Investing in the stock market is historically one of the greatest ways to build long term wealth. Our smart phones have made it easy and accessible for anyone – and any budget – to get started buying individual stocks, ETFs or mutual funds instantly with the click of the buy button.
If you are just getting started we've put together this step by step guide to open an investment account, fund your account, find investments, and purchase your first investment.
Let's get started 👇
Step 1: Find a Good Broker
A broker is a registered firm that acts as an intermediary between you the investor and a securities exchange (where stocks are traded). There are many online brokers to choose from – some are good and some may not fit your investment needs. We suggest going with one of the major U.S. banks or well established brokers.
A few things to look for in the right broker are: low or no trade fee's, do they allow fractional shares, do they offer alternative investments like crypto, account minimums, and do they offer educational material. A few we like are TD Ameritrade (who we use personally), Fidelity, Merrill Lynch, E Trade, SoFI, or Robinhood.
Once you choose a broker, visit their website or contact them to open up a brokerage account. There will be different account types that include "taxable" or "tax-advantaged". Below is a quick note about each account. You can open one or multiple accounts to fit your goals. We recommend opening both a taxable brokerage account as well as a tax-deferred account.
Taxable Brokerage account: A taxable brokerage account is where you can invest after-tax dollars into individual stocks, ETFs, mutual funds, and even options. There is no limit on how much you can invest. When you sell a stock you will be taxed by uncle sam. You can also write-off any stock losses on your annual tax bill. Use this account for investments you plan to use BEFORE retirement.
Tax-deferred or Tax-advantaged Brokerage Account: AKA... retirement accounts – like a traditional or Roth IRA. This type of brokerage account is sheltered from tax until you retire. The benefits is that you wont pay taxes on your transactions today (yay – compound interest!). However, there are limitations on how much you can contribute each year and you are not allowed to withdraw funds until you hit retirement age. Use these accounts to invest in you retirement.
Let's add some money and start investing! 👇
Step 2: Fund your account Account
Now it's time to add that hard earned money to your account. Depending upon the a type of account you choose there may be a limit to how and how much you contribute. Retirement accounts have limitations. For example, you can contribute up to $6000 annually in your Roth IRA. A taxable account has no limitations.
Your broker will often have a few different options to fund your account: wire transfer, automatic deposit from a paycheck (check with employer), or even sending them a check by mail.
If you are serious about starting to create wealth and investing your money – automated deposits are the way to go. Link your checking account OR employer deposit up to your brokerage and have a certain amount deposited directly every time you get paid. This will give you new funds to purchase stocks weekly or bi-weekly. Constancy is they key to building wealth!
Money's in the account... now let's put it to work! 👇
Step 3: Asset Allocation and Diversification
Before you start throwing money at new investments, you will need to decide how much money you want to allocate to each. Asset allocation and diversification are two of the most important parts of a successful portfolio – they are similar in terms of where you put your money, but they mean two different things.
Asset allocation is the approach to the distribution of assets (such as individual stocks) within your portfolio that matches your objectives and goals–where you put your hard earned money. Allocation is determined by risk tolerance, age, asset base, income requirements, amongst many other factors. Asset allocation is usually expressed as a proportion of the asset classes in which your investments are held.
Diversification refers to the proportion of your portfolio that is comprised of the same asset class. The greater the difference in the investments you have, the more diverse your portfolio is.
Diversification is so important. If you invested all of your money into one company and that company suddenly went out of business or was caught up in a scandal, your entire portfolio could go to zero – it does not happen often, but stocks can go to $0. However, a well diversified portfolio can have hundreds or thousands of investments – so it would not hurt as much if one company went to zero.
So before you start buying stocks, decide how much you want to allocate to each investment and be sure to choose investments that are well diversified.
Step 4: Pick your Investments
Your brokerage will have a wide variety of investments to choose from including stocks, funds, ETFs, stock options, and more. We recommend new investors stick to diversified ETFs and then add individual stocks as they get more familiar with how investing works. Most people can find long-term wealth by simply putting 100% of their money into a low-cost S&P 500 index fund or ETF. But if you want to dip your toes into the world of stocks– there are no shortage of great companies to choose from.
A great place to start is by researching the companies you use on a regular basis. Have an iPhone? Check out AAPL. Use gmail or google home products? Check out GOOG. Spend a lot of time on Facebook or Instagram or interested in the Metaverse? Check out FB.
When researching stocks to invest in you will come across a lot of data, valuation talk, analyst options, and greek terms. You will learn the lingo overtime, but the best way to get started is simply find good companies you know and love and ask yourself – do you think they will be bigger companies in 5-10 years? If the answer is yes, odds are that they will make a good investment now. Keep your investing goals simple... find and invest in companies that you would want to be an owner of.
The company’s annual report is a great place to start — specifically management’s annual letter to shareholders. You can find this information on the companies website. The shareholder letter will give you insight into what’s happening with the business and their projections for the future.
One you have chosen a company you are interested in investing, you can dig a little deeper with tools provided by your broker. Most brokers will provide guides on how to use their tools and research your investments further. Many brokers will even have rating on the stock. You can also join forums and find other investors feedback on your stock online.
Got a great idea for a stock? Let's take a look at how to purchase it! 👇
Step 5: Buying a Stock
Once you have found a stock to invest in, you will need to decide how many shares to buy. You never want to put all of your eggs in one basket– so spend only a small portion on each stock. Many people suggest owning 20-30 (or more stocks) – if you are choosing individual stocks. This is really up to you. Consider starting small to get a feel for what it’s like to own individual stocks and whether you have the fortitude to ride through the rough patches with minimal sleep loss. You can add to your position over time as you master stock trading.
Personally, I like to own just 10 individual stocks – like my fantasy lineup. I feel that is the most my brain can keep track of – anything over 10 is really just like guessing. I try and pick the stocks that I have the most conviction will multiple by 10-100 times in the next 10 years. Owning 10 stocks means that I allocate approx. 5% of my portfolio to one company (50% in an S&P 500 Fund, 50% in individual stocks).
When I first purchase a new stock I don't so all in with that 5%. I like to buy shares gradually in case there is a downturn in the market (or a better opportunity). For example, if I want to buy $2000 worth XYZ stock for $100, I will purchase 5 shares today, 5 more next month, and 5 shares month after.
There are two order types that most investors use to purchase shares: market orders and limit orders.
With a market order, you’re indicating that you’ll buy or sell the stock at the best available current market price. Don’t be surprised if the price you pay is not the exact price you were quoted just seconds before. Bid and ask prices fluctuate throughout the day. A market order is best if small differences in the price you pay are less important than ensuring that the trade is fully executed.
A limit order gives you more control over the price of your stock. If XYZ stock is trading at $100 a share, but you think a $95 per-share price is more in line with how you value the company, your limit order tells your broker to only execute your order only when the ask price drops to that level. Limit orders are good for investing during periods of short-term stock market volatility or when buying a large amount of stock and you are more concerned about the price than fulfilling the order.
Congratulations, you purchased your first stock! We are in the stock market to make money – however, you don't actually make any money until you sell your investment. Let's learn when to cash in 👇
Step 6: Knowing When to Sell
We recommend the goal of holding your investment of individual stocks 5-10 years. This is the typical time period it takes for a good company to become a great company with a much higher value. However, the timeline you plan– is not always the timeline you keep. There are a million reasons to buy a stock, but only 2 good reasons to sell it.
It helps to answer these two questions...
Do you need the money?
If you need the money – cashing in on an investment is often times much better than using a credit card or going into debt. Of course you will need to decide which investment is worth trading for your reason to sell. We always recommend selling your worst performer or the stock you like the least. Many people often think they should sell their biggest winner – but winners tend to keep on winning – and the opposite goes for losers.
Did your investment thesis change?
When you purchased your investment, you did so for a certain list of reasons. Quality company, great CEO, the best products in the industry, low competition, up and coming technology or industry, etc. If any of these things drastically changed – maybe it's time to sell your investment.
I like to review each of my individual stock holdings on a regular basis. I check headlines each week and I do a deep dive every quarter. The individual stocks I choose are ones that I believe will be the next Amazon, Apple, Tesla, or Google. I am not always right so as soon as I see a glimpse of doubt in my thesis – I will sell out of my investment and find a new one.
The key to being a good investor is patience. Generating wealth takes time. But if you choose good investments over a long period of time, you can be wealthy beyond your wildest dreams someday. Keep at it.