How to pick stocks: when to invest, what to invest in, and how

Investing is daunting but it’s useful (and still very possible) even if you have only a few dollars to invest.

Key takeaways

  • You can start investing for as little as $1.

  • Start investing early, especially for your retirement.

  • Trading individual stocks won’t make you rich and it’s risky.

  • Passively managed mutual funds and ETFs have the lowest management fees.

If you haven’t invested much or at all, getting started is daunting. And with thousands of companies listed on the U.S. stock exchanges alone, how do you know which stocks to pick? Luckily, there are some simple guidelines that can help you get started. You also don’t need a lot. In fact, it’s best to begin investing as soon as you can. Some companies and apps, called robo-advisors, will simplify the process for new investors, but doing it yourself may be easier than you think and it could help you save money.

Understand why you want to invest

Before you spend any money, think about why you’re investing. Your financial priorities will ultimately determine how you invest. Saving for a retirement that’s decades away looks very different from saving for the down payment on a house or day trading to try and build a major source of income in the present.

Two savings goals to consider

Your individual priorities will vary, but a couple of financial goals everyone should consider are saving for retirement and building an emergency fund.

Even if you’re in your 20s, start saving for retirement. The best way to grow retirement savings is to invest and no matter how much you can afford to invest, you can help yourself by starting now. The longer that money is in your account, the longer it can build wealth on its own.

An emergency fund is important because it’s money you can fall back on when something unexpected happens. This could be buying a new tire for your car, calling a plumber when your toilet breaks, or paying a doctor bill when your child gets sick.

If you don’t have money saved up to cover unexpected costs, consider whether or not investing is the highest priority for you.

Recession-proof your money. Get the free ebook.

Get the all-new ebook from Easy Money by Policygenius: 50 money moves to make in a recession.

Policygenius Image

How much can you afford to invest?

If you struggle to build savings or don’t have enough to cover your daily expenses, start by getting a savings account. Savings accounts earn interest, calculated as an annual percentage yield, or APY.

However, investing even a little bit is a good idea. In general, you gain the most by letting your investments sit for longer. So if you have just $1 that you don’t need right now, you can start investing in exchange-traded funds (ETFs), which we’ll talk about more later. There are also apps and services out there, like Acorns, that can help you start investing with just your spare change.

Certain types of investing also offer tax advantages. Retirement accounts like a 401(k) or IRA offer tax benefits that help you save in the long term by investing your money right now.

General investing strategies

There are two main ways to invest in stocks: trading individual stocks and investing in a bunch of stocks through a fund. Funds, including passively managed mutual funds and ETFs , are the better option for the average investor. They allow you to quickly diversify your investments, which means you aren’t relying on a single company or sector of the economy to do well. They also have low management fees.

In many cases, the investing formula that financial experts recommend is simple. Invest in low-cost funds that represent the total stock and bond markets. Then hold those investment for years to help shield you from market volatility. If you want to invest in individual companies, be careful that your portfolio (your collection of investments) stays diverse.

When you’re younger, experts generally suggest investing more in stocks than bonds. Many stocks are higher risk than bonds, therefore it’s wise to move more of your portfolio to bonds when you’re older or if you just want to decrease your chances of losing money. This is the general investing advice you’ll find from personal finance experts, but it may not apply to everyone. Let’s break down how you can think about which stocks to choose.

How mutual funds and ETFs work

Mutual funds and ETFs work as bundles of a number of individual stocks. An individual fund could invest in dozens or even hundreds of stocks and when you invest in the fund, you’re partially investing in all of those stocks. This offers the advantage of diversifying your portfolio. Diversifying is important because it protects your money if one company or one sector of the economy isn’t doing well.

Mutual funds

Mutual funds are a classic type of investment fund that have been around for years. They are usually actively managed , meaning there is an actual person (or group of people) choosing the stocks that they think will do best. In order to pay those people, actively managed mutual funds have relatively high expense ratios . An expense ratio is a percentage of your investment that you pay in order to cover management of that fund. Active funds can have a fee of 1% or more. So 1% of the money you invest goes to the fund managers and not into your actual investment.

There are also passively managed funds. A passively managed fund is one where the stocks in the fund mirror some kind of index. For example, an index fund that mirrors the S&P 500 stock index will automatically invest in the companies of the S&P 500. When those companies change, the makeup of your fund will change accordingly. Because there aren’t people doing the hard work of researching and picking stocks, expense ratios can be less than 0.2% for index funds.

Mutual funds may also require a minimum investment of $3,000 or more, which makes them inaccessible unless you have a lot to invest.


ETFs, or exchange-traded funds, are also bundles of stocks, but they get traded on the stock market the same way that individual stocks do. Most ETFs are passively managed and have low expense ratios. ETFs also have low investment minimums. In most cases, you can buy a share of an ETF for just $1 (as long as the share itself only costs $1).

What stocks are in mutual funds and ETFs?

The stocks in a mutual fund or ETF vary greatly. However, they usually revolve around a single goal or idea. For example, a fund that mirrors the entire U.S. stock market will include stocks that represent the entire U.S. market. Some funds will also focus on growth stocks (riskier stocks that have a higher chance of growing quickly) or bonds. Some funds, called target-date funds, invest in a way that helps you save for retirement based on the year you plan to retire. Target-date funds are especially popular in 401(k) plans and traditional IRAs.

There are also funds that support certain ideals, areas, or industries. Some funds invest only in companies that support environmental sustainability or women’s rights. Other funds may invest only in emerging economies or health care companies. Learn more about socially responsible investing.

Should you consider individual stocks?

When most people think of buying stocks, this is what they imagine: You choose a company, buy some of its stock, the stock takes off and you’re rich. In reality, very successful companies are not common. Chances are low that you’ll find an unknown company that becomes the next Apple or Google.

Don’t buy stocks with the expectation that a company will take off and you will become a millionaire.

With that being said, there’s nothing wrong with buying the stock of an individual company. For example, if you’re a lifelong buyer of GM trucks, you might want to buy GM stock and hold it in your portfolio, as you'd know better than anyone when the company is releasing good products that may boost its share price.

It’s also common for employees to have company stock in their portfolios. Some companies even offer employee stock options as a benefit. Again, there’s nothing wrong with that; just be careful to maintain a diverse portfolio. If you invest thousands in your company and then it struggles, you could lose thousands of your hard-earned dollars.

How to trade individual stocks

When you invest in a company’s stock, you can’t get stock directly from the company. You need to go through a brokerage firm, or broker. Brokers are just intermediaries that allow you to buy and sell stocks. Some of the biggest investment brokers in the U.S. are

  • TD Ameritrade

  • Charles Schwab

  • Fidelity


  • Merrill Edge

  • Vanguard

Each broker has its own minimums, fees, and rules for investors. Most brokers charge a commission per trade, but some brokers offer commission-free trades. Some also offer different investing options. You should do some research or talk with a financial advisor to help you choose a broker.

As for the actual trade, there are multiple types of trades you can make. The most common are market orders and limit orders. With a market order you buy the stock as soon as the market is open, regardless of the stock’s price. It’s common that the price you see at the close of market isn’t the same as the price when markets open, since a variable number of people may be trying to buy the stock. A limit order allows you to buy a stock only when it goes below a certain price.

Making a career of stock trading

If your goal is to become a day trader who makes a living picking stocks, know that many stock pickers lose money. It’s very risky and comes with a lot of uncertainty. Your earnings will vary from month to month and even day to day. Day trading will require you to thoroughly read the financial statements of thousands of companies to help you choose stocks. You will need to be very in tune with how the market is moving, future trends, and economic policies.

Some training or classes could go a long way. Familiarize yourself with common evaluation metrics, like debt-to-equity ratios, price-to-earnings ratios, and dividend yields. Consider talking with a certified financial advisor, like a CFP, before you make any career moves.

How to start investing

How you start investing depends on what kind of investment you’re making. If you’re saving for retirement through a 401(k), you just need to enroll in your employer’s plan and select your investments. If you want to invest outside of an employer, you have a few options.

Financial advisors

One investing option is to work with a financial advisor. Advisors will choose and manage your funds, as well as help with other financial aspects of your life, like creating a trust. Human advisors usually charge a management fee of 2% of your assets under management (AUM) or more. AUM is the amount of money that the advisor is managing for you. This management fee is probably in addition to expense ratios of funds or trade commission fees.

The high fees mean financial advisors aren’t the best choice for everyone. Most also require a minimum investment. So if you don’t have a lot to invest, consider a robo-advisor.


Robo-advisors manage your investments for a fee that’s as low as 0.25% of AUM. These services automatically choose investments and manage your portfolio for you. All you need to do is answer some questions on your goals and how much you have to invest. Robo-advisors and other investing apps are a great option for new investors because they have a low cost and put your investing on autopilot. Most robo-advisors invest exclusively through ETFs.

Do-it-yourself investing

Another popular investing option is to do it yourself. Choose a broker, open an account, select your investments, and then manage your portfolio on your own. Yes, this requires more work than working with an advisor, but there are many resources out there to help you.

Brokers typically offer a lot of guides and learning materials. If your broker doesn’t offer such materials, consider another broker. You can also check the sites of robo-advisors. They typically offer details on how they choose investments and create portfolios. This could give you a great jumping off point for choosing how to invest.

The major perk of the DIY method is that you save money. Basically the only fees you pay are the expense ratios for funds and any commissions from trades. Many brokers even have commission-free trades of ETFs.

Your home may be your most important investment of all.

Make sure it’s protected with homeowners insurance. Policygenius can help you get coverage that fits your finances.