What stocks actually are and why people buy them

A stock is a small piece of ownership in a company. When you buy one share of Apple stock, you own a tiny fraction of Apple — along with millions of other shareholders. Companies sell stock to raise money for their operations. You buy stock hoping the company will grow, make more profit, and become more valuable over time. If it does, your share becomes worth more, and you can sell it for a gain.

The other way stocks make money is through dividends. Some companies pay their shareholders a small amount of money each quarter or year, just for owning the stock. Not all stocks pay dividends — many younger or faster-growing companies reinvest all their profit back into the business instead.

Stocks are riskier than keeping money in a savings account. The price goes up and down based on how the market feels about the company's future. You could sell your stock for less than you paid for it. But over long periods — decades, not months — stocks have historically returned more money than bonds or savings accounts.

Key Takeaways

  • You need a brokerage account to buy stocks, which you open online in about 15 minutes with a Social Security number and bank account information.
  • Most beginners start by buying index funds or exchange-traded funds (ETFs) rather than individual company stocks, because they spread your money across many companies at once.
  • You can start with as little as $1 to $100 depending on the brokerage, though most people invest more regularly over time.
  • Stocks held in a regular brokerage account are taxed on gains and dividends each year, but retirement accounts like IRAs let you delay or avoid those taxes.

Opening a brokerage account

Before you can buy any stock, you need a brokerage account — a place to hold your money and execute trades. A brokerage is a company licensed to buy and sell securities on your behalf. The major ones for beginners are Fidelity, Vanguard, Charles Schwab, E-Trade, and Robinhood. Each charges different fees and has different minimum account balances, though most have dropped minimums to zero in recent years.

Opening an account takes about 15 minutes online. You will need your Social Security number, a government-issued ID, your address, and access to a bank account for funding. The brokerage will ask you questions about your investment experience and financial situation — these are required by law, not a judgment. Answer honestly. Once approved, you can link your bank account and transfer money in.

The money sits in your account as cash until you decide to buy something. You are not charged just for having the account open. Some brokerages charge per trade, some charge nothing, and some charge annual fees if your balance is below a certain amount. Read the fee schedule before you open — it matters more when you are starting small.

Index funds and ETFs: the beginner's shortcut

Most financial advisors recommend that beginners do not pick individual stocks. Instead, they suggest index funds or exchange-traded funds (ETFs) — both are baskets of many stocks bundled together. An index fund that tracks the S&P 500, for example, holds a piece of 500 large American companies. When you buy one share, you own a tiny piece of all 500.

The advantage is diversification. If one company in the fund struggles, the others can offset the loss. If you bought only Apple stock and Apple had a bad year, your entire investment drops. With an index fund, you are betting on the overall market, not on any single company's success.

Index funds and ETFs are nearly identical for beginners. The main difference is that ETFs trade like stocks — their price changes throughout the day — while index funds are priced once per day after the market closes. For a beginner buying and holding for years, this difference barely matters. Both charge very low fees, usually between 0.03% and 0.20% per year.

Popular beginner-friendly index funds include the Vanguard S&P 500 ETF (ticker: VOO), the Fidelity S&P 500 Index Fund (ticker: FXAIX), and the Schwab U.S. Broad Market ETF (ticker: SWTSX). Each tracks a slightly different group of companies, but all give you broad exposure to the American stock market with one purchase.

How much money to start with

You can open a brokerage account with as little as $1 at most major brokerages. However, some index funds have minimum investments of $500 or $1,000, and some ETFs require you to buy in whole shares — so if an ETF costs $400 per share, your first purchase is $400. Check the specific fund's minimum before you commit.

Most beginners do not invest a lump sum once and stop. Instead, they set up automatic investments — telling their brokerage to move money from their bank account into stocks on a regular schedule, like $100 every two weeks or $500 every month. This is called dollar-cost averaging, and it removes the stress of trying to time the market perfectly. You buy more shares when prices are low and fewer when prices are high, which evens out over time.

Start with whatever amount you can afford to leave invested for at least five years. Money you might need in the next year or two belongs in a savings account, not the stock market. The stock market can drop 20%, 30%, or more in a single year. If you need that money soon, you might be forced to sell at a loss.

Individual stocks versus funds: when to pick one company

Picking individual stocks is harder than it sounds. You need to read financial statements, understand the company's competitive position, and predict how the market will react to news. Most professional investors with decades of experience do not beat the market consistently. A beginner picking stocks based on a tip or a feeling will almost certainly underperform.

That said, some beginners want to own a few individual stocks alongside their index funds — to learn how it works, or because they believe in a particular company. This is fine as long as individual stocks make up a small portion of your portfolio, maybe 5% to 10%. Put the rest in index funds. This way, if your individual picks fail, your overall wealth is not destroyed.

If you do buy individual stocks, buy them the same way you buy index funds: through your brokerage account, using the company's ticker symbol. You can buy fractional shares at most brokerages now, so you do not need $500 to own one share of an expensive stock — you can buy $50 worth.

Tax accounts: regular brokerage versus retirement accounts

A regular brokerage account is taxed every year. When you sell a stock for a gain, you owe capital gains tax. When a stock pays a dividend, you owe tax on that dividend. The tax rate depends on how long you held the stock and your income level, but it can be 15% to 37% of your gains.

A retirement account like a Traditional IRA or Roth IRA lets you avoid or delay these taxes. With a Traditional IRA, you contribute money before taxes, and you do not pay tax until you withdraw in retirement. With a Roth IRA, you contribute after-tax money, but your gains and withdrawals are tax-free forever. Both have annual contribution limits — for 2024, you can contribute up to $7,000 per year if you are under 50.

Most beginners should max out a Roth IRA first, then use a regular brokerage account for anything beyond that. A Roth IRA is especially good for young people, because decades of tax-free growth adds up to enormous wealth. You can withdraw your contributions (not your gains) at any time without penalty, so it is not as locked-down as it sounds.

If your employer offers a 401(k) with a match, contribute enough to get the full match before you open any other account. A 401(k) match is assistance programs — your employer is literally giving you a raise. After that, open a Roth IRA.

What happens after you buy: holding and rebalancing

Once you own stocks or index funds, the hardest part is doing nothing. The stock market drops 10%, 20%, or 30% every few years. When it does, your account balance drops too. The instinct is to panic and sell. Do not. Selling locks in your loss. If you hold and wait, the market historically recovers and goes higher.

Check your account balance once a month or once a quarter, not every day. Daily checking makes you feel the short-term ups and downs too much. Yearly or quarterly checking keeps you focused on the long term, which is where stocks make money.

If you set up automatic investments, your account will naturally become unbalanced over time. If you started with 80% index funds and 20% individual stocks, and the index funds grew faster, you might end up with 85% and 15%. Once a year, you can rebalance — sell some of the winners and buy more of the laggards to get back to your target mix. This forces you to buy low and sell high, which is the opposite of what your emotions want you to do.

Frequently Asked Questions

Can I lose all my money in the stock market?

If you own individual stocks, yes — a company can go bankrupt and the stock becomes worthless. If you own an index fund, it is nearly impossible. An index fund would need hundreds of large companies to all fail at once, which has never happened in modern history. Even during the 2008 financial crisis, the S&P 500 recovered within five years.

How much money do I need to start?

You can open an account with $1 at most brokerages. However, some index funds have $500 or $1,000 minimums. If you do not have that much, start with an ETF that has no minimum, or wait until you have saved enough. Many people start with $100 to $500 and add money automatically each month.

Should I wait for the stock market to drop before I buy?

No. Trying to time the market — waiting for a crash to buy — almost never works. Professional investors cannot do it consistently. Instead, invest regularly on a schedule, whether the market is up or down. Over decades, this approach beats trying to guess.

What is the difference between a stock and a mutual fund?

A stock is ownership in one company. A mutual fund or index fund is a basket of many stocks managed by a company. Mutual funds are actively managed (a person picks the stocks), while index funds are passively managed (they just copy a list). Index funds charge lower fees and perform better for most beginners.

Do I need to pick a brokerage based on fees?

Fees matter, but they are not everything. Most major brokerages charge similar low fees now. Pick based on which platform is easiest for you to use, which has the best customer service, or which one your friends use. The difference in fees between Fidelity and Vanguard is tiny compared to the difference between investing and not investing.