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 you can also invest in real estate, cryptocurrency or art, just to name a few, most people usually invest in stocks before anything else. So it’s important to have a basic understanding of investing for beginners, including the most common financial instruments, such as stocks, bonds, mutual funds, ETFs and CDs. Each comes with different levels of risk and return, so determining 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 for Beginners Is 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:

• Let’s say you invest $8,000, and your investments grow 6% annually.
• Left alone, that $8,000 will grow by $480 by next year, for a total of $8,480.
• 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 $9,519.65.
• And the year after that, the account would earn $571.18, for a total 10,090.83.

That’s compound interest. So you can see how it has the potential to transform modest savings into a serious nest egg over time. And the earlier you start investing, the more you stand to gain from the magic of compound interest. It’s quite possibly the easiest way for many people to get access to growing the total amount they have saved for retirement.

You can also use the Rule of 72 to estimate how much your money could grow through investing. 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 the calculation itself, this equation could be used as a “shortcut.”

4 Types of Investments for Beginners

There are a lot of different ways to invest your money, and it can feel overwhelming at times, especially for beginners. For those new to investing, the best places to start are the ones that have a long history of being fairly stable, and where you can hold for a longer period of time to get the return you want. Here are four options that best fit this criteria:

1. Stocks

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

Dividends are another way stocks can earn you money. Some companies will pay out a part of their earnings per each share an investor owns, often four times a year, according to a set schedule. While Facebook doesn’t pay dividends, other established companies like AT&T, Exxon Mobil and Coca-Cola do. Larger, more established companies can pay up to $1 per share, which could lead to significant gains in your portfolio.

As much upside as stocks have, however, they can also have 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 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 stock or market sector.

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 out across a variety of different investments.

That said, there are some differences between mutual funds and ETFs. The biggest difference is in how they trade. When you buy a mutual fund, you don’t actually know what price you’re 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 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 concentrated 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 certificates of deposit (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 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. In general, the riskier the corporation (often because its finances are shaky), the higher the interest rate. And because bonds can be sold on the secondary market, their prices can fall. This can happen if rates suddenly jump up. Investors will sell their bonds, so they can get the higher interest rate. You won’t lose money on your bonds if you 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’re bank products, the Federal Deposit Insurance Company (FDIC) insures them for up to $250,000. So no matter what happens to the bank, you’ll 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 investments can be rented out to recoup some or all of the money you spend on the property. And 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. 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

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 even any) investments that are high return/low risk. Those who chase the highest returns usually invest most heavily in stocks.

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

But 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 that 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 and have a lot 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 shift a significant portion into 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 one. There are a number of different routes you can take for access and help with investing. The premier choice is typically brokerage firms. Their services come with fees, and you should do your research here to find those with the lowest fees, or where the fees justify your access to features that might be important to you.

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

Brokerage Comparison

If you’re uneasy about going into investing on your own, consulting a financial advisor can be a good idea. Financial advisors will have experience integrating long-term financial plans into a portfolio. They can also help with 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’s no perfect amount of money to have before you start investing, unless there’s 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 technology, investment has never been so accessible. You can get started with as little as a couple hundred dollars and slowly add to your total investment over time. However, 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

If you want to turn a modest salary into a comfortable retirement income, you’ll most likely have to invest. Many employees the opportunity to invest through their employers via a 401(k). If this pertains to you, it’s important to take advantage of any resources or education your company offers. And in general, do your homework before investing your hard-earned money.

Tips for Investing for Beginners

• 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.

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