Investing for Beginners — Step-By-Step Guide & Best Investments

One of the biggest misconceptions of investing is that it’s only for the rich. The reality is that it’s easier than ever to start investing for beginners. Most brokerages have eliminated commissions and minimum balance requirements. There’s also technology that’s replaced expensive advisors. 

All of that makes investing more approachable for beginners — you can start saving for retirement, building your wealth, and letting your money work for you. 

Why is investing important?

Investing is how you build long-term wealth. It’s also important because if you’re relying on saving alone, you risk not having enough money in the future because of inflation. 

Think of saving for retirement — stashing cash under your mattress or in a savings account that is earning little to no interest means your savings won’t be able to go as far when it’s time to retire in 20, 30, 40 years. 

The cost of living keeps increasing, and investing can help you prepare for those long-term adjustments.

With brokerage practically eliminating commissions and micro-investing, the barriers are so low that there’s almost no reason not to start investing. This guide will explain the best investment for beginners, the steps to starting, and more.

5 Steps to Start Investing for Beginners 

1. Decide how you’re going to start investing

There are many different investing approaches, but there are three good ways to start investing in the stock market. There are benefits to each of these approaches, and you can try one or all of them.

There are two main differences in the strategies below: your investment goals and how much investment guidance you want. Again, you can start with one strategy and add another. For example, you can set your investments on autopilot with a robo-advisor and then start actively trading stocks once you’re ready.

Let’s dig into the options!

Option #1: Invest in your company’s retirement plan

A 401k is a retirement savings vehicle that allows employees to save a portion of their paycheck for retirement. Employers will sometimes make contributions, and all of the money paid into a 401k is invested in a long-term, tax-advantaged account.

If your employer has a 401k, this is one of the best ways to invest in stocks because. It’s easier to save and invest for retirement because money is automatically deducted. If your employer offers a match or any kind of contribution, then that’s even better. 

You can have a Roth or traditional 401k — this is the kind of tax advantage you take. Roth means you pay taxes on the money now and not when money is withdrawn from your 401k. With a traditional 401k, you pay no taxes on the money now, but you’ll pay taxes when you reach retirement age and withdraw money.

Speaking to an investment advisor can help you decide which tax advantage to take so you can lower your tax bill and maximize every dollar you save.

Your employer enrolls you in the plan, and you can take your 401k with you if you ever leave your job. You can roll it over to your new employer or into an IRA, which is another kind of retirement plan.

I will explain choosing investments a little further down, but that’s something you will need to do with your 401k. Your contributions will sit in a money market account, which will gain some interest, until you select investments. Your company will likely offer some retirement planning help so you can choose investments based on your risk tolerance and retirement goals.

Option #2: Let an expert manage your portfolio

Investing can be overwhelming, but a robo-advisor or investment advisor can help you make decisions that meet your needs. Having your portfolio managed by an expert is also a great option for people who want to take a “set it and forget it” approach.

Robo-advisor

Robo-advisors ask for information about your age, goals, basic financial information, and then the robo-advisor recommends a portfolio for you and handles the best. The investment advice you get from a robo-advisor is based on algorithms that find the best way to manage and allocate your assets in the most efficient way possible. They take care of purchasing investments, allocated funds, rebalancing your portfolio, and adjusting your portfolio as your needs and goals change. 

There is a growing list of robo-advisor apps, and many of the biggest brokerages are now offering robo-advisor services because this is becoming such a popular option for brokerage accounts. 

Robo-advisors are typically a much more affordable way to get investment advice because you’re not working with an individual advisor. The cost is typically based on assets under management (AUM), which can range from 0.25%-0.40% per year. Some robo-advisors charge a flat monthly fee, ranging from $1-$9/month.

Investment advisor

An investment advisor can be a person or firm that provides investment advice and manages your brokerage account. You can meet with them in person to discuss your goals and financial situation, and they can recommend the best investment vehicles, explain retirement plans, and more. 

It’s recommended that you look for a CFP (certified financial planner) because of their expertise. There are a few different fee structures for human advisors:

• AUM: You’re charged based on the assets under management, and the median range is 1%.
• Retainer for services: You’ll get very comprehensive service here, and the cost can range from $2,000 to $7,500/year.
• Hourly rate: A good option if you want to schedule a few meetings to look at retirement plans, set your account, plan for your kids’, etc. Cost is typically $200-$400/hour. 
• Flat fee: This is when you pay for a comprehensive financial plan and guidance that you’re responsible for following. Cost can be $1,000-$3,000.
• Commission: Some advisors are paid through commissions on investments they recommend. 

Option #3: Actively manage your account

Actively managing your account means you’re researching, selecting, and purchasing your investments. And this is the way to go if you want to be a hands-on investor. 

It takes more work on your end, mainly researching what to invest in, but that’s not a bad thing. You learn a lot through this style of investing, including how to mitigate your risks.

There are a lot of intuitive investment apps out there, and here are some of my top picks:

2. Open your investment account

Technology has made it much easier to start investing for beginners because you can open your first investment account in less than five minutes. All you need to start is your name, social security number, and a funding source. It’s worth noting that most online brokerages have little to zero minimum deposit requirements, which means you can start investing with very little money.

The main question new investors have is what kind of investment account to open. There are two main choices for people who are just starting to invest: individual brokerage account and individual retirement account (IRA).

Both account types will let you buy stocks, index funds, ETFs, mutual funds, etc. The difference is how accessible you want your funds and your investment goals.

Individual brokerage account

An individual or standard brokerage account is better if you want easy access to your money. This is a good way to invest for a rainy day, and it’s also the kind of account you’ll want if you plan on actively trading. You can open an individual brokerage account through an online investment platform or brokerage. 

IRA

IRAs are tax-advantaged retirement savings accounts, and there are two main types: traditional and Roth IRAs. Like I explained earlier, the difference is when you want to take your tax advantage.

There are also specialized IRAs if you’re self-employed or own a small business, including SEP IRAs and SIMPLE IRAs. They operate as traditional or Roth IRAs where you pick your tax advantage.

Having a tax-advantaged retirement account can help you optimize your taxes and plan for retirement, but it’s difficult to withdraw money early. You will likely incur penalties for withdrawing before you hit retirement age.

What to look for when opening an investment account

Most online stock brokerages have eliminated commissions, which is great for new investors. Because the playing field has been leveled there, here’s what you’ll want to look for:

• Investment types: You have a lot of choices for investments — mutual funds, index funds, ETFs, individual stocks, bonds, etc. I will explain the differences in the next section, but consider what’s available when opening an account.
• Educational content: Do you want your investment app to explain things like investment returns, share prices, trading types, market volatility, and other investment concepts? 
• Research tools: Some apps give you high-level research data that can help you understand how the stock market works. These apps are generally a little more expensive to use.
• Features: Custodian accounts for children, physical branches, ability to trade on a foreign exchange, tax loss harvesting, cash management accounts — these are just a few of the features some brokerages offer.
• Usability: Your brokerage’s trading platform should be user-friendly. You can compare usability through reviews, but don’t hesitate to ask about trying a demo.

3. Decide what to invest in

Depending on what path you’re taking, this section will be important. Passive investors can rely on a robo-advisor to decide which investments are best for their account, but I honestly think it’s important for everyone to understand.

There’s a wide variety of investment options, and here are five investment types beginners should know about.

Stocks

Most people have a basic understanding of what stocks are. You’re buying a small part of a company with each share (stock) you own. The value of each stock goes up based on demand. Higher demand equals a higher share price, and demand is based on how confident investors are in that particular company. 

Buying individual stocks can be somewhat risky because it’s difficult to diversify your portfolio.  Some stocks are known to be less risky, specifically blue-chip stocks. These are shares of well-established companies that have a history of performing well. They are the big players of the stock world, like Apple, 3M, Costco, Johnson & Johnson, Walmart, etc.

Do your research before investing in any company— make sure they’re well managed, focused on growth, if they have good leaders, and so on. 

Warren Buffet famously said, “If a business does well, the stock eventually follows.”

Because individual stocks can be expensive and risky, micro-investing is an affordable way to achieve a diverse portfolio.

Micro-investing means you’re in fractional stock shares. Instead of paying $100 for one share, you can spread that $100 out over many different stocks. Most online brokerages offer fractional investing, but it’s worth looking for when you open a brokerage account. 

Exchange-Traded Funds (ETFs)

ETFs have become increasingly popular, and one of the best ways to start investing because they are inherently diverse and have low transaction fees. The reason is that ETFs track a basket of securities (like stocks) that track a specific market index. Index is like a hypothetical portfolio that holds assets from a specific segment of the stock market. 

Unlike mutual funds, which are a similar investment, ETFs aren’t actively managed, which means they have very low management fees. 

ETFs have a lower risk than individual stocks, but you can still choose your risk level based on which ETFs you decide to invest in. For example, ETFs that track a broader market sector are more diverse than, say, solely tracking medical marijuana companies.

Index Funds

Index funds are similar to ETFs because they bundle many individual investments into a single investment. You get low-cost, diverse investments with both, and they both generally have strong long-term investment returns because they’re passively managed.

Here’s what’s different about index funds:

• How they’re bought and sold. You can only buy and sell index funds for the price set at the end of the trading day. 
• Minimum investment required. Index funds typically require high minimum investment requirements. Think $2,000-$3,000 minimum.
• Capital gains tax. Because of how shares of index funds are redeemed, you could owe capital gains if you want to get cash out of an index fund through the fund manager instead of an individual investor.
• Cost of ownership: Index funds, like ETFs, charge expense ratios. They are generally inexpensive, but they’re worth comparing. You could also be charged trading commissions.

Mutual Funds

Mutual funds are a professionally managed basket of investments. The fund manager chooses how to invest the money, and they generally have some kind of theme. 

There are different kinds of mutual funds, but here are the basics:

• They provide strong diversification for your portfolio.
• They can be less tax efficient because the fund manager needs to make lots of transactions to manage the accounts, and transactions can be subject to capital gains taxes.
• Mutual funds have higher fees than ETFs because they are actively managed.
• Most brokerages offer their own mutual funds, and these generally have lower fees.
• They often have higher required balances to start investing in.
• Mutual funds are only as risky as the investments in the basket of managed investments.

Bonds

Bonds are considered the least risky kind of investment because they are debt-investments. You’re technically loaning money to a borrower for a certain amount of time, and they repay you with interest.

There are many different kinds of bonds, including bond funds that are actively managed in the same way as a mutual fund. But overall, bonds pay out at a lower rate compared to the other investments I’ve explained so far.

4. Check in on your investments

As you start investing more, you’re going to need to check in from time to time and make adjustments as needed. Think of this like an annual doctor’s visit (except you do it a couple times a year). 

What to look at:

Fees

When you check-in, look at how much you’re paying in fees. Take ETFs for example. Even with lower fees than mutual funds, if you had $100,000 invested and paid 0.50% in fees annually for twenty years, those fees would reduce your portfolio value by $10,000. That’s not something to ignore.

You’re going to encounter fees, but looking at ways to lower your fees lets you invest more of your cash.

Diversification

Diversification is investing across a variety of asset types, industries, and other categories. And it significantly mitigates your risk as an investor. The goal, for most long-term investors, is to have a diverse portfolio. It gives you some protection if something happens in the market that causes certain stocks or other assets to take a downturn. 

Asset allocation

Your asset allocation is how your portfolio is divided between stocks, bonds, cash, and other assets. It’s part of having a diverse portfolio, but the right asset allocation for you depends on your goals and timeline. 

For someone who is younger and has more time, you can handle some riskier investments. But as you get closer to retirement, you’ll need to adjust your portfolio so it has less risky investments like bonds and cash securities. 

Taxes

While you might not focus on them too much when first investing in stocks, taxes should be a consideration for your long-term investment strategy. Here’s what you need to know:

• Capital gains: When you buy an investment at one price and sell it later when the share price increases, this is called capital gains. You pay capital gains taxes when you sell an investment for a profit, and it applies to stocks, ETFs, mutual funds, bonds, etc. There are long-term and short-term capital gains. Short-term capital gains are typically more expensive, and you’ll encounter them when you profit off the sale of an asset after less than a year of ownership.
• Capital losses: When you sell an investment for less than you bought it for, that’s a capital loss. You can offset your capital gains with capital losses. 
• Tax-loss harvesting: This is strategically selling stocks for a loss to offset capital gains. You can do this yourself, some robo-advisors include it in their features, or an advisor can help.
• Dividend taxes: When you earn dividends — these are payments made by a company to the owners of the company’s stocks — you may pay dividend taxes. Qualified dividends are usually taxed at a lower rate, and nonqualified ones are taxed as ordinary income.

Taxes are complex, and consulting a tax professional can help you understand the different rules and scenarios.

5. Stay focused on the future

One of the hardest lessons for new investors to understand is holding tight and not getting worked up when the market takes a wild turn one way or another. The stock market fluctuates on a minute-to-minute basis, and that will affect the value of your investments. That can look scary at times, but it’s completely normal.

Unless you’re trying to make money as a day trader, the best strategy is to keep yourself focused on the future. If you’re starting young, you have decades in the game.