5 Stock Market Strategies for Beginners - NerdWallet (2024)

Investing in the stock market isn’t only for the select few. If you’re getting started for the first time, here are some ideas to help build your strategy.

Here are five investing strategies beginners can use to get more involved in the stock market:

1. Consider an IRA

For some Americans, an employer-sponsored 401(k) plan might be their first investment vehicle, but it's not the only option when it comes to investing in the stock market.

Whether you have access to a 401(k) plan or not, you can invest in other tax-advantaged accounts, such as a traditional or Roth individual retirement account. An IRA can be opened at an online broker or bank — many brokerages don't require an account minimum, and you don’t have to invest any of your money until you're ready to do so.

You can contribute up to $6,500 a year ($7,500 if you are 50 or older) to an IRA in 2023, either to one account or a combination of different IRAs. Each has different tax advantages, so check out which IRA is best for you. Once you’ve opened your IRA, you can choose how to invest your money in the stock market – whether it’s in individual stocks, index funds or other securities.

2. Decide how much you want to invest

A key element to any investing strategy is planning how much, and how regularly, you want to invest. This is especially relevant if you need the cash to cover your living expenses, or are still building an emergency fund.

While you can start investing with as little as $1, keep in mind that once your money is in the stock market, it’s not as easy to cash out compared with a bank account.

There’s potential for loss with the stock market, so it’s a good rule of thumb to only invest money you won’t need right away. The longer your money is invested, the more time it has to weather market fluctuations and potentially grow.

You may also have more restricted access to your money, depending on the type of investing account you have.

For example, one big drawback of traditional and Roth IRAs: since they’re intended for retirement, there can be penalties and tax ramifications if you withdraw money before the age of 59 ½. Roth IRAs are more forgiving on early withdrawals — you can take out contributions at any time, but you may be penalized or taxed if you pull out investment earnings early.

If 59 ½ feels too far away, a taxable brokerage account won’t offer the tax advantages of an IRA or employer-sponsored account, but it also won’t penalize early withdrawals. Most online brokers offer both taxable and tax-advantaged accounts.

3. Explore passively managed index funds

Most investors want to create a balanced portfolio while keeping costs down, so they often lean on mutual funds, index funds and exchange-traded funds. Rather than betting on any one company stock, these funds pool multiple stocks together, balancing out the inevitable losers and winners.

And these funds are built on passive management strategies. Passive investing seeks only to match wider market gains, as opposed to active investing, which tries to outperform the market by frequently buying and selling stocks. And while having an expert pick and choose stocks for you may sound appealing, actively managed funds haven’t consistently outperformed passively managed funds historically.

In other words, if you’d invested in a low-cost index fund that closely tracks the S&P 500, there’s a good chance you would have seen better returns than in the average mutual fund.

Passive investing also brings fewer of the fees that can erode long-term investment growth. In 2021, the average passively managed fund had an asset-weighted expense ratio of 0.12%, compared with 0.6% with actively managed funds . This cost difference has sparked a growing array of robo-advisors that automate portfolio management, which allows these companies to charge much lower fees than actively managed accounts.

» Learn more: What are ETFs?

4. Think about how much you want to actively trade

If you want to buy stocks, many financial advisors will tell you to consider keeping these to 10% or less of your total investment portfolio.

If you throw all of your money into one or a few companies, you’re banking on success that could quickly be halted by a single regulatory problem, new competitor or public relations disaster.

If you have a strong interest in actively trading with a portion of your portfolio, some stockbrokers offer educational tools and simulators, such as paper trading that allow you to practice trading before you dive in.

5. Learn about dollar-cost averaging

Active investors race to buy low and sell high, but that’s easier said than done. A better strategy, experts say, is to make new investments at regular intervals, a process known as dollar-cost averaging.

Successful investing is often less about timing the market than giving a broad portfolio of investments the time it needs to grow. Unlike the frenzied image you may have of stock market trading, slow and steady typically wins the investing race.

» Ready to get started? View our picks for the best brokers for stock trading