Everyone dreams of becoming an investor, but taking that first step into the market can feel overwhelming. Where should you begin? Which investments align with your goals? How do you determine the right investing approach for your needs?
So many questions, and we’ve got answers! In our beginner’s guide to investing, you’ll learn what the term means, the different options available to you and how to find one that best suits your personality and financial needs.
What is investing?
At its core, investing means putting your money into something with the expectation that it will grow in value over time. Investments can take many forms, including:
- Stocks-shares of ownership in a company.
- Bonds-loans you give to governments or corporations in exchange for interest.
- Mutual funds-pools of money from many investors used to buy a mix of stocks and bonds.
- Exchange-traded funds (ETFs)-similar to mutual funds, but traded like individual stocks.
- Commodities-like gold or oil.
- Real estate-whether commercial or residential.
Why invest?
While saving is essential for short-term needs and emergencies, investing is crucial for long-term financial growth. Here’s why:
- Beat inflation. Over time, inflation erodes the value of your money. Investing helps your money grow at a rate that can outpace inflation.
- Build wealth. Consistent investing — even in small amounts — can add up over time thanks to compound interest, where you earn returns on both your original investment and the returns you’ve already earned.
- Reach financial goals. Whether you’re saving for retirement, a home or your child’s education, investing can help you get there faster than saving alone.
Types of investments: the big three
There are lots of options when it comes to investing. Here’s a breakdown of the three most common types of investments for beginners:
- Stocks. When you buy a stock, you’re buying a piece of a company. If the company performs well, the stock’s value may rise, and you will likely receive dividends, or a share of the company’s profits. Stocks can offer high returns, but come with higher risk.
- Bonds. Bonds are generally more stable. When you purchase a bond, you’re essentially lending money to a company or the government. In return, they promise to pay you back with interest. Bonds are often used to balance the risk in a portfolio.
- Mutual funds and ETFs. These are collections of investments managed by professionals (mutual funds) or following an index (ETFs). They offer diversification, which spreads out your risk by investing in several companies or sectors at once.
Risk and reward: finding the balance
Every investment carries risk, which means you can lose money. Generally, the higher the potential reward, the greater the risk.
Your risk tolerance depends on factors like your age, financial goals, time horizon (when you’ll need the money) and your personal comfort with market fluctuations.
A younger investor saving for retirement might tolerate more risk (and invest more heavily in stocks), while someone nearing retirement may choose a more conservative mix with bonds and cash.
The power of compound interest
One of the most powerful forces in investing is compound interest. Let’s say you invest $1,000 and earn a 7% annual return. After one year, you’ll have $1,070. The next year, you earn interest on $1,070 — not just your original $1,000. Over time, that snowball effect can lead to massive growth, especially if you keep adding money regularly.
Getting started
You don’t need to be rich to start investing. Here’s how to jump into the world of investing in five easy steps:
- Clarify your goals. Are you saving for retirement? A home? Figure out your timeline and risk tolerance.
- Build an emergency fund first. Before you begin investing, make sure you have 3–6 months’ worth of expenses saved for emergencies.
- Use tax-advantaged accounts. Accounts like a 401(k), IRA or Roth IRA offer tax benefits and are great places to start.
- Choose a platform. You can invest through a brokerage account (like Fidelity, Vanguard, or Charles Schwab) or a robo-advisor (like Betterment or Wealthfront) that automates the process based on your goals.
- Start small and stay consistent. Even $50 a month adds up. Set up automatic contributions and let time and compound interest work its magic.
Investing tips for beginners
As you get started on investing, keep these evergreen investing tips in mind:
- Diversify. Don’t put all your eggs in one basket. Spread your investments across different asset classes and markets.
- Think long-term. Expect fluctuations in the market and don’t panic over short-term drops. They rarely affect your overall net gain.
- Avoid trying to time the market. No one can predict exactly when to buy or sell. Time in the market usually beats timing the market.
- Stay educated. Read books, follow financial blogs and/or listen to podcasts on investing to deepen your understanding.
You don’t need to be a Wall Street expert or have thousands of dollars to start investing. With a little patience, lots of discipline and knowledge, you can set yourself up for a brighter financial future.
Start now, stay steady and watch your money grow.