Investing for Beginners: How to Start and Grow Your Money
Most Americans don’t have a solid understanding of investing basics. According to the Motley Fool’s survey of 2,000 adults in 2022, only 48% of participants answered correctly in their quiz on investing terms and basic concepts. And only 55% of Americans could identify the definition of compound interest, a fundamental financial concept that allows your money to grow more quickly than simple interest.
If investing feels confusing, don’t worry. It’s never too late to learn. Here’s everything you need to know about how to start investing, including beginner investment strategies and how to invest money wisely.
Why You Should Start Investing — Even With a Small Amount
One of the biggest misconceptions people have about how to start investing is that you need to be rich to do it. But that couldn’t be further from the truth. Many investing apps let you get started with as little as $1.
And the reason you should start investing as early as possible, even with a small amount, is because of compound interest. Compound interest is when your earnings start earning their own earnings. Over time, this snowball effect exponentially grows your wealth. Even small, consistent contributions can multiply into a big nest egg if you give them enough time.
That said, make sure you’ve built an emergency cash savings fund before you start investing. That way, you have money to cover unexpected costs like car repairs if things go south.
How Much Money Do You Need to Start Investing?
You don’t need much to start investing because many online brokerages now let you buy fractional shares. That means you could invest in expensive stocks like Amazon without needing to buy a full share. But if you’re serious about investing and want to see real long-term growth, experts recommend investing at least 10% to 15% of your income each month.
The Best Types of Investments for Beginners
If you’re new to this and not sure how to start investing, consider looking into these best investments for beginners.
1. Exchange-Traded Funds and Index Funds
One of the best investments you can make is a diversified portfolio of common stocks, according to Robert R. Johnson, Professor of Finance at the Heider College of Business at Creighton University. “This is easily achieved by investing in a mutual fund or exchange-traded fund that mirrors a broad index like the S&P 500 or the Dow Jones Industrial Average,” he said.
Exchange-traded funds and index funds are pretty similar to mutual funds in that each is a basket of different investment assets. That said, ETFs and index funds aren’t typically actively managed by a live human being like mutual funds. Instead, these investments are passively managed and simply buy and hold the securities included in the index.
Index funds and ETFs are often used interchangeably, but there’s a difference between how they’re traded. ETFs can be bought and sold throughout the day, whereas index funds can only be traded at the price point set at the end of the trading day.
2. Bonds
Bonds are debts issued by corporations or governments. When you put money in bonds, you’re lending money to the bond issuer.
Bonds are considered a relatively reliable investment because they offer set interest payments on a regular schedule (typically twice a year). This predictable payout structure is why they fall under the category of fixed-income investments.
And because bond issuers are legally required to repay what they borrow, bonds are generally seen as less risky than stocks. That said, they usually offer lower returns and less growth potential compared to the stock market.
3. Mutual Fund
A mutual fund is a bundle of different investments, usually a mix of stocks and sometimes bonds, that you can invest in with a single purchase. So instead of picking and managing each asset on your own, you’re gaining exposure to a wide range of investments in one go.
Most mutual funds are actively managed by professional fund managers. However, some are passively managed and track a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. These are known as index funds.
4. Real Estate Investment Trust (REIT)
REITs let you invest in real estate without the hassle of owning property. These companies own or finance income-producing real estate, like apartments, shopping centers or office buildings. When you buy shares of a REIT, you’re entitled to a portion of the income it generates, usually paid out in the form of dividends.
REITs are a pretty solid way for beginners to add real estate to their portfolio with lower upfront costs and more liquidity than traditional property ownership. Plus, they’re traded on the stock market just like regular stocks.
How to Choose the Right Investment Platform
The right investment platform for you will depend on your goals, how hands-on you want to be, and the amount of fees you’re willing to pay.
Here are the factors to consider when you’re looking for a beginner-friendly platform:
- Fees: Some platforms charge trading commissions or account maintenance fees that can eat into your returns.
- Fractional shares: Fractional investing lets you buy a portion of a stock rather than the whole thing.
- Automated tools: If you prefer to be more hands-off, robo-advisors like Wealthfront use algorithms to manage a diversified portfolio for you, but they typically charge a small management fee.
- Educational resources: Having access to tools like tutorials, videos investment calculators, and explainers can make your life easier if you’re a beginner investor.
Beginner-friendly investment platforms like Robinhood, and Acorns are worth checking out if you have zero experience with investing.
5 Steps to Start Investing Today
Now that you understand your investment options, here’s how to start investing.
- Define your goals. Are you investing for retirement, a house or general wealth building? Knowing why you’re investing helps guide your strategy.
- Build your safety net. Make sure you have at least three to six months’ worth of expenses in an emergency fund before you start investing.
- Pick a platform and open an account. Choose a brokerage or robo-advisor that aligns with your goals and risk tolerance.
- Automate your investments. Instead of trying to time the market, set up automatic investing and review your portfolio a couple of times a year.
- Diversify your portfolio. Spread your investments across different asset classes, like stocks, bonds and ETFs, to protect your money from market volatility.
Common Mistakes First-Time Investors Make
According to experts, these are the most common mistakes first-time investors make with their money.
Trying to Time The Market
“The most common mistake that first-time investors make is attempting to time the market,” Johnson said. “And, by that, I mean they attempt to sell before the market drops and attempt to buy prior to the market rising.”
Financial news coverage makes it feel like you should be doing something to stay ahead, but in reality, doing less often earns more. “Empirical research shows that active trading is a wealth-destroying activity,” Johnson said. “And attempting to time the market is fool’s gold.”
Buying Speculative Stocks
Another mistake that new investors make is buying speculative stocks that they have no idea about and hoping to hit a home run. “This will usually end up in disappointment, and the bad experience can sometimes lead people to quit investing altogether,” said Ron Tallou, founder and owner of Tallou Financial Services.
If you’re going to invest in individual stocks, Tallou recommends doing your homework beforehand. “Make sure you understand what the company does and believe in its future potential,” he said.
Panicking During Market Downturns
Panicking and pulling out of the market when prices fall is also a rookie mistake many beginner investors make, according to Alejandro Zambrano, chief market strategist at ThinkMarkets.
“While more experienced investors may sometimes benefit from timing their exits, beginners with less than five years of experience usually find this very difficult,” he explained. Zambrano recommends staying the course even during downturns, especially if your time horizon is three to four years or more.
How to Start Investing: It’s Easier Than You Think
Investing doesn’t have to be complicated. Though all investments involve some risks, you can mitigate them by building an emergency fund and diversifying your portfolio.
If you want even more beginner-friendly investment advice, head to our investing section for helpful tips. And if you’d prefer personalized support, a financial advisor can help you map out a course of action that fits your risk tolerance level and lifestyle.
Jamela Adam is a personal finance writer covering topics such as savings, investing, mortgages, student loans and more. Her work has appeared in Forbes Advisor, Chime, U.S. News & World Report, RateGenius and GOBankingRates, among other publications.
