In this edition of Money and Markets’ Wall Street 101 series, we examine the five steps to investing for beginners.
So you’ve decided to throw caution to the wind and invest some of your hard-earned money in the casino … er, markets.
But you’ve never done it before and you have no idea what you’re doing.
That’s OK; pretty much everyone starts their investing journey in the same way. The key is educating yourself to make the best possible decisions on what to do with your money.
But first, a few notes:
- We aren’t recommending specific stocks or investments in this article, but we do have other resource articles on things like buying ETFs, tech stocks and dividend stocks.
- We’ll say it a lot, but investing comes down to you setting your limits. Know how much you want to invest — and how much you are willing to lose — and stick to it.
- We also are not recommending investment accounts in this article. Again, make sure you do your homework (we’ll talk more about investment accounts in a bit).
With that, it is time to look at the five steps to investing for beginners.
1. What Kind of Investor Do You Want to Be?
It seems like a loaded question, but it’s actually pretty simple.
Do you want to be the kind of investor that does all the work yourself, or do you want someone to do it for you?
If you want to invest on your own, what we provide in this article will help you answer those questions about investing for beginners.
You may want to have someone handle it for you, which is just as fine. The next best step for you is to find an investment manager — which could be what is called a robo-advisor.
According to Investopedia, a robo-advisor is a digital platform that provides financial planning services anchored in algorithms with little to no human supervision. There are quite a few of these out there so if this is the route you choose, do your homework to determine what is best for you.
So the first question you have to ask yourself when learning about investing for beginners is what kind of investor do you want to be?
2. Start an Investing Account
Regardless of whether you are going on your own or choosing to have someone do the legwork for you, the next step in investing for beginners is opening an investing account.
If you are on your own, you want to look at an online brokerage account. It is fairly easy to open and is likely the least expensive. These accounts allow you to buy stocks, bonds, funds and other investments.
When you are researching online brokers, make sure you look for things like trading commissions and account fees. Anymore, most of the more well-known brokerage firms have zeroed out fees, making it even less expensive to open an investing account.
Now, perhaps you want to be a less-active investor and allow someone else to do the work for you. In that case, you want to find a robo-advisor.
As we said above, a robo-advisor will use algorithms based on answers you give to certain questions to determine the best options for your portfolio and invest accordingly.
One slight drawback is that many robo-advisors do charge a management fee. This is typically between 0.25% and 0.5% of the assets you have under management. That seems a bit much, but it is still less than if you were to have an actual investment manager.
So the next big step when you are learning about investing for beginners is to start an investment account.
3. Learn the Different Kinds of Investments
You may think investing is as simple as picking a company and buying some shares, then sitting back and waiting for the money tree to bear fruit.
More often than not, that just isn’t the case.
If you are going about investing on your own, after you open a brokerage account, you need to have an understanding as to the different kinds of investments out there.
That may seem daunting, but it really isn’t. Here are the two most comment investment types:
Mutual funds or exchange-traded funds — The benefit of either mutual funds or exchange-traded funds (ETF) is diversification. When you buy into one of these, you are able to purchase small pieces of a lot of different stocks. For example, if you buy into an ETF that tracks a tech index, you own small pieces of the companies in that particular index. You can buy into different mutual funds or ETFs to diversify your portfolio even more.
For more on investing in an ETF, check out Wall Street 101: How to Invest in an ETF.
Individual stocks — This is pretty cut and dry. If you want to buy shares of Amazon, you can just buy shares of Amazon. However, if you are looking to diversify your portfolio to better guard against market volatility, investing in individual stocks will take more time, and likely more money. However, a benefit to investing in individual stocks is they are more apt to rise in share price much faster than ETFs. Pick the right stock and it could pay off. However, just as an individual stock can rise fast, it can also fall just as fast.
There are many other kinds of investments. Check here to learn more about those.
When you are learning about investing for beginners, it is very important to know the different kinds of investments out there.
4. Know Your Limit
There are a couple of different ways to look at this: How much money do you need and where should you invest it.
If you follow the market closely, you know that the price of company shares can range from cents to thousands of dollars. So if you are investing in individual stocks, the amount of money you need really depends on the price of the shares you want to buy.
However, if you are looking to be more diversified and perhaps don’t have thousands of dollars laying around to invest, an ETF is the route you might want to go. Since ETFs trade like a stock, buying and selling is as simple as going to your brokerage account and putting in the order.
And because ETFs are more diversified and carry small percentages of companies in the fund, they are likely considerably less expensive — like, around $100 or less per share — than buying individual shares in the companies listed in the fund.
The bottom line is you don’t have to be rich to start investing in stocks.
The next question to answer is where should you invest?
If you are investing in ETFs or mutual funds, it’s a bit safer to allocate more of your portfolio to stocks. Perhaps something like 75% stocks and 25% bonds, or something like that.
This is especially good if you are looking at long-term investment for retirement. As you get closer to retirement, you can start to change your portfolio to be more bond-heavy and less reliant on stocks in order to better protect your investments.
However, if you are investing in individual stocks as well, it might be best to limit the amount you have in your portfolio until you’re more seasoned.
5. Get Started
Now that you have decided what kind of investor you want to be, opened your account, learned about the different investments and set your investment limits, it’s time to get started.
Investing isn’t difficult, but it does take patience and a willingness to learn.
The hardest thing you will do is make that first investment. You will likely second-guess yourself and that’s OK. But you have to press “Submit” at some point.
Once you do that, you’re likely hooked.
In the end, it all comes down to your tolerance and budget. The most important thing is to be educated on what you are investing in and how much you are investing. Don’t throw your life savings into the market when you are just getting started — if ever.
It’s OK to start slow and work your way up as you become more comfortable with what you are doing.
Remember, there are ups and downs in the market, so you have to be willing to weather the bad times just as much as you relish the good times.
Investing should be fun and a way to earn extra income for things like retirement.
So there you have it; five steps to investing for beginners.