What is a good amount to invest in stocks?

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.Learning how to invest begins with learnin

What is a good amount to invest in stocks?

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

Learning how to invest begins with learning how to invest in stocks. Historically, the return on equity investments has outpaced many other assets, making them a powerful tool for those looking to grow their wealth. Our guide will help you understand how to kick-start your investing journey by learning how to buy stocks.

Different Ways to Invest in Stocks

There is more than one way to invest in stocks. You can opt for any one of the following approaches or use all three. How you buy stocks depends on your investment goals and how actively involved youd like to be in managing your portfolio.

  • Invest in individual stocks. If you enjoy research and reading about markets and companies, buying individual stocks would be a good way to start investing. Even if the share prices of some companies seem pretty high, you can look at buying fractional shares if youre just starting out and have only a modest amount of money.
  • Invest in stock ETFs.Exchange-traded funds (ETFs)buy many individual stocks to track an underlying index. When you invest in an ETF, its like buying stocks from a very broad selection of companies that are in the same sector or comprise a stock index, like the S&P 500. ETF shares trade on exchanges like stocks, but they provide greater diversification than owning an individual stock.
  • Invest in stock mutual funds.Mutual fundsshare certain similarities with ETFs, but there are important differences. Actively managed mutual funds have managers that pick different stocks in an attempt to beat a benchmark index. When you buy shares of a stock mutual fund, your profits come from dividends, interest income and capital gains. Lower-cost index funds are mutual funds that work more like ETFs.

Keep in mind that theres no right or wrong way to invest in stocks. Finding the best combination of individual stocks, ETFs and mutual funds might take some trial and error while youre learning to invest and building your portfolio.

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Choose How to Invest in Stocks

There are a variety of accounts and platforms that you can use to buy stocks. You can buy stocks yourself via an online brokerage, or you can hire a financial advisor or a robo-advisor to buy them for you. The best method will be the one that aligns with how much effort and guidance youd like to invest in the process of managing your investments.

  • Open a brokerage account.If you have a basic understanding of investing, you can open an online brokerage accountand buy stocks. A brokerage account puts you in the drivers seat when it comes to choosing and purchasing stocks.
  • Hire a financial advisor.If you would prefer to have more advice and guidance for buying stocks and other financial goals, consider hiring a financial advisor.A financial advisor helps you specify your financial goals and then purchases and manages your investments for you, including buying stocks. Financial advisors charge fees, which can be a flat annual fee, a per-trade fee or a percentage of the assets they manage.
  • Choose a robo-advisor.Robo-advisors are a simple, very inexpensiveway to invest in stocks. Most robo-advisors invest your money in different portfolios of ETFs, and they buy the assets and manage the portfolio for you. They are generally less expensive than financial advisors, but you seldom have the benefit of a live human to answer questions and guide your choices.
  • Use a direct stock purchase plan.If youd prefer to invest just a few stocks, many blue-chip companies offer plans that make it possible to purchase their stock directly. Many programs offer commission-free trades, but they may require other fees when you sell or transfer your shares.

Keep in mind that no matter the method you choose to invest in stocks, youll most likely pay fees at some point to buy or sell stocks, or for account management. Pay attention to fees and expense ratios on both mutual funds and ETFs. Dont be shy about asking for a fee schedule or chatting with a customer service representative at an online brokerage or robo-advisor to advise you on fees you might incur as a customer.

Accounts to Invest in Stocks

There are a variety of different account types that let you buy stocks. The options outlined above offer some or all of these different investment accounts, although some retirement accounts are only available via your employer.

  • Retirement accounts:The two most common types of retirement accounts are 401(k)sand individual retirement accounts (IRAs). The former are only available from an employer, while anyone can open an IRA at an online brokerage or a robo-advisor. These accounts often offer tax advantages that incentivize you to save for retirement, but they also come with annual contribution limits. Other retirement account types include 401(b)s, SEP-IRAs and solo 401(k)s.
  • Taxable investment accounts. The retirement accounts outlined above generally get some form of special tax treatment for your investments and have contribution limits. Proceeds from stock investments made in taxable investment accounts are treated as regular income, with no special tax treatment. Plus, there are no contribution limits.
  • Education savings accounts:If youre saving money for qualified education purposes, education savings plans allow you to invest in stocks, generally through mutual funds and target-date portfolios. These accounts include 529 plansand Coverdell Education Savings Accounts.

Depending on how hands-on youve chosen to be with investing in stocks, youll either set up your investment accounts through a broker(online or through your financial advisor), through your bank (for Coverdell ESAs), or through your employer (for employer-sponsored plans).

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How to Fund Your Account

If you plan on buying stocks via a retirement account like an IRA, you might want to establish a monthly recurring deposit. For example, the 2020 contribution limit for an IRA is $6,000 for anyone below age 50, and $7,000 for anyone 50 or older. If your goal is to max out your contribution for the year, you might set a recurring deposit of $500 per month to meet that max limit.

If youre buying stock through an employer-sponsored retirement plan like a 401(k), youll need to indicate what percentage of your pay or a flat dollar amount you want to be deducted from each paycheck.

For all other types of investment accounts, establish clear investing goals and then decide how much of your monthly budget you want to invest in stocks. You can choose to move funds into your account manually or set up recurring deposits to keep your stock investment goals on track.

Here are a few things to keep in mind as you set your investment budget and fund your account:

  • Mutual fund purchase minimums.Many stock mutual funds have minimum initial purchase amounts. Be sure to research different optionsMorningstaris a great resourceto find ones with zero or low minimums to start investing in stocks as soon as possible.
  • Trading commissions.If your brokerage account charges a trading commission, you might want to consider building up your balance to purchase sharesespecially individual stocksuntil the commission only represents a small fraction of your dollars invested.
  • Mutual fund fees:When buying a stock mutual fund, be sure to review what the loadis on the shares youre purchasing. Some mutual funds have an upfront or back-end sales chargethe so-called loadthats assessed when you buy or sell shares. While not all mutual funds have loads, knowing before you buy can help you avoid unexpected fees.

Start Investing in Stocks

Select the individual stocks, ETFs or mutual funds that align with your investment preferences and start investing. If youve chosen to work with a robo-advisor, the system will invest your desired amount into a pre-planned portfolio that matches your goals. If you go with a financial advisor, they will buy stocks or funds for you after discussing with you.

Upon successful execution of your order, the securities will be in your account and youll begin enjoying the rewards of the stock market. And yes, your funds will reap dividends and experience losses as the economy changes, but for the long-term, youll be taking part in the sector of investments that have helped investors grow their wealth for over a century.

As you make your initial stock purchases, consider enrolling in a dividend reinvestment plan (DRIP). Reinvestment plans take the dividends you earn from individual stocks, mutual funds or ETFs, and automatically buys more shares of the funds or stocks you own. You may end up owning fractional shares, but that will keep more of your money working and less sitting in cash.

Set Up a Portfolio Review Schedule

Once youve started building up a portfolio of stocks, youll want to establish a schedule to check in on your investments and rebalance them if need be.

Rebalancing helps ensure your portfolio stays balanced with a mix of stocks that are appropriate for your risk tolerance and financial goals. Market swings can unbalance your asset mix, so regular check-ins can help you make incremental trades to keep your portfolio in order.

Theres no need to check in on your portfolio daily, so a monthly or quarterly schedule is a good cadence. As you review your portfolio, remember that the goal is to buy low and sell high. Investing in stocks is a long-term effort. Youll experience inevitable swings as the economy goes through its usual cycles.

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