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Investing for Beginners

While saving is the first step to building wealth, putting your savings to work through investing is typically the first step to growing that wealth. While stocks are usually the first thing people think to invest in, you can also invest in real estate, cryptocurrency, art, or just about anything else. This guide focuses on the basic financial instruments, including stocks, bonds, mutual funds, ETFs, and CDs. Each of these comes with different levels of risk and return, so which ones are right for you largely depends on your goals, time horizon, and risk tolerance. A financial advisor can answer your questions, while also helping you build a financial plan for the future.

Why Investing Is So Important

For most of us, simply placing our money in a savings account won’t make us rich. You’d have to earn a lot and save most of it over a large number of years in order to see that kind of success. Instead, we need our money to make more money, which is one way of describing what investing is. When you invest, you tap into the power of compound interest. Here’s how it works:

  • You invest $8,000 and your investments grow 6% annually
  • Left where it is, it will grow $480 by next year for a total of $8,480 in the account
  • After another year passes with a 6% gain, your balance will jump by $508.80 for a total of $8,980.80
  • The following year, the gain would be $538.85 for a total of $9519.65
  • And the year after that, the account would earn $571.18 for a total 10,090.83

As you can see, compounding interest can transform modest savings into a serious nest egg over time. The earlier you start investing, the more you stand to gain from the magic of compound interest, and it’s likely the easiest way for many people to get access to growing the total amount they have saved for retirement.

For a simpler way of figuring out how your money could grow through investing, try the Rule of 72. This simple math equation can make it easy to figure out what your potential returns could look like. Rather than trying to understand the nuances of such a calculation, this time-tested shortcut could prove to be invaluable.

4 Types of Investments For Beginners

There are so many ways to invest your money that it can feel quite overwhelming to many beginners. The best places for those that aren’t as experienced in investing are going to be ones that have a long history of being pretty stable and that you can hold for a long period of time to get the return you want. We’ve compiled a list that includes four of the best options that fit these criteria.

1. Stocks

Stocks or equities are shares of a company that you ideally buy low and sell higher. For example, when Facebook first went public in May 2012, you could buy shares for about $38 each. The company’s stock has skyrocketed since then, making it one of the most successful investments of this millennium.

Dividends are another way stocks can earn you money. Depending on the company, it will pay out a part of its earnings per share, often four times a year, according to a set schedule. But while Facebook does not pay dividends, other established companies like AT&T, Exxon Mobil and Coca-Cola do. These typically can pay up to $1 per share, which could lead to some quick and significant gains in your portfolio.

As much upside as stocks have, however, they also can have considerable risk. For example, while Facebook opened at around $38 per share, it fell to $18.05 three months after its initial public offering (IPO). This is fairly common in the stock market, as companies can gain or lose value quite fast. On the other hand, the trade-off is potentially high returns. Plus, a diversified portfolio of stocks can help protect against losses in a single area.

2. Mutual Funds & ETFs

Mutual funds and exchange-traded funds (ETFs) are similar in that both are baskets of different stocks and/or bonds. Some focus on a certain sector (like large-cap companies), while others track certain indexes. Designed to offer diversification, they are less risky than individual stocks, since your money is spread across many different investments automatically.

That said, mutual funds and ETFs have some differences. The biggest of these is how they trade. When you buy a mutual fund, you don’t actually know what price you are paying. This is because the price resets every night, based on the closing prices of the fund’s holdings. So if you sent $3,000 to open an account, you would be told how many shares it bought on your statement. If shares closed at, say, $76.23 per share, you would have 39.354 shares (assuming it’s a no-load fund).

ETFs, on the other hand, trade like stocks, meaning you can see the price as they fluctuate throughout the day. In turn, you can set the price you’re willing to pay beforehand. There are no minimums for these securities, though your brokerage may charge a commission per trade. Many ETFs follow well-known indexes like the S&P 500 and the Dow Jones Industrial Average. Others track collections of stocks that concentrate on industries like healthcare, technology or agriculture.

3. Fixed-Income Securities

Fixed-income securities include several different types of securities, such as U.S. Treasury bonds, corporate bonds, municipal bonds and CDs. It’s easiest to think of them as loans to the government, corporations, state agencies, and banks, respectively. You agree to let them “borrow” your money for a set period of time, and they will pay you interest and your money back at the end of the period. Generally, the longer the period, the higher the interest rate. Though this isn’t always the case.

While the potential for growth is low, these investments are relatively safe. Of course, some corporate bonds are bigger risks than others. And actually, the riskier the corporation (because its finances are shaky), the higher the interest rate they’ll pay. Also, because bonds can be sold on a secondary market, their price can fall. This happens if rates suddenly jump up. (People want to unload their bonds so they can get the higher interest rate.) You won’t lose money on your bonds if you can hold them to maturity. But if you need or want to sell them, you may lose money.

Of all the fixed-income securities mentioned here, CDs are typically the safest. They are money deposited in banks that you agree not to touch for six months to six years. Since they are bank products, Federal Deposit Insurance Company (FDIC) insures them for up to $250,000. So no matter what happens to the bank, you will get your money back up to $250,000. If interest rates spike higher than what you’re earning, you can withdraw your money early for a penalty, which is typically three to six months of interest.

4. Real Estate

An investment type that many people are more familiar with is real estate. You can take your money and put it into a second home or an investment property. Both types of investments can be rented out to recoup some or all of the money you’re spending on the property for the year. Renting out multiple properties can help you achieve a compounding impact on your overall monthly income.

While you can receive income from renting out multiple properties, the easiest investment in real estate for beginners is through holding the property and selling it for more than you bought it for down the road. If you choose the area of the property well then holding it as an asset for multiple years can mean a nice increase when you sell it one day. Many people believe that real estate is the most stable investment a beginner can make.

What to Consider for Your Investment Strategy

Investing for Beginners

Every investment strategy falls somewhere on the spectrum of low return/low risk to high return/high risk. The reason everyone doesn’t jump into the stock market is that, unfortunately, there aren’t many or any investments that are high return/low risk. So those who chase the highest returns invest most heavily in stocks.

On the other hand, if you are averse to risk or are unwilling to invest in equities, you might stick to ETFs, mutual funds, or bonds. This conscious decision leaves you open to the possibility of lower returns than if you invest primarily in stocks.

One important principle to follow, no matter your financial goals, is diversification. When you diversify, you invest in multiple sectors of the market to protect yourself from sharp declines. This could involve buying both domestic and foreign securities and combining risky and safe investments in percentages that best align with your risk tolerance.

The decision between a high-risk, high-return investment strategy and its counterpart should depend, in part, on your investing time frame. Conventional wisdom states that the farther you are from retirement, the more risk you can afford to take.

That means you can have a stock-heavy portfolio in your 20s when you can afford to chase returns. Then, even if your portfolio takes a hit during a recession when you’re in your 30s, you’ll have time to make up your losses before you retire. By the same logic, the closer you are to retirement, the more you want to focus on preserving your gains and avoiding too much risk.

If you hit 67 with lots of money in your portfolio, enough to last you 30 years even if there are ups and downs in the market, you can afford to make the shift to bonds. But some people make that shift too soon, missing out on the gains that they need to keep their investments growing and make it through retirement. With people living longer in retirement and therefore requiring more retirement income, experts are shying away from advising that anyone eliminate their equity exposure too soon.

How You Can Start Investing

Most of us don’t have the time to research dozens of individual securities and even if we do, we may not know how to properly research each. There are a number of different routes you can take for access and help with investing. The premier choice is typically brokerage firms. These services come with fees, which you should research to find the lowest.

There are plenty of brokerages you can join forces with, such as:

Brokerage Comparison
Brokerage Firm Trading Fees Minimum Best For
TD Ameritrade
Read Review
– Stocks: $0 (online)
– ETFs: $0 (online)
– Bonds: $1
– Mutual funds: $0 load/$49.99 no-load
$0 – Online traders
– Investment veterans and newbies alike
Merrill Edge
Read Review
– Stocks: $0 (online)
– ETFs: $0 (online)
– Bonds: $0 (online new issues)
– Mutual funds: $0 load/$19.95 no-load (online)
$0 – Bank of America account holders
– Customer support users
Read Review
– Stocks: $0
– ETFs: $0
– Bonds: $1
– Mutual funds: $19.99/$0 on 4,000 funds / $49.99 early redemption no-load
$0 – Active and experienced traders

If you’re uneasy about going into investing on your own, consulting a financial advisor may be a good idea. These individuals often have experience integrating your long-term financial plans into a portfolio. On top of this, they can help with plenty of other financial planning services, such as:

  • Retirement planning
  • Education fund planning
  • Tax planning
  • Estate planning
  • Insurance planning
  • Budgeting
  • Philanthropic gift planning

How Much Do I Need to Start Investing?

There is no perfect amount of money to have before you start investing unless there is a minimum amount you must have to purchase your desired investment (like real estate). The truth is, many people try to wait for the perfect time and for the right amount to throw into new investments but it just delays any potential returns on the money you do have to invest.

Thanks to the tech industry, investment has never been so accessible. You can get started with as little as a couple hundred dollars and just slowly add to your total investment over time. It should be noted that using larger brokerages might require a minimum of $1,000 or more, but that shouldn’t stop you from getting started if you’re ready.

Bottom Line

Investing for Beginners

If you want to turn a modest salary into a comfortable retirement income, you’ll likely have to invest in some way. Many employees get investing opportunities through their employers via a 401(k). If this is you, it’s important to take advantage of the educational resources your company offers. In general, do your homework before investing your hard-earned money.

Tips For Beginner Investing

  • If you want to learn about investing, the services of a financial advisor could be helpful. They can help you navigate investing for the first time and help you figure out what might be the best way to invest your money to reach your goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • A robo-advisor is a unique alternative to a financial advisor, as they can automatically manage your investments based on your investor profile. Robo-advisors typically have lower fees and account minimums, making them a good option for newbie investors with less money to invest.

Photo credit: ©iStock/progat, ©iStock/YurolaitsAlbert, ©iStock/Newbird

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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