Congratulations! You’ve set aside a healthy chunk of change over and above your emergency savings—yes, you should keep your emergency savings in cash, separate from your stocks—and now you’re ready to invest $10,000 in the stock market. Now, how do you invest in stocks?
You are aware that you can put that money into mutual funds and exchange-traded funds (ETFs), but you enjoy the idea of the stock market enough that you’d like to try your hand at owning stocks. Great idea!
Because all types of investing carry some risk, let’s look at how to lower your potential risk so that you can best enjoy your investing experience.
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How to Invest $10,000 in Stocks
Buy stocks of famous companies. Odds are good that if a company is big enough that you know its name, it’s probably on stronger financial footing than a smaller company you’ve never heard of.
Large-cap stocks (like most of the companies you’re likely familiar with) are traditionally less volatile than smaller stocks.
Plus, should the market head south, it helps to know that you own a piece of Apple Inc. (AAPL) or FedEx Corp. (FDX). You can remind yourself, FedEx is not going out of business. The delivery guy is literally parked on my street right now!
If you’re starting off with a modest $10,000 portfolio, having a solid foundation built on a few core holdings of big, well-established companies can help you gain experience investing without taking the kind of risk that comes with buying highly volatile stocks.
Look for companies that are expected to grow earnings both this year and next. How can you possibly know what will happen in the future?
Fortunately, Wall Street analysts spend their entire days studying Nike’s (NKE) and Apple’s business operations and balance sheets. They are relatively accurate at telling investors how the profit situations look for those companies, several years into the future.
Profits are commonly discussed as earnings per share (EPS). For example, if a company is expected to earn $1.26 in 2025 EPS, that literally means that the company will earn $1.26 profit this year for every single share of the company’s stock. In reality, the profit number could be in the hundreds of millions of dollars or even billions of dollars. But investors go right to EPS so that the number is clear, simple and comparable to other stocks.
There are many websites, such as Yahoo! Finance, that tell you the expected EPS numbers. If you do use Yahoo!, you can look under “Analysis,” in the section labeled “Earnings Estimate,” and find the earnings expectations from all of the analysts that cover that stock.
Earnings are just one piece of the puzzle, but if you’re just getting started, it’s a great place to start identifying companies that are profitable and growing.
Divide your money evenly into four or five stocks from different industries and sectors. If you buy five technology stocks, you’re creating a different type of risk, which is sector risk.
If technology stocks have a bad year in the market, you’ll end up underperforming the major indexes (like the S&P 500) because those indexes have more diversified exposure to different types of companies.
Let’s eliminate that risk by selecting stocks from a variety of walks of life. Here’s a random assortment of famous companies that represent a diversified stock portfolio: Microsoft (MSFT), Pepsi (PEP), Chevron (CVX), Nike and JPMorgan Chase (JPM). And here’s what not to do: Intel (INTC), Apple (AAPL), Microsoft, Micron Technology (MU) and Oracle (ORCL).
No matter how well those five technology companies are performing from the perspective of revenue and profits, the stock market can easily go through a phase where technology stocks fall and underperform for many months, as we saw in 2022 and the beginning of 2023, and that goes for any single sector, too. That’s what we’re avoiding by diversifying your stocks.
Resist the urge to trade your stocks. Remember, you don’t have to buy or sell at any given time, doing nothing is a perfectly reasonable choice as well, and one that Warren Buffett has famously advocated for.
Studies have found that how frequently you trade in or out of stocks is a poor predictor of your performance. Most active traders fail to beat the results of an investor who simply buys and holds for the long term.
And if you’re concerned about investing your full $10,000 into a handful of stocks in one fell swoop, consider dollar-cost averaging, where you’ll buy fixed amounts of stocks (or funds) periodically over time.
When you have additional cash to invest, add to the stock with the lowest value. If three of your stocks rose, one stayed about the same, and one fell, then you buy more shares of the one that fell. That’s because its share price is on sale today. Your goal is to keep those five stocks at relatively even dollar values as the months and years progress.
Here’s the most important reason to sell. You’re going to look at the earnings estimates periodically, maybe once every three months or so. If you notice that one of the companies is expected to see profits stop growing, you are going to sell that stock.
How to Invest Your First $10,000: Breaking It All Down
To recap:
- Make a list of famous companies. It’s okay to have 30 stocks on that list.
- Look up Wall Street’s earnings per share (EPS) estimates for those companies.
- Cross companies off your list that are not experiencing EPS growth.
- Pick four or five of the remaining companies that represent various industries and sectors to keep in your $10,000 stock portfolio.
- Invest equal dollar amounts in each of those companies’ stocks.
- When you have more money to invest, buy more shares of the company that has the lowest dollar value in your portfolio. (It’s also okay to add another stock to your portfolio.)
- Monitor the profit outlooks for your companies. Sell when profits stop growing.
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*This post is periodically updated to reflect market conditions.