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How to start investing

Starting out as a beginner can be daunting. Read on for everything you need to know to start investing.

If there’s one piece of advice the investing experts agree on, it’s this: the time to start is now. The sooner you begin, the sooner you can begin to compound your gains into a sizable nest egg.

For most of us, this means buying stocks. Because while equities go down at times, over time the market goes up –– at several times the pace of a savings account.

So whether you’ve never even dabbled in investing, you own a few stocks you want to turn into a real investment plan, or you just want faster growth, 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. So 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 savings and loan though. A money market fund at a broker 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 match. 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 hand 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 change over time, but give it some thought as you begin. There are four critical questions:

  • How much will you invest? Do you have a chunk of money to invest right now, or will you commit a little each payday? If it’s the latter, you may want a broker offering fractional shares –– letting you invest small amounts in any stock you choose.
  • What’s your time frame? If your investing is aimed at short- and medium-term goals like a home or travel, you’ll want a taxable brokerage account. If at least some of that money is for retirement, consider a tax-advantaged retirement account. If you’re saving for higher education, consider a 529 savings plan.
  • How much time can you invest? If you’ll seldom check your stock holdings, consider an automated portfolio like a robo-advisor. If you want control and can check every day, you can consider day-trading. Most of us fall in the middle. Likewise, if you want to invest in real estate, you can buy and manage property –– a hands-on job –– or pick one of the brokers that will sell you a piece of a deal.
  • How much risk can you accept? In investing, more risk often equals more reward. But it also raises the odds your investment will go down in value. The risk-averse might keep more money in cash, the most conservative investment, or in bonds, which have a guaranteed return. Stocks have their own risk spectrum; conservative investors might lean to broad-market index funds or the biggest blue-chip companies because while markets rise over time, individual companies can struggle or go broke. Risk-takers might stick to smaller, less-established companies in hope of finding the next Apple or Amazon..

Pick the right broker

If you have a workplace retirement plan or own a few stocks, you might already have a broker. You may need more than one, particularly if you want to invest in more specialized products.

Some keys to consider:

  • What it costs: Low- and no-fee options abound, particularly for stocks and ETFs. But watch fees on mutual funds and options.
  • What you’ll trade: For a starter portfolio, stocks and exchange traded funds are critical. Check on the costs for mutual fund investing. If you know you’ll want to trade options or cryptocurrency or commodities, check on those; not all brokers offer them. More specialized brokers can help you invest in real estate or even fine art.
  • How much advice do you need? Do you want personalized planning, in-person consultation or will you do it yourself? Do you want sophisticated tools for stock trading, or something more casual?

Pick the right accounts

You’ll also need to consider what kind of account or accounts to open:

  • Workplace retirement plans: These include employer sponsored plans like 401(k)s and 403(bs), which offer a variety of tax benefits and in which your employer may match all or part of your contributions. (If you’re self-employed, you can set one up for yourself.) The tradeoff is that your investment choices will be limited, and you’re tying up your money long term; withdrawals before certain ages incur a penalty.
  • Individual retirement account (IRA): These are similar to workplace accounts, with similar tax advantages, but you’re in control and likely have more options. But you’re not allowed to save as much per year.
  • Taxable investment account: This is the basic account you get when you sign up with any trading platform. No tax breaks, no limits. Unlike a retirement account, you can take money out at any time without penalty.

Compare trading options

Consider your options and needs when picking a broker.

Name Product Stock trade fee Asset types Option trade fee Annual fee Signup bonus
Sofi Invest
Stocks, ETFs, Cryptocurrency
A free way to invest in stocks, ETFs and crypto.
Stocks, Options, ETFs
Free stock (chosen randomly with a value anywhere between $2.50 and $200)
Sign up using the "go to site" link
Make unlimited commission-free trades in stocks, funds, and options with Robinhood Financial.
Interactive Brokers
Stocks, Bonds, Options, Mutual funds, ETFs, Currencies
$0 + $0.65/contract, $1 minimum
IBKR Lite offers $0 commissions, and IBKR Pro offers advanced tools for professional traders.
Stocks, Options, ETFs
Get one free stock valued between $2.50 and $250 when you open an account, one more with a deposit
Open an account
Margin financing rates start at 3.99%. No monthly subscription fees for margin.
Stocks, ETFs
$0 per month

Compare up to 4 providers

*Signup bonus information updated weekly.

Understanding stocks and bonds

An investment can be anything you think will increase in value over time, but for most people it starts with stocks and bonds. Here’s a deeper look at those investment options:

Individual stocks

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, as you build a portfolio, it’s best to keep stock-picking to a portion of your portfolio dedicated to riskier investments. Keep the bulk of your gains in safer places, such broad-market index funds, and mind your mix of large blue-chip stocks vs. riskier mid- and small-cap stocks.

Mutual funds and ETFs

Most financial advisors would point novice investors to exchange-traded funds or low-cost index mutual funds before buying a lot of individual stocks. A total market fund will give you a piece of every company in the market; an S&P 500 ETF will give you a piece of the 500 largest.

What they give you is a diversified portfolio across companies and across sectors, which is how you get that steady growth over the long term. When one stock goes down, others go up. To do this with individual stocks is tough; the experts say it takes 20 or 25 stocks at minimum to build a properly diversified portfolio, which takes a large portfolio given the price of market-leading stocks.

In general, ETFs track indexes, matching their performance at a lower cost than mutual funds. Mutual funds have active managers who try to juice returns based on different strategies. But there are indexed mutual funds and actively managed ETFs, so study the strategy, the track record and the fees closely before you buy.

Consider broad index funds as the basics. Over time, you may want to add 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

Bonds are the traditional hedge for a diversified portfolio. 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 also buy actual bonds, 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 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 an 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 sometime 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.

What are the benefits of investing?

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.

What are the risks of investing?

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.
Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

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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