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Investing 101: 4 Ways to Invest in Stocks

January 15, 2025

Investing 101: 4 Ways to Invest in Stocks

Investing in stocks can feel intimidating at first, but it doesn’t have to be. Whether you’re brand new to investing or just want to refresh your knowledge, understanding the different ways to invest in the stock market is the first (and quickest) step toward building long term wealth.

There are a variety of ways that you can become an investor and a number of different asset classes in which you can invest in. But here’s where I think it’s important to begin, addressing the 4 ways in which you can invest in stocks within the stock market.

When you buy stocks, you become a part owner of a company or fund. But not all stock investments are created equal, fees, taxes, trading rules, and risk vary depending on your approach.

Here’s a breakdown of the four main ways to invest in stocks.

1. Individual Stocks/Companies

Purchasing individual stocks involves investing in specific companies. You can purchase a number of shares in a particular company – an example of a company would be Microsoft or Apple. At that point, you would own a portion of that company and would participate in the company’s growth (or losses). 

Investing in individual companies will require more research, understanding of their business and more engagement on your part than investing in the other types of investments I will note below. 

Why? Because investing in individual stocks inherently has a bit more risk. You have chosen to invest your assets in one thing, or one company. With that, you are exposed to more concentration risk or as the saying goes, “putting all your eggs in one basket.”

But I also recognize that investing in companies provides a level of comfort, for some, because they feel they understand and know what they are investing in.

I enjoy investing in individual stocks that I consume, understand and see value/potential in. 

But typically, I do not like to see my portfolio or that of my clients with any more than 15%-20% of a portfolio dedicated to individual stocks and no more than 10% in one individual stock.

2. Mutual Funds

A mutual fund is where money has been pooled together to invest in a variety of investments (mostly stocks – but can also include bonds, gold, etc.). Mutual funds invest in a number of investments that have commonalities or specific goals that meet the requirements of the mutual funds investment strategy.

There are mutual funds that invest specifically in companies that are all part of a market index (see below for index fund), or companies that are of a specific region of the world (US, Europe, Asia, etc.), or companies that are in a specific sector or industry (like technology, health, energy, etc.), or that have an overarching purpose (like women led companies, energy efficiency, etc.).

The beauty of mutual funds is that you are effectively investing in a number of companies all at once by simply investing in one single mutual fund. You are exposing yourself to greater diversification and thus reducing your risk. 

So as an example of why you might want to consider a fund like this, let’s say you had conviction in the technology space/stocks. Instead of picking 2 or 3 companies to individually invest in, instead you could invest in a technology focused mutual fund that will have invested in hundreds of technology driven companies and will now spread out your risk. 

There are both passively and actively managed mutual funds. A post for another day, but note that actively managed mutual funds have a much higher fee associated with them due to their active management.

3. ETFs – Exchange Traded Funds

An ETF is similar to a mutual fund in that it invests in a variety of investments with a specific purpose. But one of the major differences is that ETFs can be purchased and sold throughout the day similarly to a stock. Whereas a mutual fund transacts at the close of the market each day.

Many ETFs, but not all, track the performance of an index and are passively managed with a low expense ratio (meaning, they are cheap).

ETFs are a low cost, flexible way to diversify your investments without the stress of picking individual stocks and are typically the direction I go when investing my assets personally and for clients.

4. Investing in an Index Fund

One of The Best Ways to Begin Investing

What is an Index? An index is a basket of securities, investments, etc. that represent and measure the performance of a specific market. Three examples:

  1. S&P 500 Index: The S&P 500 Index is a basket of 500 of the largest United States companies
  2. Russell 2000 Index: An index that tracks the performance of 2,000 small-cap companies
  3. MSCI Europe Index: This index measures the performance of a number of large and mid cap companies across 15 developed countries in Europe

An index is simply used as a measure to determine the performance and overall health of a specific market. Individual investors and investment managers will also use indexes to track and measure their own portfolios performance as a comparison to the performance of the index.

While you can’t invest directly in an index, you can through:

Index Funds: A type of mutual fund. An example of an index fund that tracks the S&P 500 Index is VFINX – the Vanguard 500 Index Fund.

Index ETFs:  A type of ETF. An example of an index ETF that tracks the S&P 500 Index is VOO – The Vanguard S&P 500 Index ETF

The biggest difference between the two is how they trade. Index ETFs can be bought and sold all throughout the day whereas index funds in the form of mutual funds transact at a specific value at the end of each trading day.

Tip: For new investors, starting with a low cost, liquid ETF that tracks a major index like the S&P 500 or Total Stock Market is often the easiest way to begin.

Building Your Investing Foundation

Don’t forget, it’s all about building on your foundation of financial knowledge. You will not learn everything in a day. But over time, you will become comfortable with all of these concepts. 

Investing is a journey, not a race. Over time, as your knowledge grows, you’ll feel more confident experimenting with individual stocks, mutual funds, ETFs, or index investing. The key is to start with a strategy that fits your risk tolerance, goals, and time horizon.

No matter which approach you take, make sure you understand the fees, the risks involved, and how it fits into your bigger financial picture.

Next Steps

If you’re ready to dive deeper:

  • Looking to elevate your financial life? Learn more about my services here

Follow @finpoweredfemale on Instagram for weekly tips on personal finance, investing, taxes, and business ownership

written by: victoria mcgruder, cpa, cpwa®

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I'm a financial advocate, coach, and blogger on a mission to help you build wealth with confidence! 

Having worked closely with countless clients over my 15+ year career, I've gained a very deep understanding of money management and effective planning strategies in guiding individuals and families towards financial success. Now, I want to share that wealth of knowledge and insight to empower YOU to take control of their finances, make well-informed decisions, and create a life of abundance without the stress of finances looming over you. I'm so glad you're here! 

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