One of the biggest misconceptions of investing is that it’s only for the rich. The reality is that new investors and those investing with little money have more options than ever before. 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.
How to start investing for beginners — 6 Steps to Start
1. Decide how you’re going to start investing
There are many different investing approaches, but there are three good ways to start investing for beginners. They all have benefits, and none of them limit you from investing in other ways in the future.
Option #1: Invest in your company’s retirement plan
For many brand new investors, investing in your company’s 401k is the most approachable way to start investing. Contributions to your 401k are deducted from your paycheck before calculating taxes, which means it can lower your tax bill for the year 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. Most companies provide some kind of help here.
Option #2: Let an expert manage your portfolio
If you’re the kind of person who would rather have an expert handle everything, you can invest using a robo-advisor. These are online services that build and manage your investment account using computer algorithms.
Many online brokerages have a robo-advisor service — it’s an affordable way to have a managed account. Instead of paying a financial advisor, you enter information about your age, goals, basic financial information, and the robo-advisor recommends a portfolio, then handles the rest. That includes purchasing investments, rebalancing your portfolio, and adjusting it as your needs and goals change.
This is good for people who want something close to a “set it and forget it” style of investing.
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 hands-on with your investments.
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.
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 account balances, which means you can start investing with very little money.
There are many online brokerages to choose from, and I’m going to break them down based on what kinds of investment experience you want.
If you want a hands-off experience
Robo-advisors manage your account for you and are best for those who want a more passive experience. These services have monthly fees, either a flat fee or a percentage of your account balance, but this fee is much less than you would pay a human advisor to manage your investments.
Betterment is a popular robo-advisor — the first one around. Betterment charges 0.25% AUM (assets under management). They specialize in goal-based investing and offer individual brokerage accounts, retirement accounts, and more.
If you want to actively manage your account
For anyone who wants to have more control and select their investments, you have lots of choices. If you’re not already saving for retirement with a 401k or another employer-sponsored retirement plan, I recommend starting with an IRA. This is an individual retirement account that offers tax advantages, and it’s one of the best investment accounts for beginners.
If you already have a retirement account, you can set up an individual brokerage account. There aren’t tax advantages, but there aren’t limits to how much you can invest or when you withdraw your money.
Interactive Brokers, Webull and Stash are all places to start looking. Stash is considered a micro-investing app — you can purchase fractional shares and invest with spare change, which can be a good choice if you’re investing with little money.
If you want all the options
Why limit yourself? Some solid online brokerages offer robo-advisor services, let you manage your own accounts, offer fractional shares, and even offer self-employed retirement savings accounts for side hustlers who are learning how to start investing.
Most of these brokerages have eliminated minimum balance requirements and eliminated trading fees or commissions to stay competitive. Fidelity, Charles Schwab, and Vanguard are three of the most well-known online brokerages.
3. Understand what kinds of investments are available
Depending on what path you’re taking, this section is going to 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 four investment types beginners should know about.
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 higher value, and demand is based on how confident investors are in that particular company.
Buying individual stocks has a moderate- to high-risk rate because they aren’t diversified. You have to buy stocks in many different companies to diversify what’s in your stock portfolio.
Some stocks are known to be less risky: blue-chip stocks. These are shares of well-established companies that have a history of performing well. They are the big boys of the stock world, like Apple, 3M, Costco, Johnson & Johnson, Walmart, etc.
Exchange-Traded Funds (ETFs)
ETFs have become increasingly popular, and one of the best ways to start investing for beginners 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.
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 the basic things you need to know about them are:
- Mutual funds 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.
- Mutual funds often have higher required balances to start investing in.
- Mutual funds are as risky as the investments in the basket of managed investments.
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. Set a budget
One of the major barriers to investing is that many people think they don’t have enough money to start investing. But the reality is that investing for beginners is more budget-friendly than ever before for a few reasons.
First of all, most online brokerages have eliminated account minimums. More brokerages offer fractional shares, which is when you only buy a percentage of a stock or ETF. Instead of needing $120.99 to buy a single share of Apple (price at time of publication), you can buy $5 worth of Apple stock. Or you can buy $5 worth of an ETF that tracks an entire index.
Being able to buy fractional shares allows you to invest in a diverse portfolio for much less money, which is good for beginners who don’t have much to invest.
Even with fractional shares, it’s still important to set an investment budget, and here are some tips to help:
- Automate it: You’re more likely to invest some every month if you automate your investments. It’s also good if you lack the willpower to save each month. Most investment apps let you set up recurring deposits to your account.
- Plan for retirement: You can use a retirement calculator, or a free app like Personal Capital, to see how much you should be saving each month for retirement. You can calculate current savings, monthly contributions, and an average return rate to give you an idea of how much you should invest each month.
- Invest your windfalls: Next to using windfalls (unexpected chunks of money) to pay off high-interest rate debt, investing your windfalls is a great way to start investing. This can be your tax refund, work bonus, etc.
5. 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:
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 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.
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.
6. Stay focused on the future
One of the hardest lessons for new investors to understand is holding tight and not getting worked up with 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.
The final word on investing for beginners
New investors should start building their foundation with retirement investments, like a work 401k or IRA. From there, you can add an individual brokerage account and add even more to your portfolio.
Try not to get caught up in the noise of market volatility, meme stocks, or trying to beat the market. Hold tight and keep your focus on long-term growth.
ETFs are one of the best investments for beginners because you’re not buying shares of one company. You’re tracking a basket of assets that are tracking a market index. ETFs are generally safer and diverse than single stocks, making them a good investment when you’re first starting.
If you have an employer-sponsored retirement plan, that’s where I would start. Contributions are pulled off the top of your paycheck before taxes are taken out, which makes it sting a little less. Another option is to look for a brokerage that offers fractional shares. You’re buying a portion of an ETF, stock, bond, etc.
And this goes without saying, but if you want more money to invest, save, or pay down debt, finding ways to make money is always a good way to reach your goals.