Investing for Beginners: What First-Time Investors Need to Know

A comprehensive guide for the newbie investor.

Choosing stocks, mutual funds and other types of investments can be intimidating for first-time investors. Relying on the advice of friends and family isn’t the best way to get started investing in stocks for beginners because everyone’s financial situation and investing risk tolerance are different. Relying on investing experts and expert resources, however, can give you some peace of mind when you’re making informed investing decisions that can potentially grow your money.

To help you get started, GOBankingRates has put together this guide on investing for beginners. You’re already on the first step: understanding why investing is important. Strategic investments can grow your money over the long term, and the sooner you start, the more time you have to ride out the ebbs and flows of the stock market as well as capitalize on the power of compound interest.

Investing 101: How to Invest in Stocks

Deciding how to invest money involves making several choices. You’ll want to assess your short- and long-term financial goals, determine how much you can afford to invest, take a risk-tolerance quiz and decide whether you want to consult a human investment advisor or use a robo-advisor. Use this overview to get a handle on the basics.

Learn: How to Invest $500 or Less

Set Goals to Achieve Your Long-Term Plans

You know investing is an important part of a long-term financial plan but the first step in investing for beginners is to establish why it’s important to you. List your long-term goals so you can figure out how much they’ll cost and how you can use investing to achieve them. Here are some examples of financial life goals:

  • Retiring
  • Paying for a child’s college education
  • Buying a house or other real estate
  • Building a business

Once you know what you want, you can start planning. You’ll need to find answers to these questions to create a road map that will help you reach your ultimate goals:

  • What is the total amount of money your goal will cost?
  • How much money can you afford to invest now to get started?
  • How much money can you add to your investments over time and how often can you contribute to them?

You can turn to financial advisors and use online calculators to help you break down your goals. If you need more capital to invest to increase your potential annual earnings, set shorter-term savings goals — like saving a certain amount of money to open a high-yield certificate of deposit or money market account. Your plan will likely involve using several financial tools and account types to achieve your goal.

Check Out: 9 Best Short-Term Investment Options

Review Your Budget

Prioritization is a critical part of any financial plan. If you don’t have your financial ducks in a row, you might be setting yourself up for failure when you start investing in stocks and other investments.

By creating a budget, you can determine how much money you have to invest. With a detailed budget, you can assign portions of your income to various savings goals, ranging from shorter-term ones like buying a house to longer-term ones like retirement. Before you allocate money to your investment goals, however, many financial experts recommend putting aside money for an emergency fund.

Budgeting is an important step because you’ll want to know how liquid you are before you lock money into an investment. For example, if you need assets to pay for your student loans, you must plan ahead to make sure those funds are available in time. If you’re already 50 and don’t have any retirement savings, however, you won’t want to contribute as much to your child’s college fund as your retirement account.

Here’s a look at the average retirement account balances among Vanguard retirement fund participants. Use it to help you gauge whether you should be prioritizing retirement savings over a college fund or other investments.

Investing for Beginners
AgeAverageMedian
25 or younger$4,154$1,325
25-34$22,256$8,192
35-44$61,631$23,491
45-54$116,699$43,467
55-64$178,963$66,643
65 or older$196,907$60,724

2016 average and median account balances by age group
Source: Vanguard

Learn Basic Investing Terms

Whether you plan to manage your investments on your own or want help from an advisor, stock market news can be mind-boggling. If you’re working with a financial advisor, don’t be afraid to ask questions about how the financial markets and your portfolio are working. If you’re reading up on stock market news, look up terms you come across and commit them to memory.

Check Out: 9 Best Investing Books for Beginners

Determine Your Risk Tolerance Level

The level of risk appropriate for your portfolio generally depends on your preferences and when you need to access your funds. One of the best investment tips for beginners to take a risk-tolerance quiz to help you determine how much risk you can reasonably take on when you invest. A quiz will ask you questions regarding how you spend and save money — and what you would do with a windfall.

If you find that you are highly averse to risk, you might want to take on more conservative investments, like bonds. If you’re open to tackling more risk, you’ll want more volatile stocks in your portfolio, which might enable you to grow your savings faster but at the risk of losing more money.

Understand Investment Risk

Diversification is often touted as a way to reduce risk within a portfolio. Some investors, however, confuse risk reduction with risk elimination.

Seventy-one percent of American investors correctly believe they can eliminate investment risk through a diversified portfolio according to a TIAA-CREF study. The study also revealed that 53 percent of investors think higher risk guarantees higher returns, which is not true.

Don’t Get Emotional

For experienced investors and beginners, investing in stocks can be thrilling. Your emotions, however, can have detrimental effects on your long-term savings goals.

The stock market rises and falls every day. And on especially bad days like Oct. 19, 1987 — known as Black Monday — the stock market can fall a lot. But selling stocks when your portfolio is at a low — and when you’re scared — is a bad idea. Even if you’re worried you’ll lose all of your money, it’s typically better to ride out the storm. Often, your investments will bounce back.

Ways to Invest: How to Get Started

Investing in the stock market is an exciting venture. When you’re ready to buy, decide first whether you’ll be managing investments with a robo-advisor, a financial advisor or on your own.

Choose a Platform

Another decision involved with investing for beginners is deciding what platform to use. Whether you’re investing in mutual funds, stocks, bonds or anything else, here are the three platforms from which you can choose:

1. Traditional Advisors

Having a professional oversee your investments can help you keep your sights set on long-term goals, so you might want to consider a hiring a financial planner. If you plan to hire one, make sure he is a fee-only financial advisor. A fee-only advisor doesn’t earn commissions based on product sales, meaning he has fewer conflicts of interest and can provide more comprehensive advice.

Learn: How to Find a Financial Advisor

2. Robo-Advisors

A robo-advisor is an online wealth management service that offers investment advice based on algorithms. A robo-advisor takes human financial planners out of the equation. Although you’re liable to spend less on fees with a robo-advisor, don’t expect to receive advice on personal wealth management issues, like dealing with your taxes.

3. Yourself

You can also manage investments on your own. With the wealth of information online, there are numerous resources to help you navigate the intricacies of investing. Without professional help, however, you’re liable to make costly mistakes — and you’ll need to spend time managing your portfolio as you figure out how to start investing.

Choose Investment Account Types

As a beginner, there’s no need to look into complicated investments, so start with the basics. Take a look at these six common financial products and how they work to grow your money.

1. Annuities

Insurance companies offer annuities, which involve investing a large sum of money or making a series of payments to the company. Either immediately or in the future, you can start receiving periodic payments, which come with interest.

See: 5 Best Annuities for Your Financial Plan

2. Certificates of Deposit

CDs allow you to grow your money virtually risk-free. You deposit your money for a predetermined amount of time when you invest in a CD, and your money will grow at rates typically higher than most savings accounts. The longer you lock in your money, the higher the rate you’ll get.

3. Money Market Accounts

Money market accounts work like savings accounts but generally come with limited check-writing ability and a higher minimum balance requirement. Money market accounts are FDIC-insured, which enables you to grow your money risk-free.

Explore: What to Ask Before Opening a Money Market Account

4. 401ks

A 401k allows you to make contributions from your paycheck before or after taxes. Your contributions get invested — and you control how. Many employers that offer 401k plans will match your contributions up to a limit. If your employer offers a match, make sure you contribute enough to your 401k to get the full match.

5. Traditional IRAs

Contributions you make to a traditional IRA are tax-deductible and subject to taxes only when you make withdrawals. A traditional IRA is best for investors who won’t need their savings before they’re 59.5.

6. Roth IRAs

A Roth IRA is an individual savings account that’s not tax-deductible. Your savings will grow tax-free and you can make qualified withdrawals tax-free. Because a Roth IRA is not tax-deductible, you won’t need to pay taxes on your earnings when you make a withdrawal, as long as you’re at least 59.5 and have had the account for five years.

Choose Investments

When you open an investment account, you can put your money into any number of vehicles: investing in mutual funds, exchange- traded funds and bonds are all options. A typical investment portfolio includes a mix of volatile and more predictable options, which enables your portfolio to weather the lows of the market while capitalizing on its highs. Review these four types of investments and see if any fit your needs.

1. Bonds

A bond is a type of loan you make to an organization and you receive interest payments for that loan. At the end of your bond’s term, you get back the money you originally invested. Because bonds are safe investment vehicles, the returns you earn are typically small compared with more volatile options like stocks.

2. Stocks

When you invest in stocks, you buy a small portion of a company. The value of your stock market investment rises and falls as the company succeeds or fails. You can also make and lose money based on market trends, among other factors.

Find Out: Why Dividend Stocks Are Great for Beginner Investors

3. Mutual Funds

Mutual funds are comprised of stocks, bonds and other investment vehicles. A mutual fund investment allows you and other investors to buy into a collection of securities via the mutual fund share market. For small investors, mutual funds are an easy way to diversify investments. The typical mutual fund has more than 100 securities, according to Fidelity.

4. Exchanged-Traded Funds

Like a mutual fund, an ETF pools money from numerous investors. You can, however, trade or sell ETF shares on the stock exchange, but you can buy them only from a broker.

Investing Strategies

How aggressively or conservatively you invest your money is based on your risk tolerance. Here are five investing basics and rules for beginners and for more experienced investors.

1. Talk to Experts

The best first step for any beginner investor is to speak to someone who has spent years studying the market. The right expert is key because you’ll be entrusting this person with your hard-earned money as you learn how to start investing.

Even if the fees are higher for a more experienced financial advisor, the cost will be well worth it if he knows to sell before a fund crashes, buy when a stock is on the verge of breaking through or help you build a diversified portfolio. If you choose to hire a professional, make sure you fully understand his fee structure.

Related: Experts Reveal the Best Investments They Ever Made

2. DIY Investing

Management fees from financial advisors can eat into your earnings. Using online investment tools and resources, many individual investors choose to manage their own portfolios. If you go this route, research brokerages and their trading and maintenance fees to find one that suits your needs.

As you begin investing, keep your long-term goals in mind and evaluate your portfolio’s health from time to time. Establish a backup plan in case you’re unable to continue managing your portfolio or if the market takes a turn for the worse.

Surrounding yourself with other individual investors can be a powerful tool. Sometimes you’ll want advice from others, whether you’re buying into a new stock or looking to sell.

3. Diversification

One of the most dangerous things an investor can do is put all of his money into one investment, especially if there is considerable risk involved. Sinking every dollar into your favorite tech company, for example, is risky even if you’re sure that stock will continue to dominate for many years. Part of mastering “Investing 101” is understanding that unexpected occurrences can wipe out years of earnings in a matter of days.

Diversification, when done right, can reduce risk and improve gains. Many successful stockholders have made their money from a combination of funds.

Remember to diversify among types of investments and among specific investments in a particular class. For example, you’ll want to diversify across asset classes by investing in stocks and bonds or in foreign and U.S. stocks.

You can diversify within asset classes by investing in different securities within that class. For instance, if you have U.S. stocks allocated in your portfolio you can buy small- and large-cap stocks to further diversify. Buying a stock mutual fund could satisfy the same goal with a single investment.

4. Dollar-Cost Averaging

Experts have noted that in a thriving market investors tend to choose high-risk stocks and in a struggling market buy low-risk investments. By resisting this urge, you can benefit by buying stocks when prices are low and waiting it out until they rise.

One way to “beat” the market is to invest on a regular basis. Instead of trying to time when the market is high or low, regular investing — known as dollar-cost averaging — will guarantee you’ll buy more shares when the market is low and fewer when it’s high.

For example, say you invest $200 per month, and during the first month your mutual fund share price is $10 — your $200 will buy you 20 shares that month. If the price drops to $8 the following month, your $200 will buy 25 shares — which means you’ll be buying more when the market is down. Over the long haul, this type of investing can make temporary market declines a good thing.

5. Leveraged Investing

Leveraging allows you to use borrowed money from banks and brokerage firms to invest in stocks but you must pay back the amount you borrow with interest. Although leveraging allows you to buy shares that you otherwise might not have access to, if the shares you buy drop in value you’ll be out a lot of money. In general, avoid leveraging because it increases your investment risk.

Ready, Set, Invest

If you put time and attention into learning how to start investing, you’ll likely be successful. Choosing the best technology, expert advice and strategy for your financial situation and personal preferences is the first step toward making smart investing decisions.

Up Next: 25 Investing Myths Debunked

John Csiszar contributed to the reporting for this article.