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

Learn how to invest in stocks and other investment vehicles.

Choosing stocks, mutual funds and other types of investments can be intimidating for first-time investors. To help you get started, GOBankingRates has put together this beginner’s guide to investing.

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: What Is Investing?

Put broadly, investing is the creation of more money through the use of capital. Essentially, when you invest, you offer your money to people and organizations who have an immediate use for it, and in exchange, they give you a share of the money that they earn with this funding. There are different types of investments — including stocks, bonds and real estate — and each comes with its own level of risk.

Different Types of 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 types of investments and see if any fit your needs.

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

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.

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

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.

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 and a half.

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 and a half.

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 investment 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.

Stocks

When you start investing in stocks, you are buying 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: The Best Brokers of the Year

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.

Exchanged-Traded Funds

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

Real Estate

Purchasing a commercial property or home as an investment is one way to invest in real estate, but it might require more capital than you have readily available. Another form of real estate investing is through a real estate investment trust, or REIT. An REIT is a company that owns a property such as an office building, mall, apartment building or hotel. Individuals can invest in an REIT, and earn a share of the income produced through the real estate ownership — without actually having to go out and buy commercial real estate.

Commodities

Commodities are goods such as metals and grains that are traded through futures contracts. A futures contract is an agreement to buy or sell a specific quantity of a commodity at a specified price on a specified date in the future. Commodities trading is vulnerable to fraud, so be sure to check that the individual and firm you are investing with are registered.

Options

Options are contracts that give the owner the right to buy or sell a specific asset at a specified price, on or before a set future date. These contracts derive their value from the underlying assets, which can include stocks, ETFs, foreign currencies or commodities.

Investing Strategies: Smart Ways to Invest Money

How aggressively or conservatively you invest your money is based on your risk tolerance. Here are five investing basics and rules that beginners — and even more experienced investors — might find helpful:

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: The Best Investment Brokers

Try DIY Investing

Management fees from financial advisors can eat into your earnings. Because of this, many individual investors choose to manage their own portfolios using online investment tools and resources. 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.

Aim for Diversification

One of the most dangerous moves an investor can make is to 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 correctly, 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.

Practice 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. Over the long haul, this type of investing can make temporary market declines a good thing.

Use 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.

Read: The Best Online Stock Brokers for Beginners

How to Get Started

Deciding how to invest money involves making several choices. Use this overview to get a handle on the basics.

Step 1: Set Goals to Achieve Your Long-Term Plans

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.

Step 2: Review Your Budget

By creating a budget, you can determine how much money you have to invest. 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.

Check Out: The Best Robo-Advisors

Step 3: Determine Your Risk Tolerance Level and Choose Your Investment Type(s)

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 is 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.

Step 4: Choose a Platform

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. Here are the three platforms from which you can choose:

  • 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 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.
  • 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.
  • 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.

Step 5: 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.

Tips for New Investors

If you follow the above outline, you’ll be setting yourself up for success, but there are things to keep in mind as you begin investing:

  • 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. All investments come with a certain degree of risk.
  • Don’t get emotional: The stock market rises and falls every day. 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.
  • 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.

Click through to read about 25 investing myths debunked.

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    John Csiszar and Gabrielle Olya contributed to the reporting for this article.