Beginner's Guide to Stock Investing

Long-term investing in the stock market is a time-tested way of building wealth to fund future ambitions, whether buying a new car or house, or retiring early. Historically, the stock market yields returns that are substantially higher than savings accounts, certificates of deposit (CDs) or bonds, making it an appealing option for those seeking strong capital appreciation.

However, even with the benefits understood, getting started in the stock market can be daunting. From finding a broker to selecting a strategy, new investors face many challenges and questions as they begin their wealth-building process.

This AAII guide outlines the key steps needed to begin investing. Click through on any included link for more details and education on how you can invest like a pro—and perhaps outperform the market while doing so.

What Is the Stock Market?

The stock market is an aggregate collection of centralized exchanges where investors buy and sell shares of publicly held companies. Those shares represent fractional ownership of a company and entitle the stockholder—that is, the person or institution that buys these shares—to a portion of the corporation’s assets and profits equal to the percent of owned stock.

Its centralization provides liquidity as well as oversight and regulations to protect investors. Individual investors can trade shares with hedge funds, shareholders from across the globe or whomever else is looking to take the opposite side of a desired transaction.

Investors come to the stock market to buy shares in companies they believe will see capital appreciation, generally through earnings growth or increased dividend payments. Similarly, when investors think growth will slow or subside—or think other companies have better potential for large growth—they come to the stock market to sell their shares, ideally realizing capital gains.

To take part in these transactions, individuals need to open a brokerage-accounts.

For more information on the stock market and how it works, please click here.

Selecting a Brokerage Account

Investors trade shares on the stock market through brokerage firms, which facilitate order matching and the transfer of share ownership. These entities are regulated by organizations such as the Financial Industry Regulatory Authority (FINRA) and by the exchangesYou need a brokerage-accounts to trade securities.

There are two main types of brokerage-accounts: discount brokerages and full-service brokerages. Discount brokerages, which have gained popularity in recent years, provide better deals on costs, but limited access to sophisticated tools. Thanks to competition among start-ups and established players, discount brokerages almost universally offer stock trades and a plethora of investment research and analysis for little or no cost. Some discount brokerages include Charles Schwab Corp. (SCHW), E-Trade, TD Ameritrade and Robinhood Markets Inc. (HOOD).

Full-service brokers execute your trades and manage your investment decisions. Such options are ideal for investors who want to outsource those actions, whether for want of time or expertise. These brokers charge more than discount brokers because they actively manage your money. An example of a full-service broker is Edward Jones Investments.

Once you’ve chosen a broker and opened a brokerage-accounts, if you are interested in stocks you’re ready to select between the various types of stocks.

To learn more about selecting a broker, click .

Types of Stocks

Selecting stocks for investment depends on your strategy. Unfortunately, it’s not as easy as simply picking a company and putting all your money into it! Nuanced investing, which is most likely in the long run to produce strong results, requires understanding your risk tolerance and building a portfolio that aligns with a corresponding asset allocation.

Understanding various types of stocks allow you to build a healthy, diversified portfolio. Here are some of the key types of stocks to consider.

Blue-chip stocks

Blue-chip stocks are typically companies with a long-established reputation. They tend to be large, financially sound companies that have operated for many years, have dependable and predictable earnings and often pay dividends to investors. These companies also usually have market capitalizations in the billions. Examples include Coca-Cola Co. (KO), IBM Corp. (IBM) and Boeing Co. (BA).

Cyclical stocks

Cyclical stocks are those whose price swings with macroeconomic changes in the overall economy. They generally follow the economic life cycle from expansion through its peak, recession and recovery. Because consumer spending comprises such a large portion of the overall economy, cyclical stocks involve companies that sell discretionary items that consumers buy during a strong economy but which they cut back on during recessions. Cyclical stocks include TJ Maxx (TJX), Louis Vuitton (LVMUY) and Walt Disney Co. (DIS).

Defensive stocks

Defensive stocks provide consistent dividends and stable earnings regardless of overall market performance and trends. Their companies have constant demand for products, which protects earnings and performance from various phases of the business cycle. Such stability lowers downside risk, but also, with limited volatility and constant demand, limits the upside potential for these stocks. Some defensive stocks include Procter & Gamble Co. (PG), Johnson & Johnson (JNJ) and Philip Morris International Inc. (PM).

Dividend stocks

Dividends are regular payments from stocks, or payments a corporation makes to its shareholders from company earnings. These payments help investors generate consistent income while still potentially achieving further growth through stock price appreciation. Usually, established companies (not start-ups) pay dividends. Such companies no longer need to reinvest all their earnings to sustain growth and thus return some of their earnings to shareholders. A few well-known dividend-paying companies include Gilead Sciences Inc. (GILD), 3M Co. (MMM) and Aflac Inc. (AFL).

Learn more about dividend investing here.

Growth stocks

Growth stocks are those anticipated to grow at a rate significantly higher than the market average. Generally, these stocks don’t pay dividends because all accrued earnings are reinvested to accelerate short-term growth. Often, growth companies aren’t immediately profitable, but investors still choose them on the anticipation of future earnings growth that will lead to substantial share price appreciation. While that provides significant upside, failing to achieve the lofty expectations could depress prices. Some growth stocks include Amazon.com Inc. (AMZN), Facebook Inc. (FB) and Netflix Inc. (NFLX).

Get more information on growth stocks with our guide.

Large-cap stocks

Large-cap stocks refer to companies with market caps greater than $10 billion. Leading benchmark indexes, such as the S&P 500 and Dow Jones industrial average, skew toward large-cap companies, which, per the Wilshire 5000 Total Market index, represent approximately 93% of the total U.S. equities market. Large-cap companies have the benefit of transparency, dividends (though not always) and stability. Examples include Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Visa Inc. (V).

Small-cap stocks

Small-cap stocks are those with market caps between $300 million and $2 billion. Their advantages include the ability to beat institutional investors because many mutual funds have rules precluding their inclusion. Other regulations also limit the ability of institutional investors to accrue meaningful positions in small-cap stocks, which have historically outperformed large-cap stocks. Three examples include California Resources Corp. (CRC), Dynex Capital Inc. (DX) and Hovnanian Enterprises Inc. (HOV).

Mid-cap stocks

Mid-cap stocks fall between small- and large-cap stocks. They usually have market caps between $2 billion and $10 billion. Their appeal comes from expectations for continued growth and profit increases. As they grow, economies of scale may increase their market share and productivity. Since they have some establishment, they’re considered less risky than small caps while still having faster potential growth than large caps. A few mid-cap stocks include Chewy Inc. (CHWY), HubSpot Inc. (HUBS) and GoodRx Holdings Inc. (GDRX).

Speculative stocks

Speculative stocks are, as the name implies, companies that traders use to speculate on movement. Their fundamentals usually do not show apparent strength or a sustainable business model. In other words, they’re risky. Penny stocks or stocks in emerging markets can be speculative stocks. Traders bet that their volatility presents an opportunity for greater returns, of course with much greater risk than choosing some of the other mentioned stocks. Long-term investors generally stay away from such gambles.

Once you’ve selected the type of stocks you want to invest in, it’s time to place your order.

Types of Orders

There are a few different types of stock market orders you can use to control execution.

Market order

The most commonly used, market orders execute trades immediately at the best price available.

Limit order

Here investors want to restrict, or limit, the price received or paid for a security. They thus place a minimum price at which a stock will be sold or a maximum price at which it may be bought. This protects against price volatility but risks orders not being filled.

Stop-loss order

These tell a broker to buy or sell shares once they reach a certain price. Then, the order becomes a market order and is immediately executed. Investors use these to protect against losses or preserve gains—e.g., by placing a sell order for 10% below the current price of a stock holding.

GTC order

Good-til-canceled (GTC) orders do not expire until either canceled or executed. They can be combined with limit and stop orders. Often, you can set a time expiration for GTC orders.

Fill-or-kill order

Orders that are canceled if the specified quantity and price cannot be executed immediately.

All-or-none order

This is the same concept as a fill or kill, but the order remains in effect even if not immediately filled.

More information on the various order types and their benefits is available here.

Lastly, you need to know the stock market’s hours to successfully trade!

Stock Market Hours

Trading occurs between 9:30 a.m. and 4:00 p.m. Eastern Time on weekdays. On early close days, usually those before or after a market holiday, regular stock trading concludes at 1:00 p.m. Eastern Time.

Markets are closed on:

- New Year’s Day
- Martin Luther King Jr. Day
- Washington’s Birthday
- Good Friday
- Memorial Day
- Juneteenth
- Independence Day
- Labor Day
- Thanksgiving Day
- Christmas Day

Investors can also execute trades in pre-market and after-hours sessions, though these usually have less liquidity and higher price swings.

Conclusion

This guide presents an overview on investing. Of course, rigorous portfolio building requires more research and education to master. AAII is here to help. Throughout our education section, you’ll find detailed analysis and articles about various investing topics, from types of stocks to optimal asset allocation. If you want more tools, plus our industry-leading AAII Journal and an educational model portfolio that has substantially outperformed the market since its inception, please consider joining with a $2, risk-free trial. You can learn more about membership and how it can help you by clicking here: https://invest.aaii.com/membership