How to invest in stocks

Finding out how to invest in stocks can equip you to grow your savings over the long term.

If you’re a beginner, investing can feel confusing or overwhelming. This simple guide shows you how to start buying stocks step-by-step

• Investing in stocks is one of the best ways to grow your savings over the long term.

• Time is the most important ingredient for growth. The longer you can leave your investments, the better.

• Keep it simple. Build a diversified portfolio, invest regularly and don’t fiddle too much.

Investing for beginners

What is investing? 

Investing is about trying to do more with your money. 

Simply put, investing is putting money aside today with the aim that it will be worth more in the future. 

Why should you invest?

Keeping cash in the bank is one way to save, but when it comes to growing your savings, it’s not always the best option.

Over time, the value of money and what you can buy with it changes. 

More often than not, prices will rise (in economic talk, this is inflation). It’s not really a problem in the short term - £1,000 today will be close to £1,000 tomorrow or even next month. 

This makes cash a good option for your emergency savings or money you’ll need to use soon. But over a longer time frame, your savings left as cash will start losing value. 

Here’s an example of how rising prices can affect the value of your cash, the longer you leave it.

Disclaimer: This table is just for illustrative purposes only and does not use real inflation rates. 

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This is where investing comes in. 

Investing is about growing your wealth over the long term. The aim is to make a return higher than inflation so that your real wealth grows and your purchasing power is greater in the future.  

Investing in the stock market has historically been a great way to do this. That’s the short answer to why investing can be a good idea.

Remember though, when you invest, you are taking on the risk that you may get back less than you started with. If you invest in a stock and it reports poor results, the value of your investment may go down.

But over a longer time frame, investing tends to generate returns greater than inflation. For example, the 2024 Barclays Equity Gilt Study found that equities have a 70% chance of outperforming cash over two years, with this rocketing to a 91% chance over a full decade. 

What are stocks and why invest in them?

A stock is a type of investment. A stock is a portion of ownership, or share, in a company. As a partial owner of the company, the value of your investment will rise and fall over time based on the business’s performance. 

Stocks are bought and sold on marketplaces called stock exchanges, like the London Stock Exchange or the New York Stock Exchange. Fortunately for modern investors, you don’t have to be in the building to make trades these days, as online platforms allow you to buy and sell stocks quickly and easily. 

Let’s go through the step-by-step process of buying a stock as a beginner.

What are the 5 steps to investing in stocks for beginners?

1. Set your investment goals
2. Open an investment account
3. Pick your stocks
4. Decide how you want to invest
5. Buy your first stocks

1. Set your investment goals

Before you start investing, it's important to decide what you want out of it. 

Some people invest to save for their retirement. Others may have a specific future purchase in mind or just want to beat inflation. 

Understanding your goals is important because it should set investment foundations, like how much you invest and what you invest in. Remember to also consider how comfortable you are with the risks associated with investing. 

2. Open an investment account  

Choosing the type of account you want to open is an important step. You can buy stocks through several different types of account. Think about how these different accounts tie in with your investment goals:

• ISA (individual savings account). This is a tax-efficient account for your investments. You can add up to £20,000 to your ISAs each tax year. Shares and other investments held within a stocks and shares ISA can grow free from capital gains and income tax. Their tax-advantaged status makes these accounts the first port of call for many savers.
• SIPP (self-invested personal pension). This is a tax-efficient account for your retirement savings. You choose how your pension is invested. Once your investments are inside a SIPP, you can’t withdraw any funds until you’re 55 (or 57, from 2028 onwards) but like an ISA, your shares and other investments grow free from UK tax. These accounts are great for long term investing and helping you to reach your retirement goals.
• GIA (general investment account). This account has different names depending on the provider. There’s no tax efficiency, meaning you may have to pay capital gains taxes on any profits and income tax on dividends or interest, over certain annual allowances. These accounts suit investors who have already used their annual ISA allowance, but still want to invest any excess funds.

Once you’ve chosen your platform and you’re ready to open your account, they’ll need a bit of information from you: 

• A valid form of photo ID
• Your email address 
• Your phone number
• Your national insurance number
• Your bank account details, to link it up and fund your account

3. Pick your stocks

Picking the shares you want to buy can be tricky. Remember that buying a stock is essentially a vote of confidence in a company, and a prediction that the share price will increase. Think about the following when you are searching for shares.

• How do the fundamentals look? So-called “fundamentals” are some of the chief metrics investors use to quickly judge stocks. Our piece ‘Rationalising Ratios’ provides an insight into how to use these to pick your next stock. 
• Have you checked the earnings? Nothing offers a snapshot into how business is going like a company’s earnings reports. These can be found on companies’ investor relations websites. If you are struggling to find them, try Googling the name of the company and the phrase “investor relations”. 
• What does the news say? You might choose a stock on the basis that journalists and commentators are excited about the company’s innovative new products. On the flip side, companies embroiled in scandals or facing insolvency might be ones to avoid. It’s always worthwhile exploring opinions for and against a company, rather than making a snap judgement based on a single press report. 
• Have you checked past performance? Historic strength is no guarantee that things will keep improving, but you might be more comfortable backing a stock which has achieved consistent growth over a long period. 
• Do you understand the company? Investing in a business you do not understand might not be a good idea. If you have specialist knowledge of a sector or industry, you might be able to use it to your advantage.
• Do you believe in the company? If you feel strongly or passionately about the quality of a company’s products or services, there is a good chance other people do too. 
• Is my portfolio diversified? While it might be tempting to put all your eggs into one basket and shoot for the moon, many investors prefer the safety of diversification. In short, this is the principle of protecting yourself against a major downturn that might hit a stock, sector or even a country. 

You don’t have to consider all, or even any, of these things if you don’t want to. But having a rhyme or reason to your stock picks is a good idea.

If you still feel lost, check out our guide to picking stocks and shares.

4. Decide how you want to invest

We all have different aims, financial circumstances and ultimately different lives. How one person invests may not work for someone else. 

There are many different investment strategies out there, but one of the most basic things to choose is whether you want to be active or passive. In reality, many of us will do a bit of both, but here’s a quick breakdown:

	Active	Passive
What’s the goal?	Outperform the stock market return.	Track the performance of an index as closely as possible.
How does it work?	Research and select individual companies to invest in. Build a portfolio of companies that could grow faster than the market.	Invest in an instrument such as an index fund or an ETF that tracks an index.
Who does it?	You can invest actively yourself or leave it to a fund manager.	You leave it up to the fund manager.
What to consider?	Active strategies often carry higher costs, particularly when f...re doing it yourself, you’ll have to buy each individual stock.	Passive funds are usually less expensive than actively managed funds, as they are cheaper to run. - They should also cost less than buying all the individual shares.

5. Buy your first stocks

With your goals nailed down, your account open, your stocks selected and your strategy picked, it’s time to buy! 

Most trading platforms make buying stocks pretty simple, letting you invest in just a few taps or clicks. Your final decision will likely be how to actually buy your chosen stocks. Depending on your chosen platform and the time of day, you will be presented with one or several of the following options:

• Instant order: Sometimes called a market order, this is an immediate purchase at the best available current price. 
• Basic order: An instruction to purchase at a specific time, such as when the market reopens.
• Limit order: This is an order to automatically purchase stock at a certain price, meaning no purchase will happen unless it is available at your chosen price or below. 
• Trigger order: A trigger order initiates a stock purchase as soon as the share price hits a certain level. 

Once you have selected your option and the purchase is complete, your new shares should soon appear in your portfolio. Well done for beginning your new life as an investor! 

How do you make money from stocks?

You can make money from your stocks by selling them for a profit, or by collecting dividend income.

The simplest way to make money from stocks is to sell them for a higher price than you bought them at. This is known as a capital gain, and it can be subject to tax if you don’t hold your investments in a tax-efficient account like a SIPP or an ISA.

Meanwhile, dividend income is a share of profits a company gives to its shareholders. It’s basically a reward for owning a unit of the stock. This can also be subject to tax if you are not using a tax-efficient account.

Compounding

Compounding is one of the greatest benefits of being a long-term investor. 

Compounding in its simplest form is growth on an already growing investment pot. And the longer you can give it, the more powerful it becomes. 

The chart below shows compounding in action. Both £1,000 investment pots grow at 5% each year but the pot that was invested when you were 25 grows to a much bigger size. It’s time, not extra cash that’s created this difference.

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Does it cost money to buy stocks?

When it comes to fees, there are three main charges you may face: 

• Commission: A fee charged for buying or selling shares. Freetrade doesn’t charge this, but some other platforms may. 
• Foreign exchange (FX) fees: If you buy overseas investments, such as US stocks, you will usually need to pay for them in the local currency. This means the GBP in your account must be converted as part of the transaction, resulting in an FX fee.
• Platform fees: Sometimes called account fees, these tend to be a fixed monthly subscription fee or a percentage fee based on the value of your portfolio.

You may also need to pay stamp duty of 0.5% when you purchase UK-based shares electronically. You’ll see this disclosed on the trade confirmation. 

💡  Commission-free share dealing is when you are not charged by a platform or broker to buy or sell shares. This is how Freetrade operates and we are one of only a handful of commission-free platforms in the UK. ‍Other charges apply. 

How to buy shares? - FAQs

What stocks are good for beginners?

There is no right answer when it comes to which shares to invest in first. It's going to be different for each of us. 

Spreading your money across different investments is a key first step, so your portfolio isn’t reliant on one thing to grow. 

How many stocks should you own?

While online consensus often points to around 25-30, there is no magic number of stocks you should have in your portfolio. Having more can be a way to spread risk, but having fewer might allow you to enjoy greater impact if one or two of your picks outperform the market. 

It’s worth noting that you can keep your portfolio diversified by choosing a few different companies to invest in OR by choosing investments that do it for you, like ETFs and investment trusts.

How much do you need to start investing?

You can start investing with as little as £1. That’s all you need to open some investment accounts. With fractional shares you can invest small amounts into stocks right away. So if you want to get into the habit of investing and enjoying the benefits of compounding, you might be ready to get started today. 

However, you should be comfortable about the amount of money you choose to invest, and avoid risking your financial wellbeing.  

What to do after you buy stocks?

Forgetting about your shares for a few days, weeks or even months could be a good start. Watching the daily share price ups and downs is not going to make a good viewing or lead to good decisions. 

While we’d suggest not monitoring the share price, keeping an ear to the ground on things that might affect the company over the long term is a wise idea. So is bearing in mind why you bought the shares in the first place and what your goals are.‍

When should you sell your shares?

Deciding when to sell is often just as hard as deciding what to buy. If your shares suddenly jump in price it might be tempting reflexively sell. You also might end up holding on and on in the hope of future returns.

Ultimately, it should be determined by your investment goals. To help with making a decision, we’ve written a comprehensive guide to help you think about when to sell your stocks.