How to Begin Investing: Investing for Beginners
Investing for beginners refers to the process of putting your money into various financial assets with the expectation of generating a potential profit over time. It involves understanding basic concepts, choosing the right investment vehicles, and developing a strategy that aligns with your financial goals. Here’s a guide on what investing for beginners can entail.
Understanding the basics of investing
Investing involves putting your money into assets with the expectation of generating a potential profit over time. This can include stocks, bonds, and real estate. But it's also important to first set goals, select the right account for you, make investments that can help you meet your goals, and more.
Start investing as early as you can
The earlier you can afford to start, the better. This gives you more time for investments to grow and with compound interest, it allows your earnings to generate even more over time. For example, if you start investing in your 20s, even small contributions can potentially grow significantly by the time you retire.
Another reason to begin early, is you typically have a longer investment horizon, meaning you can take on relatively more risk with the potential for higher returns than when you are older. If the market takes a downturn, you have time to recover. And by starting early, it can help you develop disciplined financial habits. You’ll learn about budgeting, saving, and how to make informed investment decisions.
Step 1: Determine your investment goals
Define your financial goals—whether it's saving for retirement, a home, or education. Your goals will shape your investment strategy; understanding where you stand financially is crucial. Looking at your time horizon is one place to start. This is the timeframe you have for each goal; it can significantly affect your investment approach.
Consider your risk tolerance. How much risk are you comfortable with while investing? This can include reacting to market volatility, understanding how much you're willing to risk losing money in the short term for potential long-term gains and asking yourself if you have a financial cushion, such as an emergency fund to enable you to potentially take on greater investment risks for long-term rewards.
Step 2: Select an account type
As a beginning investor, selecting the right type of account is essential for aligning your investment goals with your financial situation. Here are a few common account types you can consider as you learn how to start investing:
Brokerage account
A brokerage account is the most flexible and widely-used account for investing in stocks, bonds, mutual funds, ETFs, and more. It allows you to buy and sell investments freely, with no withdrawal restrictions. However, any profits (capital gains) or dividends you earn are subject to taxes in the year they’re realized. This is a good choice for investors who want full control over their investment choices and don’t need the tax advantages of retirement accounts.
401(k) or 403(b)
A 401(k) and a 403(b) are both types of employer-sponsored retirement savings plans in the U.S. that allow employees to save and invest a portion of their paycheck before taxes are taken out. Both the 401(k) and 403(b) are powerful tools for building retirement savings, that may offer tax advantages and employer matching to help grow your money over time. Which one you have access to depends on the type of organization you work for.
A 401 (k) retirement plan is offered by private sector companies or for-profit organizations and employees contribute to the plan directly from their paycheck, and in many cases, employers offer a matching contribution (e.g., contributing 50% of what the employee saves up to a certain percentage).
With a 403(b), this plan is available to employees of non-profit organizations, public schools, universities, churches, and certain hospitals. Similar to a 401(k), employees contribute directly from their paycheck, and some employers offer a matching contribution.
Traditional IRA (Individual Retirement Account) or Roth IRA
Traditional IRAs and Roth IRAs are two of the most common types of Individual Retirement Accounts (IRAs) designed to help individuals save for retirement with tax advantages. The key difference between them lies in how and when you receive the tax benefits.
With a traditional IRA, contributions are often tax-deductible (depending on your income and whether you or your spouse have a retirement plan at work). This means you don’t pay taxes on the money you contribute in the year you make the contribution, which lowers your taxable income. For a Roth IRA, contributions are made with after-tax dollars (you don’t get a tax deduction for contributions). However, your investments grow tax-free, and withdrawals in retirement are also tax-free, as long as certain conditions are met.
Step 3: Open an account and consider how much to invest
Once your brokerage account is funded, you can begin buying and selling stocks, ETFs, and other securities. Here's a few considerations:
Before you start investing, make sure you have an emergency fund in place, covering 3–6 months of living expenses. It should be kept in a highly liquid, low-risk account, such as a high-yield savings account.
Create goals for the short-term (0–3 years) such as money for a down payment or the long-term (3+ years) including retirement or education.
Decide how much to invest initially whether it's starting small (as little as $100 or $500), a percentage of your income such as 15% or dollar-cost average which encompasses investing a fixed amount of money at regular intervals (e.g. monthly).
Determine your risk tolerance to help guide how you allocate your capital. This can range from high risk, high reward with stocks and ETFs for more experienced investors, a moderate risk with a mix of stocks and bonds or lower risk with bonds and other fixed income securities.
Be consistent by making regular contributions to your brokerage account, whether it’s weekly, monthly, or quarterly, to steadily build your portfolio.
Step 4: Think about the type of investor you want to be
Short-term investors, who have more experience and may undergo more risk and long-term investors differ in their investment strategies, goals, risk tolerance, and time horizons.
For long-term investors, they focus on building wealth gradually over several years or decades, such as five years or longer with retirement or college savings goals. Their strategy relies on the compounding of returns over time and typically involves less frequent trading and a more passive investment approach.
For short-term investors, their time horizon is typically less than 1 to 3 years. Their goal is to achieve quick profits by capitalizing on short-term price movements in stocks, bonds, or other assets and from this, they are generally willing to accept more risk, as short-term market movements can be volatile.
Step 5: Consider your investment options
There are many types of investment options, each serving different financial goals and offering varying levels of risk and return. The main types of investments are stocks (equities), bonds (fixed-income securities), mutual funds, ETFs, real estate, commodities, options and derivatives, cryptocurrency, CDs, annuities, savings account and money-market accounts, and collectibles.
Step 6: Build a portfolio based on your goals
Building a portfolio based on your financial goals involves aligning your investments with your objectives, time horizon, risk tolerance, and desired returns. Here are some steps to help you construct a personalized portfolio:
Start by clearly identifying your goals: different goals require different investment strategies. One place to start is with less complex and less risky ones.
Assess your time horizon as each goal influences the types of investments you should choose.
Determine your risk tolerance, which is how much risk you are comfortable taking with your investments.
Choose the right asset allocation which is the process of spreading your investments across different asset classes (stocks, bonds, cash, real estate, etc.) to manage risk and achieve your goals.
Rebalance as necessary by selling some assets and buying others to maintain your original allocation strategy.
Consider the tax implications of your investments by either utilizing tax-advantaged account such as a 401 (k) or Roth IRA or taxable accounts.
Step 7: Continue to learn and save
Beginning investors can continue learning and saving by following an approach that combines education, consistent savings habits, and well-planned investment strategies. By doing this, you generally can and steadily build wealth while becoming more confident in your financial decisions. Losses will come your way, as it's natural to make mistakes when starting out but don't be overly discouraged by losses or bad decisions, learn from them. Focus on long-term success and improving your investment skills.
FAQs for beginner investors
What investment is good for beginners?
For beginners, it's important to start with investments that are relatively easy to understand, low in risk, and offer the opportunity to grow wealth over time. Some beginner-friendly investment options can include ETFs, stocks in large, established companies (blue-chip stocks), bonds and bond funds, high-yield savings accounts or certificates of deposit (CDs) and dividend stocks.
Can I start investing with little money?
Yes, you can absolutely start investing with little money! Thanks to advances in technology and a variety of new investment platforms, it’s easier than ever to begin investing even if you have a small amount of cash to start. A few ways to get started with a limited budget can include starting with fractional shares, using a low-cost, no-commission trading platform or robo-advisor, setting up automatic investments and utilizing employer-sponsored retirement plans.
How many types of investments are there?
There are many types of investments, each serving different financial goals and offering varying levels of risk and return. The main types of investments are stocks (equities), bonds (fixed-income securities), mutual funds, ETFs, real estate, commodities, options and derivatives, cryptocurrency, CDs, annuities, savings account and money-market accounts, and collectibles.