How to Start Investing
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- Find out how to start investing
- Know the difference between investing and trading
- Find the right investment products and instruments
Investing in the stock market is known to be one of the best ways to generate a return on your money. As such you may be thinking of taking your first tentative steps and starting out on your own investing journey.
If you’re new to investing, it’s important to do your research and understand what you’re getting into before you make the plunge and start buying shares on the stock market.
So, from how to compare an investment platform, to some of the different assets that first-time investors could consider, find out everything you need to know in my guide to investing for beginners.
The 5 steps on how to starting investing
It’s remarkably straightforward for beginners to start investing.
- Choose a stock broker. You first will need to choose a stockbroker or trading platform – Before you can make any moves you will need to decide on a stockbroker or investment platform to facilitate your investing. We have compared some of the best investing platforms to help you get started.
- Choose an account. You then need to choose an investment account – From general investment accounts (GIAs) to IRAs, there is a range of different accounts available. Search for the most appropriate account for you based on your investing needs.
- Set your goals. Work out your investment goals – Your investment goals will help you define your investment strategy, risk-tolerance, the financial products you explore and also the types of assets you choose to trade..
- Set your investment strategy. With your goals in mind, decide how you’re going to get there. Research different investment strategies and figure out which of these will work best for you.
- Start trading your investments. Once you have a strategy in place that targets your goals, you can start buying, selling, and trading investments.
Choosing the right investment account
Stockbrokers and trading platforms offer a variety of accounts to choose from. Here are some of the most common investment accounts available to beginner investors.
General investment account
A general investment account, also sometimes referred to as a “share dealing account” or a “GIA”, is the most basic type of account, allowing you to trade a variety of investments, typically with no limits.
Some brokers now offer their most basic accounts for free, including no commission on your trades.
However, investing in this type of account can leave you with a tax liability, depending on how much you generate.
Individual Retirement Account – IRAs
An IRA (standing for “Individual Retirement Account”) is a type of personal account that allows you to hold money and investments in a tax-advanced way.
Each tax year, you have an IRA allowance, this is the maximum limit that you can deposit into your IRA. The annual contribution limit for 2019, 2020, 2021, and 2022 is $6,000, or $7,000 if you’re age 50 or older.
Crucially, with an IRA your investment is tax incentivized. There are a number of IRA accounts available, each with their own set of perks but for simplicities sake we will just look at two. There are others but there are less relevant to solo investors.
There are various types of IRAs, each with its own benefits:
The original IRA lets you make contributions pre-tax. You are only liable for tax once the payouts begin. This is a useful way of lowering your current tax burden.
Another useful advantage to the Traditional IRA, and something that a young investor may not be thinking of, is the fact that at retirement your income is likely to be lower so the amount of taxes you have to pay should be lower too.
In any case once you hit 59 ½ you are able to make withdrawals from your IRA account without incurring any penalties or fines.
The contributions made to a Roth IRA are subject to tax. So, in essence the money you make from your income and invest into the Roth IRA is taxed prior to your depositing it. The upside to this is that any payouts are now tax-exempt.
There also a few other terms and conditions with the Roth IRA, namely it is not available to high-earners. If you are fortunate enough to make more than $140,000 a year, or $208,000 for a couple, you can’t contribute to a Roth IRA.
Another nice upside to the Roth IRA is that you are not required to make withdrawals. The IRS has already taken its slice of your pie and as such you can leave the money there as long as you like. And should you wish, you could even pass it on to your heirs.
Whilst it is hard to make a recommendation without knowing your current circumstances my recommendation is that a Roth IRA makes more sense for young investors. As your current tax burden is likely to be lower and the perk of making tax free withdrawals from you fund is hard to beat.
In any case either of these comes with tax incentives, the choice is up to you.
Pension Scheme/Pension Trust
If you wanted to use your investing for saving towards retirement, you could consider opening your own Pension Scheme.
The range of individual Pension Schemes available to US citizens is large, to say the least, but providers such as Charles Schwab have earned a good reputation for offering a great product for investors. And with investment minimum contributions of just $100 and a wide range of products available for those wanting to start retirement planning there really is no excuse.
In any case a number of various pension options are available and whether you decide to go through an insurer or brokerage company the choice is yours.
Working out your investment goals
In the short period of time between opening your investment account and choosing the specific assets you want to buy and sell, you should give some thought to your investment goals. Identify what it is exactly that you are investing for?
In order to help you set these out it can be useful to separate your financial goals into short-term objectives, medium-term, and long-term.
- Your short-term objectives are the types of ambitions that you hope to reach in the immediate to near future, typically within a time frame of 12 months or less.
- This is usually something like saving towards a dream holiday or buying a car.
- Medium-term objectives are those aims you have that will take upwards of a year, potentially even up to five or maybe 10 years.
- Buying a first home is one example of a common medium-term goal. And usually, medium-term ambitions are where people start their investment and savings journey.
- Your long-term goals are the ones that will take the most time, often requiring you to build up towards them over many years or perhaps even your entire working life.
- This typically includes things such as your retirement goals. Or you may have grand ambitions, such as travelling the world, which you’ll need to invest over many years to accomplish.
No matter what your specific goals are, having investment objectives like this can make it easier to make informed decisions regarding not just the management of your investments but also the choice of investment you make.
Always remember that you can change your goals as you go, you may decide to go for a second-hand car and suddenly the money set aside for your short-term becomes money you can use for medium-term objectives. These targets should serve you as providing a good benchmark for what you’re trying to achieve with your investing, but you’re free to adapt them depending on your own changing circumstances.
Setting your investment strategy
While it’s impossible to predict exactly how your investments will perform, the future success of your investing does in part depend on your choice of investment strategy.
Some investment strategies are more suitable for beginners looking to invest than others, so here are three that you could consider:
1. Value investing
Value investing simply means buying shares at a low price and then selling them once they exceed the original buy-in price.
While the returns using this strategy tend to be smaller than with other investment strategies, making multiple transactions for small profits can add up over time. The secret lies in the sheer volume, and every nickel and dime will add up.
Also, another nice thing is that your risk exposure is low, so should your investment not go as planned it means that any losses you incur will also be smaller.
One word of caution I would raise is that this can be an expensive way to trade, depending on your brokers pricing model, as it may mean you have to pay more in trading fees and commission.
2. Growth investing
Growth investing is more of a long-term strategy. Usually, investors who select this strategy are hoping to capitalize on stock market developments over a period of a few years.
Generally, growth investing means looking at longer-term trends, comparing these forecasts with current market conditions and once a suitable window arises based on this model you are hoping that the investments you bought into will grow and reach their full potential.
Naturally, this leaves a lot of room for error. For example, no one could have forecast the impact that the Covid pandemic had on global economies or current developments in the Ukraine. As such even the smartest of investor may come undone.
3. Dollar-cost averaging
Dollar-cost averaging involves putting small amounts of money into the stock market over a longer period of time. This is also a great way of encouraging investment and wealth creation as it helps develop a disciplined investing habit.
The logic here is that you’re less likely to be affected by swings and dips in value, as you end up with an average of the market’s performance over a period of years.
Of course, this may not always be true, particularly if the economy is just about to enter a bear-market, that is to say a period of prolonged decline. Or if you are just unlucky and make a bad pick as your investment continuously drops during the period that you invest.
Using different elements of each
Arguably, the most sensible course of action is to pick and choose the best elements of each of these strategies and combine them into a method that works best for you.
Doing your research
As part of designing and setting a strategy that works for you, you might find it useful to do some of your own research before you get started.
Stockbrokers and investment platforms often have extensive “learn” sections which can be a good starting point for finding out about investments. But as you usually have to already have an account with these platforms to access the information it is strongly recommended that you read-up as much as possible before picking a broker or investment platform.
Otherwise, reading around in the finance section of news outlets can also be a good way to keep in touch with what’s going on in the investment world.
What kind of investments should a beginner have?
There are a variety of asset classes that you can invest in, but the main ones that beginners may want to look at are stocks and shares, bonds, and funds.
Stocks and shares
Stocks and shares are probably the most common asset class that people invest in and, generally speaking, most investors will hold at least part of their investment portfolio in them.
When you buy stocks and shares, you’re essentially buying a small piece of the company. The prices of these stocks will change over time and price fluctuations are to be expected. The goal is to sell out when the stock price is greater than when you bought it.
Picking individual stocks and shares like this can be difficult and volatile but it can also be highly rewarding, assuming you make the right decisions.
As well as making money by selling shares that have risen in value, some companies will pay dividends to their investors who own stocks in the company. This is a way of thanking shareholders for owning shares, and is a useful strategy for companies that want to avoid shareholders selling shares and thereby impacting the company value. It is a useful strategy for companies to encourage long-term shareholders.
Dividends are paid out as a percentage of how much you own. As a result, the more shares you hold with a company, the greater your dividend payments.
You can take this additional income as profit or reinvest it into more stocks and shares in the company.
Bonds are small loans that you make to a company in return for your money back with interest. This is a popular method for companies to raise money in the short-term, and is often used to fund strategies such as mergers and acquisitions.
Lending money in the form of bonds can be useful to you, as it means you receive regular interest payments before they mature. So, provided that the interest rates are in line with your financial goals, bonds can present solid, fixed-income investments, including guaranteed investment funds.
Of course, you should only buy bonds in companies that you’re confident in. After all, if a company were to go bust, you could lose your entire investment.
Alternatively, rather than receiving your interest payments and waiting for your bonds to mature, you can also consider selling them on a secondary market.
Selling bonds to another buyer can be lucrative, as they may be willing to pay a premium for your bonds. This can be a good short-term strategy but also useful in the long-term if you think your current bond holdings are over-valued.
Of course, by selling the bond, you’ll no longer receive the interest payments.
You can also buy bonds from governments, known U.S. Treasury securities.
U.S. Treasury securities tend to pay back lower interest rates than corporate bonds but are typically more secure. After all a company may go bust but it would the collapse of the entire government and its bankruptcy for you not to receive your payout. Something that even in today’s uncertain times is extremely unlikely.
You can also sell U.S. Treasury securities on a secondary market.
Also consider: Your Comprehensive Guide to U.S. Treasury securities
An investment fund is essentially a small basket of investments that you can buy all at once.
Investing in funds like this is a lot like the ready-made IRA products that I discussed above; you simply put your money in and it receives returns in line with how the underlying investments perform.
Of course, this still doesn’t mean positive returns are guaranteed.
There are many different types of funds, but the ones below are some of the most common:
A mutual fund is simply a basket of investments that you invest in alongside other investors.
Mutual funds are typically actively managed funds, meaning the money invested is handled by a professional fund manager. Any investment decisions are made on your behalf, though within the risk-parameters set out by you.
Knowing that these decisions are being made for you by a professional can be reassuring, as it means the investments are constantly being refined and curated, even if you haven’t built up your investing knowledge yet.
Bear in mind that there may be higher trading fees with actively managed funds.
Index funds are another basket of investments, only the difference is that they track a specific stock market, such as the Standard and Poor’s 500 (S&P 500), Dow Jones Industrial Average, Nasdaq Composite, Russell 2000, to decide what investments to hold. As a result, you may also hear index funds referred to as “tracker funds”.
Unlike mutual funds, index funds are passive funds, meaning there’s no fund manager to keep an active eye on how the underlying investments are performing. Instead, the funds simply invest in whichever investments are on their chosen index.
Typically, index funds save you money against actively managed funds as, without a fund manager to pay for, they have lower fees.
However, this also means that there’s no one there to make changes and review the investments if they start to lose value.
An exchange-traded fund (ETF) is exactly like a mutual fund, except that it can be traded on a stock exchange.
While other funds can only be bought and sold once a day, investing in ETFs in the US have a greater degree of flexibility, allowing you to buy and sell throughout the day.
Of course, the downside here is that it can be tempting to sell if the value falls.
Also consider: How to buy gold stocks and the best gold ETFs US
While stocks and shares, bonds, and funds tend to be the most suitable asset classes for beginner investors, these are by no means the only ones available across the market.
For example, precious metals such as gold and silver are highly popular with some investors. Generally speaking, precious metals are a great hedge against market volatility and are a popular choice for investors if markets are uncertain.
Another popular choice with investors in uncertain markets is property, with many deciding to invest in property via real estate investment trusts (REITs) and other similar ventures.
You may have also noticed a huge interest in trading cryptocurrencies, with the value of some digital coins growing exponentially over the past couple of years.
However, it’s important to note that these other investments tend to be more specialized and may not be entirely suitable for beginners who are new to investing. Or at least new to investing and hoping to come out on top.
It can often be best to start with simpler investments that are easier to understand before moving on to these more complicated options.
How much should a beginner investor start with?
There is no “one size fits all” answer to how much a beginner investor should start investing with because it really depends on your goals, circumstances, and attitude to risk.
Whether you have $50, $500, or $5,000, it’s possible to find investments that are suitable for you. The key is to not invest more than you can afford to lose for living your daily life.
How can I start investing in little money US?
Often, many would-be investors are put off by the fact that you do need such sums to get started.
Fortunately, it’s possible to invest in ways that mean you don’t need to instantly put thousands into the market as even well-established companies with billions under management such as Charles Schwab offer products with very low entry costs.
As I discussed before dollar-cost averaging can be a highly useful strategy here, allowing you to invest in small sums over time.
While it’s generally true that investing more money gives you a chance of greater returns, you can still see returns on your money by investing smaller amounts over longer periods.
Another useful option to consider for those just starting to invest, is buying “fractional shares”. Instead of buying a whole stock or share in a company, you can purchase part of a single share that someone else owns.
This can allow you to hold shares in more expensive investments that you wouldn’t be able to afford otherwise.
Fractional shares don’t trade on the market, so you’d have to find a broker that will allow you to purchase them.
Investing and risk
As you no doubt already know, risk is inherent in investing and there are no guarantees for you to make money.
Even so, there are still some things you can do to manage risk when you’re investing.
Investing to your risk tolerance
The first thing you can do is tailor how much risk you’re taking on in your portfolio. This is your own personal risk tolerance.
If you’re a confident individual who’s able to deal with seeing your investments rise and fall in value, you may be able to take on more risk with the chance of greater returns. Even more so if you are planning for the long-term as in theory you can afford to weather out any market storms and come out the other side.
But, if you’re more risk-averse and will find it difficult to see your investments fluctuate, it may be better for you to find investments that target slower, steadier returns. This is the better choice for those who have short-term financial objectives in mind.
Neither approach is better than another. As with many things its often a case of mixing and matching and making the best decision for you. Your portfolio, your risk tolerance.
Never invest more than you can afford
As I mentioned before, one of the most crucial lessons that any investor needs to learn is to never invest more than you can afford.
This simply means only investing with money that’s set aside specifically for that purpose. Avoid the temptation to dip into your emergency fund or your savings accounts. Otherwise, you could end up losing money that you need to live.
Above all else, you need to understand the importance of creating a diversified portfolio. This is really important as you should avoid putting all your eggs in one basket. Whilst you can make informed decisions you cannot predict everything, and should a particular sector crash a diversified portfolio helps minimize the impact should the worst happen. This means holding different kinds of investments all at once in different industries, sectors, and regions.
For example, your portfolio may be made up of investments that are exclusively listed on the New York Stock Exchange.
However, while your investments may be in different sectors and industries, they may all be at risk of losing value as a result of political or economic changes in the US.
Meanwhile, investments in emerging markets in other countries may not be impacted by the same factors.
Try to spread your investments across a range of industries, sectors, and geographical locations. That way, you’re less likely to lose all the value of your investments in one go.
Investing and tax
One important point to note is that investments held outside of an IRA may be subject to Capital Gains Tax (CGT), a tax charged on the gains in the value of assets.
You do have a CGT allowance called the “exempt amount” before CGT is due, if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er) then the tax rate is 0%.
However, any gains that your investments generate over this amount may be subject to CGT, with the rate of tax depending on your marginal rate of Income Tax.
Currently in the US the tax rate on most net capital gain is no higher than 15% for most individuals.
To make your investment portfolio as tax-efficient as possible, it is often sensible to maximize your IRA allowance first before using a general investment account.
That way, any gains your investments generate are entirely free from CGT.
Working with a financial advisor
If you’re uncertain how to get started investing or you’re unsure whether particular investments are right for you, then you may want to take financial advice from a professional financial advisor or planner.
A financial advisor can help you set your investment goals and then choose investments that are suitable for your personal circumstances.
This can help to ensure that any investments you choose are right for you, rather than having a negative impact on your overall financial health.
FAQs about investing
How much money should I invest as a beginner?
As a beginner investor, you should only invest in small amounts. Before buying stocks and shares it’s always worth ensuring you have made full use of your annual IRA allowance, and any other tax incentivized saving options that you may have.
Where should I invest my money as a beginner?
As a beginner, investing money always comes with risk. Consider your options for IRAs, savings accounts and premium bonds before investing in stocks and shares as a beginner.