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

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When you invest, you take some of the money you don’t immediately need and use it to try to build wealth. The tradeoff is that to grow your money, you have to risk losing some of it — 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.

Read: 5 Things You Must Do When Your Savings Reach $50,000

Types of Investments

Beginners should start by understanding the different types of investments and the risk associated with each. The following list omits many types of more exotic and complex investments, like options trading and cryptocurrency. That’s because beginners who are investing for the first time should stick with the fundamentals until they gain knowledge and experience. 

Here’s a breakdown of the most common types of investments, which 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).

1. Stocks

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 only through a licensed brokerage.

Stock investors buy shares in the hope that they will appreciate in value 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.

2. Bonds

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 tradeoff for reduced risk is a lower potential for gains. 

3. Treasury Securities

There is a wide range of Treasury securities, including bills, notes, bonds, Treasury Inflation-Protected Securities, floating-rate notes and savings bonds. 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.

4. 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, cost-efficiency and the diversification they provide.

5. ETFs

ETFs 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, and often require you to commit your money for an extended period of time.

6. 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.

7. 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 — the home of most 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. 

Investing in Stocks as a Beginner

Many people think of stocks first when they consider investing. While stocks aren’t the only option, they are a popular choice — and they can be a good one. Here’s some information to get you started with stocks.

How Much Money Do You Need to Start With Stocks?

Until 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: 

  • No-fee brokerages: 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.
  • Partial-share investing: Many no-fee brokerages have lowered the barriers to entry even further by enabling partial-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.
  • Round-up investing: 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 $0.50 toward their pre-selected investments.

Can I Invest in Stocks Myself?

You can’t actually execute trades, as only licensed professionals can buy and sell stocks, but 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. 

What Is the Best Way To Invest for a Beginner?

The “best” way to invest is unique to each individual, but beginners should start with the following checklist in mind:

  • Establish both short- and long-term goals.
  • Identify your risk tolerance. Stocks, for example, are much more volatile than bonds, but they have much greater potential for growth.
  • 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.
  • Understand the tax implications of every investment you make.

Before You Get Started

Only a qualified professional can give investment advice, but rule no. 1 is never to invest what you can’t afford to lose.

Investing can be intimidating, so start small until you get a feel for it and contribute on a regular basis 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.

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

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street's investment community in New York City.
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