How to Start Investing, for Beginners

About half of Americans are actively investing, according to several industry studies. If you’re in the other half – maybe you know you should be investing but just don’t know how to get started – you aren’t alone. 

Many people hesitate to begin investing because they wonder about questions like the following:

• Can I invest with only a little money? (Yes.)
• At what age should I start investing? (As young as you can – as a teenager or younger!)
• Where should I invest and how do I do it? (There are four main types of investments; you can buy any of them through an online investment account.)  

More detailed answers follow below, with the intent to demonstrate that investing isn’t as difficult or complicated as it may seem.

If you haven’t started investing yet, you might be concerned about how much money you need to begin. Rest easy. You can start investing with very little money. Even $10 per week, $50 or $100 per paycheck, or 1% of your salary invested consistently will grow over time. Experts suggest automatically transferring whatever amount of money you can afford directly from your paycheck and into an investment account. 

Time is perhaps the best ally in achieving investment goals. While you can begin investing at any age, the younger the better for long-term growth. Keep in mind that experts say you should invest only money that you can leave untouched for at least five years. That gives your investments time to recover should they decline due to stock market downturns, which have historically lasted less than that time period. 

You might have heard about high minimums – like $1,000 and up – for investing in mutual funds (discussed below), but don’t sweat it. Many funds waive those minimums when you sign up for automatic monthly investments as low as $50. Typically, minimums on Exchange-Traded Funds (ETFs) are even lower, set as the price of a single share.

Investing is different from saving – the act of simply putting money aside for a particular goal, like buying a car or setting up an emergency fund. Investing’s purpose is to make your money grow. But this also adds a dimension of risk. Choosing the right investments depends on your investment goals, your time horizon, and the amount of risk you’re willing to take on, regardless of whether you’re a beginner or an experienced investor. Together, these factors will guide your investment selection among the four major types of investment products: cash, bonds, stocks, and funds. These products differ in many ways, but one is crucial for a beginning investor to know: the risk-to-reward ratio.

Most investments have some level of risk, and usually the higher the risk, the higher your potential investment returns will be. The word “potential” is emphasized because investment returns aren’t guaranteed. Consider how willing you are to lose some (or all) of your money in exchange for potential returns. 

In investing, if you’re a high-stakes gambler, you’re called an “aggressive investor” – one who actively seeks out higher-risk stocks in hope of higher rewards. Conservative investors, on the other hand, seek to preserve the amount of money they invest – known as the “principal” or “cost basis.” As a result, they seek low-risk investments and accept lower returns.

Aggressive investment approaches work better for long-term goals because you’ll have more time to weather the market’s ups and downs. With more conservative investment choices, your principal is safer, so they might be better for short-term goals.

Following are the four types of investments most often recommended to new investors, including how they differ in terms of risk-reward.

1. Cash equivalents. Investments like Certificates of Deposit (CDs), high-yield savings accounts, money-market accounts and treasury bills are guaranteed by the federal government and are low risk. Consequently, they also have the lowest return potential and are most suited for short-term goals and conservative investors. It’s important to consider the low risk-to-return in the context of inflation, which erodes purchasing power and may outpace the returns over time.

2. Bonds. Bonds are a fixed-income investment, meaning they generate a steady stream of income based on a built-in interest rate – also called the bond’s discount rate. Bonds are conservative investments, especially U.S. Treasury bonds, and usually have returns that are greater than cash equivalents but lower than stocks. Junk bonds, also known as high-yield bonds, are an exception to this rule. They’re riskier because they’re rated as more speculative and have a high risk of default. As investors get closer to the end of their investment goals, they often sell off their higher-risk investments and buy bonds instead. 

3. Stocks. Also called equities, stocks rise and fall based on the underlying company’s financial results – provided everything else is equal. The entire stock market also rises and falls in response to changes in the economy, economic policy and political events. All of that makes stocks “volatile,” which simply means they sometimes have sharp swings up and down. They also require significant research before investing. Stocks are aggressive, high-growth and high-risk investments, not usually recommended for short-term investing, especially for beginners. For more information, check out “A Guide to Investing in Stocks.” 

4. Mutual funds & exchange-traded funds (ETFs). These are typically collections of many stocks and bonds. They’re often recommended for beginner investors seeking higher returns than cash equivalents and bonds, but with lower risk than individual stocks. The lower risk comes from “diversification” – another important concept for beginning investors to understand. Diversification means spreading your investment money over an assortment of investments, particularly ones that react differently to the same economic or political event. Diversification reduces your dependence on the success or failure of any one stock. 

Mutual funds and ETFs have built-in diversification; when you buy a share of a fund you are really buying a piece of a portfolio of stocks and bonds. For example, an S&P 500 ETF holds stock of all 500 companies in the S&P 500 index, which is a list of the 500 largest publicly traded companies across all industries. The S&P 500 had 13.7% annual return for the past 10 years, largely due to its diversification.¹ 

Some funds have different active investment strategies. Some focus on international companies, small businesses, or specific industries. Typically, more targeted investments like these require more management oversight, resulting in higher administrative fees and lower returns. On the other hand, “passive” investment strategies minimize buying and selling over longer periods of time, and therefore tend to have lower associated costs. Passive funds simply track an index, like the S&P 500 – meaning that the fund buys all the same stocks that make up its index. Experts advise beginners to stick with low-cost index funds that track the overall stock market, where fees are generally less than a tenth of 1%.²

Another recommendation for beginners is target-date funds, which are common retirement and college saving investments. Target-date funds choose a set future date that might be 10, 20, or even 50 years away, and automatically shift their investment allocations over time, reducing risk as the “target date” approaches. 

Employer 401(k) and 403(b) funds are sound choices for young investors or beginners with limited funds. They are an efficient way to buy mutual funds, using the power of time, tax advantages, and possible employer matching.