When you are seeking either short-term or long-term investment options, you take some of the money you don’t immediately need and use it to try to build wealth. The trade-off is that to grow your money and reach your financial goals, you have to risk losing some of the initial investment. There is no such thing as free money, so often the greater the potential gains, the greater the risk.
Balancing risk and reward is the key to success, and this guide to investing for beginners will get you started on the path to finding the balance that’s right for you.
What Are the Best Investments for Beginners?
The first step is understanding the different types of investments and the risk associated with each investment type. The following list omits many types of more exotic and complex investments, like options trading and cryptocurrency, which could require the help of a robo-advisor or professional manager. If you are a beginner investing for the first time, you should stick with the fundamentals until you gain knowledge and experience.
Here’s a breakdown of the most common types of investments, including those you might include in a personal brokerage account or a tax-favored retirement account like an IRA, a Roth IRA or an employer-sponsored 401(k).
- Mutual funds
- Real estate
- Savings accounts and CDs
Publicly traded companies sell partial ownership of their businesses on the stock market to raise money to fund their operations. Those ownership stakes are sold as shares, which you can buy through a licensed brokerage that executes your buy and sell orders on a stock exchange.
The two main types of stock are common and preferred:
- Common stocks give shareholders voting rights and the right to receive dividends.
- Preferred stocks give shareholders the right to receive dividends, and they give shareholders preferential treatment in the event the company goes under and liquidates its assets.
Stock investors buy shares in the hope that they will appreciate as the issuing company grows, expands and increases its profits — but it’s quite possible to lose some or all of your investment, too. In stock investing, your fortunes rise and fall with the company whose shares you purchase.
Bonds don’t represent ownership; they represent a loan you make to the bond issuer in exchange for the promise of repayment with interest. Companies and governments issue bonds to raise capital, and although both can go bankrupt, bonds are generally a much safer type of investment than stocks.
However, the trade-off for reduced risk is a lower potential for gains.
The three primary types of bonds are corporate, municipal and Treasury.
- Corporate bonds are issued by companies. Investor-grade bonds come from companies with stronger credit ratings compared to high-yield bonds, which earn more interest but are riskier investments.
- Municipal bonds are issued by state and local governments. They’re typically backed by tax revenues or revenues from a specific project, but municipal bonds may also be issued on behalf of a private, nonprofit entity such as a hospital. How risky a municipal bond is depends on the financial strength of the revenues or entity backing it.
- Treasury securities, including bills, notes, bonds, Treasury Inflation-Protected Securities, floating-rate notes and savings bonds, are issued by the federal government. Bills have maturities of 52 weeks or less, while notes have maturities extending up to 10 years. Bonds have maturities of 20 or 30 years. All Treasury securities are backed by the full faith and credit of the U.S. government, making them among the safest investments in the world.
3. Mutual Funds
With mutual funds, many investors pool their money to invest in a basket of securities, including stocks, bonds, real estate or even currency. Index funds — passively managed funds that seek to mirror an index like the S&P 500 — are the most popular type of mutual funds because of their simplicity and cost-efficiency and the diversification they provide.
Exchange-traded funds are similar to mutual funds in that one investment buys you a diverse blend of securities — and most of them passively track indexes like index funds.
The difference is that ETFs trade in shares on the open market throughout the trading day just like stocks, which means you can buy one for the price of a share. Mutual funds typically have much higher fees and minimums.
5. Real Estate
Purchasing an investment property requires money, time and know-how that most people don’t have. An alternative is to invest in a real estate investment trust, or REIT. REITs invest in properties and share the profits with stakeholders, which makes them an excellent way to participate in real estate investing without actually buying a property. Real estate crowdfunding is another option.
6. Savings Accounts and CDs
The lowest-risk, lowest-reward form of investing is to collect interest on money you deposit with a bank or credit union. High-yield savings accounts — commonly the home of emergency funds — allow you to gain a modest return while keeping your money safe and accessible for withdrawal at any time.
CDs pay a little more, but they require you to commit your money for a set period.
How Much Money Do You Need To Start With Stocks?
Until relatively recently, investors had to pay prohibitively high fees and commissions to a broker if they wanted to trade stocks, which put the market out of reach for many. But today, just about anyone can invest in the stock market with whatever money they have — even just a few cents, if you pick the right trading platform.
Three major advancements made this revolution possible:
The last decade witnessed the rise of zero-free brokerages like Robinhood, which eliminated all costs associated with even the discount brokerages that had been lowering the price of investing for years. Now, even giants like Charles Schwab and Fidelity offer zero-fee, zero-commission trading.
Unless you choose to pay for the extras that come with a full-service broker, every penny you put up will go to your portfolio.
Fractional Share Investing
Many no-fee brokerages have lowered the barriers to entry even further by enabling fractional share investing. Before that, you had to have enough money to purchase at least one share — with many stocks trading for hundreds or even thousands of dollars, the options were limited for average investors.
Fractional share investing lets you buy slivers of shares with whatever money you have — if you have $5 to invest, you can buy half a share of a $10 stock or 0.5% of a $1,000 stock.
In 2014, Acorns pioneered the round-up investing revolution. Investors link their debit or credit cards to the app, and Acorns rounds up their regular purchases and puts the difference in their investment accounts.
For example, if a user buys a coffee for $2.50, Acorns rounds it up to $3 and puts 50 cents toward their preselected investments.
Tips on Investing for Beginners
How you invest will be unique to your financial situation and goals, but beginners should start with the following tips in mind:
- Identify your risk tolerance. Stocks, for example, are much more volatile than bonds, but they have much greater growth potential.
- When it comes to investing in stocks, you no longer have to rely on the advice of a broker — or even talk to one — to put your money in play. It’s called self-directed investing, and many people now choose to do their own research, build their own portfolios and make their own decisions. Decide whether you’ll seek professional guidance or take the plunge into self-directed investing.
- Choose a passive or active investing strategy. Most experts strongly advise against picking individual stocks, timing the market and making frequent trades, especially for novices. On the other hand, passive investments like index funds and most ETFs simply track broad indexes like the Nasdaq or Dow Jones Industrial Average.
Final Take To GO: Getting Started
Only a qualified professional can give investment advice, but the number one rule is never to invest what you can’t afford to lose. Seeking out the minimum investment requirements for some of these different options could be a good way to dip your toe in the investment pool.
Investing can be intimidating, so start small until you get a feel for it and contribute regularly with whatever you can afford — consistency is more important than the dollar amount. Choose a diverse blend of different kinds of investments with varying levels of risk to avoid having all your eggs in one basket, and invest for the long term — the pursuit of big, fast gains tends to result in devastating and avoidable losses.
- How should a beginner start investing?
- To get started investing, you'll first want to determine your goals and risk tolerance. This will help you decide your investing strategy and what kinds of investments you should try.
- After you know what you want to invest in, you can open an account with a brokerage or investment app.
- Is $100 enough to start investing?
- Yes, $100 is enough to start investing. You can even start with less. There are many brokerages and apps you can use to buy fractional shares of stocks, so you don't have to worry about not having enough money.
- How do I invest $100 to make $1,000?
- One way to grow your $100 investment into $1,000 is to invest in a high-quality dividend stock fund. Reinvesting the dividends back into the fund would compound your gains and make your money grow faster. But remember that this is a long-term strategy. Multiplying your investment by a factor of 10 could take years or even decades.
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