how does a person invest in the stock market

How does a person invest in the stock market

Brief summary

how does a person invest in the stock market is a foundational question for anyone building wealth. In short: investing in the stock market means buying securities—commonly shares of publicly traded companies, ETFs, or mutual funds—through a brokerage or investment account to pursue capital appreciation, income, or other financial objectives. This guide previews the major steps: understanding key concepts and terminology, preparing financially and legally, choosing an account and platform (consider Bitget for trading and Bitget Wallet for Web3 custody needs), placing trades, constructing a portfolio, managing costs and taxes, and avoiding common pitfalls.

This article is written for beginners and covers practical, neutral information you can act on without receiving personalized investment advice.

Introduction to stock market investing

What is a stock? At its simplest, a stock (also called a share) represents fractional ownership in a company. When you buy a share, you own a piece of that business and may participate in its gains (price appreciation) and, if the company pays them, its income distributions (dividends).

Why invest in stocks? The core economic rationale is threefold:

• Capital appreciation: stocks can grow in value over time as companies increase earnings and expand.
• Income: some stocks pay dividends that provide ongoing cash returns.
• Diversification and real returns: stocks historically beat inflation over long horizons and, when combined appropriately with other asset classes, help manage portfolio risk.

Investing vs trading

Investing usually means a long-term, buy-and-hold approach focused on fundamentals and objectives such as retirement, saving for a home, or building wealth. Trading refers to frequent buying and selling to capture short-term price moves. Typical investor objectives vary: retirement investors often have decades-long horizons and focus on diversification and low costs; short-term traders focus on liquidity and active risk management.

Key concepts and terminology

Stocks, shares, and market capitalization

• Common stock: the typical form of equity that carries voting rights and the potential for dividends and price appreciation.
• Preferred stock: a class with priority for dividends and liquidation proceeds, typically with limited or no voting rights.
• Market capitalization (market cap): company value calculated as share price × shares outstanding. Categories:
  • Large-cap: typically well-established companies (lower relative volatility).
  • Mid-cap: medium-sized firms, often a balance of growth potential and stability.
  • Small-cap: smaller companies with higher growth potential but higher volatility and risk.

Market cap helps investors set expectations for risk and return; smaller-cap stocks tend to be riskier but may offer higher long-term upside.

Exchanges and how trades are executed

Major exchanges are central venues where securities are listed and traded. When you place an order through a brokerage, that order is routed—either to an exchange, an internal matching engine, or a market maker—for execution.

Brokers: intermediaries that accept your buy/sell instructions, provide account custody, and offer trading platforms and tools. When choosing a broker or trading platform, consider fees, available products, fractional shares, user experience, and customer support. Bitget is a recommended platform alternative for those seeking an integrated trading and Web3 wallet experience.

Market makers and liquidity providers help ensure there’s a continuous market by posting bid and ask prices; they narrow spreads and support smoother execution.

Orders and execution types

Common order types:

• Market order: execute immediately at the best available price. Use when speed matters and for highly liquid securities.
• Limit order: execute only at a specified price or better. Use to control entry/exit price.
• Stop order (stop-loss): becomes a market order after the stop price is reached. Used to limit losses.
• Stop-limit order: becomes a limit order when stop price is reached; execution is not guaranteed.
• Conditional orders: execute only if specified conditions (time, price, linked security) are met.

Understanding order types helps manage execution risk, especially in volatile markets.

Indices, ETFs, and mutual funds

• Indices (e.g., broad market indexes) measure the performance of a basket of securities and serve as benchmarks.
• ETFs (exchange-traded funds): pooled funds that trade like stocks and offer diversified exposure at typically low costs.
• Mutual funds: professionally managed pooled funds that trade at end-of-day NAVs and can offer active or passive management.

For many beginners, ETFs and index funds are efficient ways to gain diversified exposure to entire markets or sectors without picking single stocks.

Preparatory steps before investing

Define goals, time horizon, and risk tolerance

Start by answering: why am I investing? Typical goals include retirement, buying a home, education funding, or building an emergency cushion. Time horizon matters: long horizons tolerate more equity exposure; short horizons favor capital preservation.

Risk tolerance is both emotional (how you react to losses) and financial (ability to absorb losses). Match asset allocation to goals and risk tolerance to avoid making knee-jerk decisions during volatility.

Financial fundamentals and emergency fund

Before investing meaningful sums, establish an emergency fund (typically 3–6 months of living expenses) and manage high-interest debt. Using retirement savings to buy a home or cover emergencies can produce long-term “leakage” from retirement accounts.

As of January 2020, according to MarketWatch, a Transamerica Center for Retirement Studies survey found 37% of respondents had taken a loan, early withdrawal, or hardship withdrawal from retirement funds at some point—demonstrating how frequently retirement savings are accessed early and the concern this creates for long-term security.

Basic tax and legal considerations

Capital gains and dividend taxation depends on jurisdiction and holding periods (short-term vs long-term). Tax-advantaged accounts (retirement plans) change the timing and treatment of taxes. Residency and ID requirements affect account opening and reporting. Always verify local rules and maintain records for tax filing.

Investment accounts and where to invest

Taxable brokerage accounts

Taxable brokerage accounts are flexible, allow a wide range of investments, and have no early-withdrawal penalties. Gains are taxable in the year realized. They’re suitable for general investing outside tax-advantaged wrappers.

Retirement accounts (IRA, Roth IRA, 401(k) in U.S. context)

Retirement accounts offer tax benefits:

• Traditional accounts (pre-tax contributions): taxes deferred until withdrawal.
• Roth accounts (post-tax contributions): qualified withdrawals are tax-free.
• 401(k)/employer plans: subject to plan rules and ERISA; proposals periodically arise that may change access rules (for example, proposals to allow home down payments from retirement balances), but legislative changes require congressional action.

If you’re considering using retirement funds for near-term goals, weigh the opportunity cost: withdrawals or loans can stall compound growth and permanently reduce retirement balances.

Other account types (custodial accounts, trust accounts, margin accounts)

• Custodial accounts: for minors, managed by an adult custodian.
• Trust accounts: for estate planning and specific beneficiary instructions.
• Margin accounts: allow borrowing against held securities to increase buying power. Margin amplifies gains and losses and carries interest and maintenance requirements. Understand the risk of margin calls.

Robo-advisors and managed accounts

Robo-advisors use automated algorithms to construct portfolios based on goals and risk profiles; they offer automatic rebalancing and tax-loss harvesting in some cases. Fees are typically lower than full-service advisors. Managed accounts provide personalized advice but often at higher costs.

Choosing a broker/platform

Key decision factors:

• Fees and commissions (trade commissions, account fees)
• Account minimums
• Investment selection (stocks, ETFs, fractional shares)
• Platform usability and mobile experience
• Research, screening tools, and educational resources
• Customer support and security
• Regulatory protections (e.g., SIPC coverage in the U.S.)

Consider platforms that integrate exchange access with modern wallet options; for example, Bitget offers trading services and a Web3 custody option via Bitget Wallet for those exploring on-chain assets alongside traditional markets.

How to place trades — a step-by-step process

Open and fund an account

• Choose a broker and open an account by completing identity verification (KYC).
• Link a bank account or transfer assets from another brokerage. Transfers can take several business days.
• Be aware of waiting periods for deposits and whether the broker offers instant settlement for certain deposit types.

Research and select investments

Use screeners, read company filings, and consider ETFs/index funds for immediate diversification. For single-stock picks, conduct fundamental analysis (balance sheet strength, revenue growth, profit margins) and review valuation metrics.

Choose order type and place trade

Enter the ticker symbol, quantity (or dollar amount for fractional shares), select order type (market, limit, stop), and review the estimated cost and fees before submitting. Monitor execution and confirmations.

Settlement and recordkeeping

Settlement cycles in securities markets have shortened in recent years. Many major markets moved from T+2 to T+1 settlement; check your broker’s disclosures for current rules. Keep confirmations and annual statements for tax reporting and to track performance.

Portfolio construction and strategies

Asset allocation and diversification

Asset allocation — the mix between stocks, bonds, cash, and other assets — is the key driver of portfolio risk and return. Diversify across asset classes, sectors, and geographies to reduce company-specific and sector risk. Rebalance periodically (e.g., annually) to maintain target allocations.

Passive vs. active strategies

• Passive: tracking an index using ETFs or index funds; typically lower fees and broadly diversified.
• Active: attempting to beat the market via stock selection or timing; higher fees and greater effort. Evidence shows many active managers underperform net of fees over long horizons.

Common investing styles

• Value investing: seeks stocks priced below intrinsic value.
• Growth investing: targets companies with higher expected earnings growth.
• Dividend investing: focuses on income-generating equities.
• Momentum: follows trends in price movement.
• Dollar-cost averaging: invest a fixed amount at regular intervals to reduce timing risk.

Each style has trade-offs; many investors combine approaches or stick to broad-market ETFs.

Short-term trading strategies (day trading, swing trading)

Short-term trading requires active monitoring, discipline, and often higher leverage. Costs and taxes can be materially higher. These strategies are not appropriate for most retirement-focused investors.

Research, analysis, and tools

Fundamental analysis

Fundamental analysis studies a company’s financial health through statements and metrics such as price-to-earnings (P/E), price-to-book (P/B), and enterprise value to EBITDA (EV/EBITDA). Look at revenue trends, margins, cash flow, debt levels, and management quality.

Technical analysis

Technical analysis uses charts and indicators (moving averages, RSI, MACD) to identify patterns and momentum. It can be useful for timing trades but has limitations for long-term investors.

Use of screeners, analyst reports, and news sources

Screeners filter large universes by valuation, growth, or other metrics. Credible sources include company filings (e.g., SEC filings in the U.S.), institutional research, and reputable financial media. Verify facts and cross-check multiple sources.

Modelling and position sizing

Position sizing controls the fraction of capital allocated to any one holding. Common rules include risking a fixed percentage of portfolio equity per position and limiting single-stock exposure to reduce concentration risk. Use scenario analysis to understand downside outcomes.

Costs, fees, and tax implications

Trading commissions, spreads, and platform fees

Trading costs include explicit commissions (now often $0 in many markets), spreads (difference between bid and ask), and platform fees. Small recurring costs compound over time and erode returns.

Expense ratios and fund fees

ETFs and mutual funds charge expense ratios that reduce returns. Lower-fee index funds typically outperform higher-fee active funds on a net-of-fee basis across many studies.

Taxes on dividends and capital gains

Tax treatment depends on holding periods and local tax laws. Long-term capital gains usually enjoy lower rates than short-term gains in many jurisdictions. Tax-efficient strategies include holding winners longer, tax-loss harvesting, and using tax-advantaged accounts when appropriate.

Other costs (margin interest, advisory fees)

Margin interest accrues on borrowed funds and can offset returns if investments underperform. Advisory and managed-account fees vary; ensure fees are transparent and justified by value provided.

Risks and risk management

Market risk, company-specific risk, liquidity risk

• Market risk: systemic moves affecting broad markets.
• Company-specific risk: events that affect individual issuers (earnings misses, fraud, management changes).
• Liquidity risk: inability to buy/sell at fair prices during stress.

Diversification helps limit company-specific risk but cannot eliminate market risk.

Volatility and behavioral risks

Volatility can provoke emotional decisions. Behavioral biases (loss aversion, herd behavior) often lead to poor timing decisions. A disciplined, rules-based plan reduces the impact of emotion.

Tools to manage risk (diversification, stop-losses, hedging)

Practical tools include diversified portfolios, position limits, appropriate use of stop-loss orders, and, for experienced investors, hedging with options or inverse products. Each tool has trade-offs and costs.

Margin, leverage, and short-selling risks

Leverage magnifies both gains and losses. Short-selling carries theoretically unlimited upside risk if the stock price rises, and margin maintenance can force liquidations. Use these tools only after understanding their mechanics and risks.

Regulatory environment and investor protections

Securities regulators and rules (SEC, FINRA in the U.S.)

Regulators set disclosure, trading, and conduct rules to protect investors and ensure market integrity. In the U.S., the SEC and FINRA are primary overseers. Know which regulator covers your account and check broker disclosures.

Investor protection schemes (SIPC, FSCS, etc.)

Insurance schemes like SIPC in the U.S. protect customers if a broker fails, covering custody loss up to specified limits; they do not protect against market investment losses. Confirm protections available in your jurisdiction before opening an account.

Fraud, scams, and how to avoid them

Watch for red flags: promises of guaranteed returns, pressure to act quickly, unverifiable credentials, and unsolicited offers. Perform due diligence: verify company filings, read prospectuses, and report suspicious activity to regulators.

Common mistakes and pitfalls to avoid

Lack of diversification and concentration risk

Holding too much of a single stock or sector increases vulnerability to idiosyncratic shocks. Diversify across multiple holdings or use broad ETFs.

Market timing and excessive trading

Trying to time the market typically underperforms buy-and-hold strategies due to missed upside days and higher trading costs. Keep trading to what your strategy requires.

Ignoring costs, taxes, and fees

Small fees and taxes compound. Consider low-cost index ETFs for core allocations and use tax-aware strategies where possible.

Emotional decision-making

Pre-define rules for rebalancing, stop-losses, and contribution schedules to avoid panic selling in downturns.

Advanced topics (overview)

Options, futures, and derivatives

Derivatives are tools for hedging or speculation. Options give rights to buy/sell, while futures obligate parties to transact at a future date. They carry elevated complexity and risk.

Margin trading and short selling mechanics

Margin increases capital efficiency but can lead to forced selling on margin calls. Short selling requires borrowing shares and may incur recall or borrowing costs.

Direct indexing, factor investing, and algorithmic trading

• Direct indexing: custom constructions mimicking an index, enabling tax-loss harvesting at the individual-stock level.
• Factor investing: tilting portfolios to characteristics (value, momentum, size) that historically explain returns.
• Algorithmic trading: automated strategies that execute according to rules; requires technical capability and rigorous testing.

These approaches are best suited to experienced investors or professionals.

Step-by-step starter checklist

1. Set clear financial goals and time horizons.
2. Build an emergency fund and manage high-interest debt.
3. Choose the right account type (taxable vs. retirement) based on goals.
4. Select a regulated broker/platform (consider Bitget for integrated trading and Web3 wallet options).
5. Fund the account and confirm settlement timelines.
6. Decide on asset allocation (stocks, bonds, cash) aligned with risk tolerance.
7. Start with diversified ETFs or a small basket of stocks; use dollar-cost averaging.
8. Track positions, rebalance periodically, and keep records for taxes.

Practical examples and model portfolios

Simple beginner portfolios

Conservative (income/low volatility):

• 20% U.S. stock ETF
• 10% international stock ETF
• 60% bonds or short-term fixed income
• 10% cash

Moderate (balanced growth):

• 50% U.S. stock ETF
• 20% international stock ETF
• 25% bonds
• 5% cash

Aggressive (growth-focused):

• 80% U.S. stock ETF
• 15% international stock ETF
• 5% bonds or cash

These model allocations use broad ETFs for diversification. Adjust allocations to personal goals and risk tolerance.

Retirement-focused portfolios

Target-date approach: gradually shift from aggressive to more conservative allocations as the target retirement date nears.

Age-based rule of thumb: % stocks = 110 − your age (or 120 − age for a slightly more aggressive stance). These are simple heuristics; consider bonds, inflation protection, and income needs in retirement.

Resources and further reading

Consult broker education centers, official filings (e.g., SEC EDGAR for U.S. registrants), and reputable investor education sites for deeper learning. Use calculators (compound interest, retirement savings) to model scenarios. Recommended reading includes foundational books on investing, guides from major financial institutions, and independent educational platforms.

See also

• Personal finance
• Retirement planning
• ETFs and mutual funds
• Portfolio theory
• Technical analysis
• Behavioral finance

References and external links

• As of January 2020, according to MarketWatch, a Transamerica Center for Retirement Studies survey found 37% of respondents had taken a loan, early withdrawal, or hardship withdrawal from retirement funds at some point. This highlights the risk of using retirement accounts for near-term goals and the potential long-term impact of "leakage." (Source: MarketWatch news summary excerpt)

• Regulatory bodies and protections mentioned (SEC, FINRA, SIPC) are standard references for investor protections in the United States. Check your local regulator for jurisdiction-specific rules.

Further practical notes and a parting prompt

If you wondered how does a person invest in the stock market and need a lightweight way to start: open a regulated brokerage account, fund it after confirming settlement rules, and begin with low-cost, broadly diversified ETFs. Track fees, tax implications, and avoid taping into retirement accounts unless you understand long-term costs and legal rules. For integrated trading and Web3 custody, consider Bitget and Bitget Wallet as part of your platform evaluation.

Explore more Bitget features and educational materials to continue building confidence in markets and self-directed investing.