How to Invest: A Beginner Guide to Investing
T he world of investing may seem overwhelming when you’re first starting out. However, even if you’re getting started on a small budget, you’ll find opportunities for investment out there. The trick is figuring out the best strategies and investments for your specific goals. This beginner guide to investing will explore the steps you should take to set yourself up for success.
- You can start investing on any budget, even if you’re totally new to the realm of investments.
- A few key steps will help you figure out the right way to dive into the investing world.
Understand the Type of Investor You Are
Image via Unsplash by markusspiske
Before you dive in, you’ll want to take a moment to understand what type of investor you are. Investors usually fall into a few main categories:
The do-it-yourself-ers of the investing world, DIY investors take a hands-on approach to their investments. If you consider yourself a DIY investor, you’ll have to commit to doing all of your own research. You’ll also need to regularly keep track of your stocks, which can be very time-consuming.
The big benefit of DIY investing? You keep total control over what you have in your investment portfolio.
If you want to invest in this way, you’ll typically get started by finding a stockbroker and opening a brokerage account. Then, you’re ready to start buying and selling stocks and/or investing in index funds on your own.
Other investors are much more passive in their approach. If you don’t have time to invest in investing, or you’re just not interested in doing all that research yourself, you have various options to hire a professional who will do that work for you.
You can even invest in exchange-traded funds or mutual funds using a robo-adviser. These advisers are ideal for investors who don’t want to get involved with the process of investing. You just get the platform, answer a few questions about your investing goals and the risk you’re willing to take on, and let the robo-adviser do the rest on your behalf.
However, with any type of passive investment strategy, you’ll have to accept that you don’t control investment decisions made for you. There also may be limits to the types of investments you can make.
Investors Who Work With Stock Advisers
If you think you fall somewhere in the middle of the above two investor types, you might choose to work with a stock adviser. This allows you to use a mix of DIY investing and passive investing.
You’ll either hire a stock adviser or sign up for a stock-picking service. This way, you can pick the stock you want for yourself but still get some insight from experts. If you go this route, you will still need to open a broker account, but you can let someone else deal with the time-consuming aspects of investing.
Understand Your Investment Options
As a new investor, you’ll have plenty of options to get started. You can invest in an employer-sponsored retirement plan like a 401(k), go with a traditional IRA or Roth IRA, or open a standard investment account. No matter which option (or combination of options) you choose, you’ll also need to pick what you’re investing in. You should understand how each instrument works, and the risk it poses, when you make your choice.
Popular investments for beginner investors include:
Also known as equities, stocks are shares of ownership in a company. You purchase stocks for a share price; this can range from just a dollar or so to a few thousand dollars. The stock price depends on the company you choose to invest in.
A bond is basically a loan you make to a company or a government entity. That company or entity agrees to pay you back in a set amount of years, and you get interest in the meantime. In general, bonds pose a lower risk than stocks as you know exactly when you’ll get your money back as well as how much you’re set to earn. However, bonds earn lower returns than stock over the long term.
Mutual funds are mixes of investments that are packaged together. Instead of deciding on individual stocks and bonds, you’ll buy a diverse collection with one transaction. Mutual funds are inherently diversified, so they’re typically less risky than buying individual stocks. Many 401(k) plans offer curated selections of index or mutual funds with no minimum investment. However, if you’re investing outside of those plans, you may need at least $1,000 or more to get started.
You can get mutual funds managed by professionals or choose index funds that follow a specific stock market index’s performance (such as the S&P 500). Index funds usually charge lower fees than mutual funds that are actively managed.
ETFs are similar to mutual funds in that they hold many individual investments together in a bundle. Unlike mutual funds, however, ETFs trade throughout the day, just like stock. You also purchase an ETF for a share price. Because the share price of many ETFs is often lower than the minimum investment you’ll need to make in a mutual fund, ETFs may offer good options if you’re just starting out or you have a smaller budget.
Decide How Much to Invest
Once you decide how active or passive you’ll be when making investments and consider your different investment options, carefully think about how much money you want to invest. This answer depends on both the funds you have available to devote to investing right now as well as how much you should be investing. The latter will depend on your goal for investing — and when you need to reach that goal.
Setting an Investment Goal
The goal you set will play a big role in determining your budget.
Retirement is one common goal for investing. One general rule is to try to invest about 10% to 15% of your income every year toward retirement (any employer match will count toward that goal as well). If that sounds unrealistic right now, you can still get started investing now and work your way to that goal over time. When it comes to retirement savings, it’s better to start off small than to put off investing completely.
You may have a retirement account from your job, such as a 401(k), that offers matching funds, which will make setting your first goal easy. You’ll want to make sure you contribute at least the minimum amount that allows you to earn the full match from your job. After all, that’s free money.
Other investing goals besides retirement call for you to think about your time horizon along with the amount you need to achieve that goal. From there, you can work back to figure out how much you should put into weekly or monthly investments.
Setting a Budget
No matter your end goal, you’ll need to determine a budget when you start investing. You’ll want to look at two aspects together:
- The minimum amount of money you need to get started: There’s technically no real minimum to start investing in stocks. Individual stock prices depend on how expensive shares in a company are, and share prices range from a few dollars into the thousands. If you want to go with mutual funds, you can do that on a limited budget as well. Though mutual funds themselves typically have minimums of $1,000 or above, you can start with ETFs that you buy for a share price and trade like stock. ETF share prices can be under $100.
- The maximum amount of money you should devote to investments: This depends on how much you can afford to lose should your investments not go as planned and the type of investment you choose. You might allocate a relatively large part of your portfolio to stock funds, particularly if you have a longer time horizon. You generally want to keep a smaller portion of a portfolio dedicated to individual stocks.
Choose Your Investment Strategy
Determine your investment strategy depending on:
- The saving goals you set.
- The amount of money you need to get to those goals.
- Your time horizon.
You can opt to put most of your investing funds into stocks if your goal is over 20 years in the future, such as saving for retirement. You can either devote the time to researching and choosing specific stocks or go with ETFs, index funds, or low-cost stock mutual funds.
Because stocks come with bigger risks, you may be better off making sure your money stays safe by turning to a cash management account, savings account, or low-risk investment portfolio. This is especially true if you are trying to save for a short-term goal and you need those funds in the next five or so years.
Once you make these first key decisions, you’re ready to get started investing. Since I’m not a stockbroker or adviser, it’s helpful to get out there and do as much research as possible before getting started.