---
title: "A Stock Market How To For Novice Investors"
description: "A stock market how to guide--investing and building wealth with stocks and value investing."
canonical_url: https://trendshare.org/how-to-invest/stock-market-how-to
markdown_url: https://trendshare.org/ai/stock-market-how-to.md
published: 2013-05-18
last_updated: 2018-01-29
content_license: https://trendshare.org/about/disclaimer
---
# A Stock Market How To For Novice Investors

Source: https://trendshare.org/how-to-invest/stock-market-how-to
Updated: 2018-01-29
Whether you're saving money for a house, college, retirement, or a rainy
day, the stock market seems like an attractive place to put your money. After
all, isn't the stock market made up of successful businesses which themselves
know how to make money?

Sure, the way some people explain their investment strategies, it sounds
like gambling. They speak of winners and losers and timing, but that's not how
wise investors invest. We do our research. We make a plan. We're cautious.
Above all, we avoid speculation and look for good businesses to own.

There's lots of jargon—lots of new technical terms—about
investing, but you can get started with a little bit of knowledge and manage
your money and your risks your own way. You can do it! This stock market how to
guide will help, in just four simple steps (five for advanced investors). You
can learn the basics of investing in the time it takes you to read a few
paragraphs.

## Step One: Set Your Investing Goals

Before you can invest, you have to know why you're investing. Are you
looking for a safe place to put your money? Are you trying to get a better
return than a money market account or a CD? How long do you plan to invest? Are
you managing your 401k your self?

Everyone answers these questions differently, but all of their answers
include some aspect of safety, growth, and risk tolerance.

An investor focused solely on safety will have to give up on risky
investments and accept that the potential for enormous growth is small.

An investor focused solely on maximizing growth will have to accept that the
risks are high.

An investor focused solely on avoiding risk will have to accept that safe
investments are boring but don't return much.

Risk includes the possibility that you might lose all of your investment,
but it also includes the *worry* you might feel if you check the
performance of your investments every day (or every hour during the day). This
is as much psychology as anything else.

Your goals should also match reality. If you have no appetite for risk at
all, your investment options are few, and you shouldn't expect to earn more
than 1% or 2% annual returns. If your risk appetite is modest, a 5% or 6%
return is realistic. Any annual return of 8% of more will require you to accept
higher risks.

Remember to factor in the anticipated holding period of your investment. If
you're 25 and hope to retire at 65, your tolerance for risk over 40 years is
very different from someone who's 60 and hopes to retire at 65.

Keep in mind that an investor looking for 401k investment options might
approach tax planning very differently from an investor looking to build wealth
to buy a house in the next five years. If one of your investing goals is to
minimize or otherwise manage your tax liability, you need to consult a tax
attorney or accountant. (In particular, be wary of the capital gains tax which
applies to non-retirement accounts.)

Once you have figured out your investing goals....

## Step Two: Decide How Much You Can Afford to Invest

Even if you've decided you have no appetite for risk and have come to accept
that you're likely to make maybe 1% or 2% per year of returns, you have to face
a truth about investing: you might lose it all.

That's probably not going to happen—the risk is very low if you invest
in something very secure like US Government bonds or Treasury bills—but
keep in mind that if you *need* to cash out an investment, you may have
lost money on it. You may have to pay penalties. You may have to pay taxes. You
may have a time window when you can sell. You may have to wait to find a
buyer.

For investing to work, you must set a budget and stick to it. Only invest
money you can afford to lose (not money you need to pay the rent or to buy
food) and only invest money you can afford to have unavailable to you for the
near future.

In other words, consider that every dollar you invest will be locked up for
a minimum of five years. If you can afford that, great! If not, reconsider your
budget.

## Step Three: Find a Discount Broker

While some investors happily hand off the responsibility for their
investments to advisors, you're better off managing your investments yourself.
In the same way that only you can set up a household budget or a diet that
meets your needs, only you can truly determine which investments meet your
goals for income while not exceeding your tolerance for risk.

Getting good advice from other people is fine—great, even—but
why hand over the responsibility to someone else who won't feel the pain of
your choices or the joy of your successes? Besides that, you're going to pay
for the privilege of letting someone else make decisions for you. You're going
to pay a lot.

You're best off [finding a discount Internet stock broker](https://trendshare.org/how-to-invest/what-is-a-discount-stock-broker). Don't worry; all "discount" means is that you're not paying [exorbitant broker fees](https://trendshare.org/how-to-invest/broker-fees). These are trustworthy
institutions used by millions of happy investors.

A good discount broker will allow you to buy and sell stocks and funds over
the Internet with low fees and low trouble. Advice and assistance are available
if you desire, but you're in charge. This does two things for you. First, it
lets you keep responsibility over your decisions. You do only what you want to
do; you don't let anyone else pressure you into doing something you don't like
or don't understand. Second, it's a lot cheaper. You could be paying 1% of your
portfolio to a professional money manager every year even if his or her choices
lose you money.

This classifies you as a self directed investor. In other words, you're
responsible for your financial decisions. You get to choose your risk and
tolerance and you reap the rewards. You can decide to plow all of your
investment dollars into Moose Brand Canada Maple Syrup (if it makes sense) or
pick low cost mutual funds. It's up to you!

Keep your money and understand your investments. Set up a discount brokerage
account.

## Step Four: Find an Index Fund

Buying a bond or a Treasury note from the US Government is a very safe
investment. Over the long term, owning a share of a market index like the [Dow Jones Industrial Average, S&P 500 index, or the NASDAQ](https://trendshare.org/how-to-invest/dow-sandp-nasdaq) provides a reasonably safe and reasonably good return of 6% to 8%
annually, over the long term. That's very good and it's not much work.

Better yet, there are almost no fees involved for investing in this type of
index fund. Low fees translates to high yield; there's a strong correlation. If
you keep your costs low, you keep more of your money. (Compare the cost of
index funds against the expense ratios of mutual funds, but you'll discover
that index funds are almost always cheaper. There are plenty of free mutual
fund ratings out there to compare—too many, in fact. Pick a few plausible
possibilities and compare.)

If you're new to investing, you could do very well to sock most of your
available money into a fund like the Vanguard 500 Index Fund (VFINX) which
tracks the S&P 500 index. It's a diverse selection of 500 large American
corporations, and it's the standard by which all other investments measure
their performance. If you're careful about picking your own stocks, you
*can* get better performance, but if you're the invest and forget it
type, this is a great way to invest over the long term.

Other great index funds exist, but look for low fees and diversity and check
their performance against the S&P 500 index.

Do note: even if you have a 401k through your employer and can't manage it
on your own with a discount broker, sinking your money into a couple of good
index funds is a great 401 k investment strategy. You can certainly find a good
IRA discount broker, but rolling your money into a 401k self directed
investment account might be more trouble than it's worth, unless you change
jobs.

## Optional Step 5: Find a Great Stock on Sale

You can safely stop at step 4. Many investors have met their goals doing
so.

If your goals are greater and if your tolerance for risk is larger, it's
time to move on to finding a great company and buying its stock when it's a
great value. This is [value investing](https://trendshare.org/how-to-invest/what-is-value-investing), and it's a
powerful technique for investors who are comfortable doing their own research
and managing risk over a longer term.

If that's you, one good place to start is to [read a good book on investing](https://trendshare.org/how-to-invest/investing-book-reviews) or two, then
immerse yourself in important concepts like [how to read stock market symbols](https://trendshare.org/how-to-invest/what-do-stock-market-symbols-mean),
[measuring real earnings](https://trendshare.org/how-to-invest/earnings-matter-most) and [patient, buy and hold investing](https://trendshare.org/how-to-invest/buy-and-hold). The risks are higher,
but the payoffs may be more—10% and 12% annual returns, if not more.

## Conclusion

This is one way to invest in the stock market. There are as many approaches
as there are investors, but learning how to invest in the stock market can be
rewarding. It's less daunting than you might have thought. Here at Trendshare,
our [how to invest](/how-to-invest/) guide for new investors can help
you navigate the sometimes confusing world of investing.

You can get more complicated if you want; certainly there's value in setting
up a personal finance spreadsheet to track your investments (though you could
use something like [Google Finance](https://www.google.com/finance)
or [Yahoo Finance](https://finance.yahoo.com/) to track your own
portfolio and get regular stock quotes). You can decide whether you want to
stick solely with index funds (a fine choice!) or buy individual stocks. If the
latter, you could look for stocks with low valuations or high dividend paying
stocks—it's up to you.

You could also stand pat (again, that's a fine choice.) What's important is
that you've made a plan. You've decided what's important to you and you've
taken control of your own investments. You're well on your way to making your
money work for you.

If you've found this short guide useful, please share it freely as our [stock market how to lesson](https://trendshare.org/how-to-invest/stock-market-how-to).