The sooner you begin investing, the sooner you can begin to grow your gains into a sizable nest egg. With the power of compound interest, you can potentially turn an initial investment of $2,000 with a monthly contribution of $100 for 30 years into almost $700,000.
So whether you’ve never even dabbled in investing or you’re just starting out, it’s time to get to work. Here’s how:
Get your finances ready
You want to invest money you won’t need right away so it has time to grow. You’ll need to do a few things first.
Build your emergency fund. The common recommendation is three to six months of living expenses. You don’t need to keep this money in your checking account though. A money market fund at a brokerage or a high-yield savings account will work fine.
Pay off high-interest debt. If your credit cards hit you with double-digit interest rates, you’ll save more by eliminating that debt than you’d gain with a lot of investments over the short term..
Commit to your 401(k) to claim any matches. Investment decisions for your workplace retirement account can come later. But if your employer matches even 25% of the money you put in, that’s an immediate 25% gain. Free money is hard to pass up.
With those goals in mind, you can set up a brokerage account (if you don’t have one already) and start investing.
Decide what kind of investor you’ll be
Your strategy will likely change over time, but these are the most common types of investors:
|Type of investor||How active||Type of broker||Likely investment||Risk|
|Passive/retirement||Hands-off||ETFs, blue-chip stocks, mutual funds||Low|
|Active||Multiple trades monthly||Stocks, ETFs, mutual funds, options, futures||Medium|
|Day trader||Multiple trades daily||Buying and shorting stocks, over-the-counter (OTC) stocks, ETFs, options, futures||Medium to high|
|Cryptocurrency||Varies||Cryptocurrencies — Bitcoin, Ether, Litecoin, Dogecoin, Monero, Ripple, NEO, Stellar||High|
Pick the right accounts
There are several types of investment accounts. The most common account where you can buy and sell stocks and ETFs is known as an “Individual brokerage account.”
With an account like this, you can deposit as much as you want and withdraw whenever you want. You’ll pay taxes on profits but you can also write off taxes on your losses.
If you’re looking to invest for retirement, consider an individual retirement account (IRA). In general, IRAs differ from individual brokerage accounts in several aspects:
- Contributions can be tax-deductible.
- There are annual contribution limits to your account.
- You can withdraw without penalties after you reach 59½ years of age.
- Limited investment options.
A 401(k) is a similar retirement account, arranged through your employer. It’s worth considering instead of an IRA, especially if your company matches part of your contributions.
Pick the right broker
With so many brokers to choose from, you’ll likely find the perfect one for your financial situation. Here’s how to compare them:
- Level of complexity. Beginners typically need a simple platform to place buy and sell orders and start investing. This can be done even through a mobile app. Because of their intuitive apps, platforms such as SoFi or Robinhood are often a good place to start. As you learn and grow, a broker such as International Brokers or Webull may be your next step because of their advanced charting and research features.
- Activity. Active and passive investors have different needs. Active investors typically require advanced charting features and research and they execute the orders themselves. Passive traders often either buy and hold long-term or use automated trading systems like the ones from Acorns or SoFi.
- Fees. Robinhood, SoFi and Public.com don’t charge commission on stock and ETF purchases, and they don’t charge inactivity fees — which is great if you plan to hold your stocks long-term.
Compare trading options
Consider your options and needs when picking a broker.
*Signup bonus information updated weekly.
Pick some stocks and funds
An investment can be anything you think will increase in value over time, but for most people it starts with stocks or exchange-traded funds (ETFs).
In any given year, countless stocks outperform the market average. Tesla grew by nearly 700% just in 2020. Netflix went up 3,900% in the last decade. No question, it’s fun to own the right hot stocks.
But in investing, winning big generally means bigger risks. So while many investors start with individual stocks, it’s best to keep stock-picking to a portion of your account dedicated to riskier investments. Keep the bulk of your funds in safer places, such as large blue-chip stocks.
Most financial advisors would point novice investors to exchange-traded funds before buying a lot of individual stocks. That’s because ETFs give you a diversified portfolio across companies and across sectors, which is how you get that steady growth over the long term.
In general, ETFs track indexes, matching their performance at an average low cost of around 1% of invested funds each year. Over time, you may want to add other types of ETFs, such as sector funds, commodity funds and other classes as you become more comfortable targeting your investments and have more money to work with.
Bonds and bond funds
Buying bonds is the traditional hedge for a diversified portfolio focused on stock. When stocks go down, bonds usually go up, though the returns are generally lower.
The old rule used to be to hold your age in bonds – at 30, 30% bonds, at 60, 60% bonds. But bond returns have been so much lower for so long that new rules have emerged. One says subtract your age from 110 and put the remainder in stocks. So at 30, you’d be 80% stocks, 20% bonds. Investing sage Warren Buffett has talked about a 90/10 mix for even retirees, with the bulk in a broad market index fund.
You can buy bond funds, actual bonds and junk bonds, and build ladders of bonds reaching maturity at different times – in short, like stocks, you can get really into bonds.
Real estate, gold and other stuff
Stocks and bonds are readily accessible, but almost anything you expect to rise in value can be part of your investment portfolio.
Real estate investing is one way to go. You can buy your house or a rental property (some would question counting your home as an investment since you have to have a place to live, but that is a side issue.) You can try an ETF, a real estate investment trust (REIT) or several specialized investment brokers that let you join a deal with very low buy-in.
Investing in metals, and particularly investing in gold, has always been viewed as a safe haven when the market crashes. Most commodities in fact can be invested in via the futures markets, or through ETFs, though that might not be as satisfying as dropping a gold coin in your pocket. (Storing commodities on your own can be a hardship, though.)
Foreign exchange investing, as well as cryptocurrencies, have grown in popularity in recent years. In forex, you’re basically betting that one country’s currency will rise and fall against another. In crypto, you’re picking one of several digital currencies because you think people will pay more for it down the road. Unlike a stock which is backed by a real company, or a currency backed by a government, crypto is only worth what someone will pay you for it. So the risks are higher, but the rewards in recent years have been huge.
Collectibles: Almost anything from collectible cars to art to antiques can be acquired and tucked away as investments. Some are literally worth more than their weight in gold. A pristine Action Comics #1 weighing about 3 ounces –– that’s the first appearance of Superman –– goes for more than $3 million. An ounce of gold? Less than $2,000.
The hitch is that for the biggest gains, you have to know the field well enough to figure out what will sell a decade or more down the road. Or have the capital to buy classics when they’re already classics.
That’s at least as challenging as picking individual stocks.
Now that you know how to get started with investing, let’s take a look at some investing myths
|You need a lot of money to start||Start with a few dollars a month|
|The stock market is too risky||While more risks can mean bigger returns, and losses, the broad market goes up reliably over time|
|You have to pick stocks to succeed||The market as a whole outperforms a lot of expert stock pickers|
|You need to actively trade||Buy and hold is one of the most profitable investment strategies|
|You need to do a lot of research||Safely pick large and popular companies and hold them long-term|
|You are too old to start investing||Invest at any age, but to get the same results, you’ll need to invest more money if you start at a later age|
Pros and cons
With investing, the idea is to use your money to make more money. By creating and preserving your wealth, you can reap the rewards of:
- Return on investment. Many investments increase in value over time. Investments aren’t always guaranteed, but profit projections can help you decide what to invest in and how much to invest.
- Dividends. If you purchase stocks, funds or cash-value life insurance, you own shares in that company and may receive a percentage of its profits — which you can either cash in or reinvest. These dividends are distributed to shareholders on a set schedule. Stocks and funds typically pay quarterly dividends, while mutually owned life insurance companies tend to pay annual dividends, sometimes called a return of excess premium.
- Compounded interest. Many investments give you the opportunity to earn compound interest, which is essentially interest on your earnings. The longer you hold a stock, the higher its value — and the more interest you’ll earn.
- Voice in how a company operates. When you own shares in a company or corporation, you get to vote or have a say in how it’s run.
Risks investors face include:
- Volatility. The value of an investment can fluctuate, sometimes wildly, due to internal factors like faulty products or external events they have no control over.
- Losses. The value of investments can decrease for many reasons. Companies can underperform, demand for products or services can dry up and the stock market can crash. The result: you lose money.
When assessing risk, consider your age as a key factor. Younger investors can take more risk because they have time to make up for losses. Those nearing retirement are usually told to dial back risk.
Are any investments guaranteed?
No. But a few protections are in place for specific vehicles and situations:
- The Federal Deposit Insurance Corporation (FDIC) insures savings accounts, money market accounts and CDs. The FDIC insures up to $250,000 of your deposits in each insured bank. The catch? FDIC-insured accounts earn a lower interest rate.
- The National Credit Union Administration insures credit union members’ deposits. Backed by the US government, it also insures up to a maximum of $250,000 of your money.
- The securities you own aren’t insured against a loss in value. But the Securities Investors Protection Corporation is a non-government entity that replaces missing stocks and securities in customer accounts held by a SIPC member firm if the firm fails. The limit is $500,000, including up to $250,000 in cash.
The keys to getting started with investing center on having a plan and understanding the assets you’re investing in. If you can handle the volatility of investing and minimize the risks, there exists an opportunity to grow your money. Evaluate your options, learn what fits you best and compare the products and services that will help you achieve your goals, starting with online trading platforms.
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