for digital wealth management is thriving. Online brokerage services have increased, including options such as Betterment, Wealthfront, SoFi and Ellevest, to name a few. But legacy asset managers like Vanguard, Fidelity and Charles Schwab have gotten on board the train as well. This competition has spurred many brokerages to slash commission fees, which can add up quickly if you buy and sell stocks, mutual funds or exchange-traded funds frequently.

The new wave of robo advisors allows access for new investors to take control of their finances and make their own money decisions. Their platforms are simple and intuitive for investors of varying knowledge and experience.

Robo advisors radically changed the investing landscape for beginners, says Sanjoy Ghosh, chief investment officer at Interactive Advisors based in Boston

"In the pre-robo era, most advisors required hefty minimums. (The) barrier to entry has been erased by robo advisors who require minimums of $100 or less."

Robo investing involves low fees and lower barriers of entry, which yields investing opportunities to middle- and low-income households that may have disregarded or held off building their wealth due to advisor fees or the requisite amount of money to start investing. Also, the appeal to the younger investor has reached the millennial generation and has helped them to start preparing for their financial future.

"Robo advisors have also made it faster to get started," Ghosh explains. "For example, with Interactive Advisors, you answer a quick risk questionnaire online and instantly receive a recommended portfolio based on your responses."

Once you open an online brokerage account, you're asked questions to determine an investment strategy that will assist in your investment decisions. These questions involve knowing your specific financial goals – like retirement or a big purchase – and your risk tolerance, or the degree of market variability you can withstand in your investments.

These online brokerages help develop and execute on an investing strategy and have elements of risk management built into their algorithms, which means your strategy adapts to market fluctuations through automatic asset allocation changes.

"While there is still no such things as a free lunch, risk reduction is as close as it gets. Robo-advised portfolios typically allocate capital to various stock, bond and inflation-hedging ETFs and are diversified across, as well as within, asset classes. This leads to risk reduction and return stability," he says.

According to a 2019 World Bank Group report, "Robo-Advisors: Investing through Machines," it's estimated that the value of assets under management for robo advisors will rise to $1.5 trillion by 2023 in the U.S., which holds the lead in the use of robo advisors.

How Much Money Should You Invest In the Stock Market?

Several online brokers like Betterment don't charge fees for a $0 account balance, nor do they require a minimum amount to open a trading account. You can start investing with as little as $100.

Discount brokers are a boon for beginners with little money, who are often looking to get stock market exposure with smaller portfolios. But a discount broker typically does not provide advice or analysis. Many of these brokers don't require a minimum amount to start an account, while some have a low beginning threshold of $1,000.

Investors can start investing with a dollar amount they can afford. With fractional shares, you can buy a piece of a stock rather than one whole share. Buying fractional shares is typically an option for investors who cannot afford to purchase a whole share of an expensive stock. If you want to manage your volatility risk by not putting up too much of your capital up front, you can buy a slice of a company to maintain a comfortable equity exposure.

Another way to protect your money while investing is to make sure you have diversification in your investment portfolio. Especially if you want to take a hands-off approach investing style, owning index funds that hold different asset in various sectors offers flexibility.

Building a diversified portfolio is the priority for beginners, who should consider adding index funds that capture the broader market, says Rick Swope, vice president of investor education at E-Trade. Mutual funds and ETFs are the easiest solutions since they own hundreds to thousands of stocks and are less volatile than individual shares.

ETFs tend to have low minimums, allowing investors to spread their first $10,000 between a few funds and gain access to a variety of areas in the market, Swope says.

"A mix of ETFs, mutual funds and individual stocks can provide even broader diversification between investment vehicles," he adds. "Bottom line: If you're just getting started, keep it simple.