How to Invest: A Beginner’s Guide to Investing in the Stock Market
This ‘Investing for Beginners’ Guide will walk you through, step by step, how to start investing without feeling completely overwhelmed.
Do you want your money to earn you more money? Well, it can’t do its work hiding in a bank account.
Whether you want to save for your child’s college or prepare for retirement, you’ll reach your goal faster by investing.
Here’s everything you need to know to get started today.
What is Investing?
When you invest, you purchase something with the expectation of profiting off of it in the future.
In the 90s, some people thought they were making smart “investments” in Beanie Babies and McDonald’s toys. But traditional investments include things like ownership in a business, real estate assets, or lending money to a person or company in exchange for interest payments.
When Should I Start Investing?
Yesterday. But if you haven’t started yet, today is a great second choice.
In general, you want to start investing as soon as you have a solid financial base in place. This includes having no high-interest debt, an emergency fund in place, and a goal for your investments in mind. Doing so allows you to leave your money invested for the long-term – key for maximum growth – and be confident in your investment choices through the natural ups and downs of the market.
Benefits of Starting Young
When it comes to investing, time is your most powerful tool. The longer your money is invested, the longer it has to work to create more money and take advantage of compound growth. It also makes it far less likely that one harsh market downturn will negatively impact your wealth as you’ll have time to leave the money invested and recover its value.
Let’s look at an example:
Since 1928, the average return of the S&P 500 (a set of 500 of the largest public companies in the U.S. that is often used to approximate the stock market) is about 10%.
So, let’s say you’re 25 and put $5,000 in the S&P 500. You see a 10% increase in value each year, letting your money continue to grow. When you turn 65, you open your account to find you have over $226,000. An excellent retirement gift to yourself!
However, if you waited until you were 35 to start investing, your value at 65 would only be $87,000. Still impressive. But less than half of what you would have had if you started a decade earlier.
Pay Off High-Interest Debt First
If you still have high-interest debt, such as credit cards or personal loans, you should hold off on investing. Your money works harder for you by eliminating that pesky interest expense than it does in the market. This is because paying off $1 of debt balance saves you 12%, 14%, or more in future interest expense. More than traditional investments can be expected to return.
Focus on getting out of debt (insert link) as fast as you can, then dive into investing.
Have an Emergency Fund in Place
Remember how we said time is the most powerful tool? To start investing, you have to be set up to let that money stay invested. Otherwise, you limit your time horizon and could force yourself to withdraw your money at the wrong time.
To protect yourself from unexpected expenses or job layoffs, save a sufficient emergency fund for your needs. (do you have a link for setting up an emergency fund?) Do not plan for your investment accounts to be a regular source of cash.
Starting Small is Okay
Sometimes people think they can’t start investing until they have a significant amount of money. But this means many people give up years of compound growth waiting until they feel rich enough. No matter how small, get your money working for you as soon as possible.
Consider our previous example of the $5,000 invested at 25- or 35-years-old. Pretend for a moment the 35-year-old didn’t have $5,000 to invest at age 25. But she did have $500. And she thought, maybe, she could scrape together $50 a month to add to her $500 investment.
If she invested $500 at age 25, and then $50 a month until she had put away a total of $5,000, she would have almost $174,000 at retirement age. Double what she would have had if she waited until she had $5,000 at age 35!
Starting small makes a significant difference, especially if it means you get in the market sooner.
The number one thing that scares off new investors is the jargon. The investment market has a ton of jargon. So, we’re going to give you the inside scoop to make it less intimidating.
A stock, also known as a “share,” is a tiny ownership stake in a business. Public companies allow anyone to buy or sell ownership shares of their business on exchanges.
A bond is What is a Portfolio?
A portfolio is a collection of all your investments held by a particular broker or investment provider. You may own some individual stocks, bonds, or ETFs. Everything in your account would be your portfolio.
However, your portfolio can also mean all your investments across all account types, as this gives a better picture of your entire exposure.
What Does Diversification Mean?
Just like you wouldn’t invest all your money in your friend’s idea for a pumpkin-spiced toothpaste business, you don’t want to only invest in one stock or bond. Diversification means owning a variety of different investments, so your success or failure isn’t dependent on just one thing.
To be properly diversified, you want to make sure your investments actually have variety. Owning three different clothing companies still means you’re facing all the same risks. An import tax on cotton products, for example, could crush the value of all three companies at once.
What is Asset Allocation?
There are three main asset classes for most investors: stocks, bonds, and cash. Asset allocation is how you split your investments across those three buckets.
Stocks offer greater long-term returns, but significantly greater swings in value. These swings, sometimes north of 20% up or down in a given year, can be a lot to stomach. Bonds are safer but provide lower returns in exchange for that security.
You determine your asset allocation by considering the length of time until you need your money, your risk tolerance, and goals.
What are ETFs?
ETFs, or exchange-traded funds, allow you to buy small pieces of many investments in one security.
An ETF is a fund that holds numerous stocks, bonds, or commodities. The fund is then divided into shares which are sold to investors in the public market.
ETFs are an attractive investment option because they offer low fees, instant diversification, and have the liquidity of a stock (they are easy to buy and sell fast). Buying a stock or bond ETF gives you access to numerous investments, all held withinthat ETF.
Stock Funds
A stock ETF often tracks an index, such as the S&P 500. When you buy a stock ETF, you are purchasing a full portfolio of tiny pieces of all the stocks in the index, weighted for their size in that index.
For instance, if you purchased an S&P 500 ETF, you are only buying one “thing”. However, that ETF owns stock of all 500 companies in the S&P, meaning you effectively own small pieces of all 500 companies. Your investment would grow, or decline, with the S&P, and you would earn dividends based on your share of the dividend payouts from all 500 companies.
Bond Funds
A bond ETF owns a basket of bonds, often tracking an index, just like the stock ETFs.
These funds could own a mixture of government bonds, high-rated corporate bonds, and foreign bonds. The most significant difference between holding an individual bond and a bond ETF is when you are paid interest. Bonds only make interest payments every six months. But bond ETFs make payments every month, as all the bonds the fund owns may pay interest at different times of the year.
If you’re ready to buy stocks, bonds, or ETFs, you may be wondering where these types of investments are held.
There are a few different types of accounts in which you can hold investments. But they can’t live in your standard bank account. Here are your options.
Retirement Accounts
Saving for retirement is most people’s biggest long-term goal. With the average person retiring at 62, either by choice or due to layoffs and health issues, most Americans face 20 years or more of retirement in which they need assets to support themselves.
To help you prepare for this massive goal, the government offers tax incentives. However, if you invest in these accounts, your access to your funds is limited until 59 ½. In some cases, there are penalties for withdrawing your money earlier.
Here are the type of accounts that offer tax savings.
529 College Savings Plans
These accounts, offered by each state, provide tax benefits for parents saving for college. Operating like a Roth IRA, contributions are made post-tax, but all withdrawals are tax-free as long as the funds are used for higher-education expenses.
Your state may offer tax benefits or contribution matches for investing in your local 529 plan, but you can utilize any state’s 529. Since each state has different fees and investment options, be sure to find the best 529 for your money.
Brokerage Accounts
Brokerage accounts offer no tax benefits for investing but operate more like a standard bank account to hold your investments. There are no limits on annual contributions to these accounts, and you can access your money at any time.
Cash or Cash Equivalents
Since investing should only be undertaken for the long-term, you may need to hold onto cash while saving for shorter-term goals. In that case, a traditional bank account might not do the trick. Checking and savings accounts offer incredibly low interest rates, if any at all, which means you are entirely at the mercy of inflation.
Online High Yield Savings Account Comparison Chart:
| Savings Account | Opening Balance | Monthly Fees | APY |
|---|---|---|---|
| $100 | $0 | 2.45% | |
 | $0 | $0 | 2.10% |
| $0 | $0 | 2.20% | |
| $0 | $0 | 2.20% |
Open Account
Open Account
In any of these accounts, your cash deposited is not at risk. FDIC insurance guarantees you your money back, even if the bank that holds your account goes bankrupt.
Where to Focus First
When first starting to invest, it can be hard to choose between the multiple types of investment accounts. As you begin, remember to focus where you see the most value.
Note: The above assumes that you have paid off all high-interest credit card debtand have a solid budget in place. If you haven’t done those things yet, get them squared away before you start investing.
7 Golden Rules for Investing Money
You may be a rookie investor, but that doesn’t mean you need to make costly rookie mistakes. Follow these seven golden rules and you’ll be on the path to success.
1. Play the Long Game
Never invest for the short-term. The market moves up and down in natural cycles that can’t be timed. Investing for less than three to five years doesn’t give you enough time to rebuild asset value if you hit a downturn at the wrong time.
2. Don’t Put All Your Eggs in One Basket
Don’t put too much of your money in any one stock or bond where one issue could destroy your wealth. Diversify with low-cost, index ETFs and avoid stock picking.
3. Make Investing a Monthly Habit
Despite headlines continually calling a market top or bottom, no one can accurately determine where we are in the cycle at any given time. The best way to guarantee that you buy at the right times is to make investing a monthly habit. Invest each and every month, regardless of headlines or market performance.
4. Invest Only What You Can Afford to Lose
Investing is risky. While the long-term trend has historically been upwards, there are also years of deep declines. If you need money in the near-term, or the thought of seeing your account balance drop 20% makes you sick to your stomach, don’t invest those funds.
5. Don’t Check Your Portfolio Everyday
Investing is the one place where a “head in the sand” strategy might be the smartest method. Set up auto deposits into your investment accounts each month and only look at your portfolio once every three to six months. This reduces the likelihood of panic selling when the market falls or piling in more money when everything seems like rainbows and butterflies.
6. Keep Your Fees Low
Mutual funds and ETFs have expense ratios. Many brokerages charge trading fees. And investment providers from financial advisors to roboadvisors charge management fees. All these fees eat away at your wealth over time.
Sticking to index funds and ETFs keeps your fees low while guaranteeing you see the performance of the market so that you can keep more money in your pocket.
7. Listen to Warren Buffet’s Investing Advice
Warren Buffett is possibly the most famous investor in history. He’s created a multi-billion-dollar net worth in just one generation. Learn from his advice to invest for your own future!
“Someone is sitting in the shade today because someone planted a tree a long time ago.”
“I never invest in anything I don’t understand.”
“If you don’t find a way to make money while you sleep, you will work until you die.”
“The stock market is a device for transferring money from the impatient to the patient.”
“It is not necessary to do extraordinary things to get extraordinary results.”
How to Start Investing Today
An easy way to start investing today from your phone or laptop is by opening an account with Acorns.
Acorns is a micro-investing app ideal for beginner investors. The basic plan, Acorns Core, starts at just $1/month with a free $5 sign-up bonus for new users.
When you make a purchase with a linked debit or credit card, Acorns rounds up to the nearest dollar and invests your spare change. You can boost your Round-Ups by 2x, 5x, or 10x.
In addition to Round-Ups, you can set up recurring daily, weekly, or monthly investments to your Acorns portfolio. Their Found Money service will also find cashback opportunities from 200+ partners and automatically invest your savings when you make a purchase.
It only takes a few minutes to set up an account. Once you complete your profile, Acorns suggests one of their five portfolio options based on the information you provided. However, you have the option to override their suggestion if you prefer a portfolio with more or less risk.
The platform automatically rebalances your portfolio and reinvests all dividend payments to continue growing your investments.
Acorns is a smart option for hands-off investors and those just getting started. As your account grows, the $1-3 monthly fee stays the same, effectively making the service cheaper over time.
