Learn all about investing for beginners, how to invest, how to pick an investment account, and the best investments to start with as a beginner investor.
Investing may seem scary, especially if you’re just starting your financial journey. The thought of analyzing stocks, choosing safe investments, and understanding complicated investment strategies can be overwhelming.
But learning how to start investing money for beginners doesn’t have to be scary or confusing. In fact, with the right tools and knowledge, it can be a very rewarding way to grow your wealth over time. By putting a certain amount of funds into something, like a business, stock, or product, that initial investment amount can grow into much more.
In this beginner investing guide, we’ll discuss the definition of investing, compare different investment accounts, and outline how to invest your money confidently to achieve your financial goals.
What is Investing?
So, what is investing, anyway? You can’t start investing if you don’t have a clear understanding of what it is. Let’s start by learning the definition of investment before we dive into investment strategies and how to get started.
Investing is the process of allocating money to generate a potential profit in the future.. A typical example of investing involves giving funds with the intent of seeing larger returns on those initial funds later.
Investments are the financial assets and resources you invest your money into. When you have financial assets, you have financial resources you can lean on in case of emergencies. For example, if you invest in a property, you can sell that property later for more money to make a profit.
How Does Investing Work?
Once you know the answer to what investing is, you can start learning how it works and how to use it to your advantage.
To start investing for yourself, you’ll want to take the following steps:
- Set investment goals
- Determine your risk tolerance
- Open an investment account
- Choose your investments
Investing is a mutually beneficial financial relationship that can potentially benefit both parties in the transaction. An investor gives funds to a business, which in turn helps that business have the funds it needs to be successful. The business’s success then leads to higher profits for the business and its investors.
Step 1: Set Investment Goals
The first step in learning how to invest is to know what you’re aiming for. Take some time to reflect on your financial goals, like purchasing a house, saving for retirement, or simply growing your wealth. Setting clear goals will help you create your investment strategy.
Assets
An asset is another term for a financial resource or investment. Assets can include property such as your home or vehicle, which can increase in value over time. They can also include cash, stocks, bonds, and other investments, all with their own risks and potential returns.
Dividends
A dividend is a sum of money regularly paid to shareholders for holding onto their stocks in a company. It acts as a reward or incentive for shareholders to keep their shares in the company rather than sell them.
Step 2: Determine Your Risk Tolerance
Investing always involves some level of risk, but not all risks are created equal. Determining which risks you’re willing to take is essential to creating your investment strategy.
Are you comfortable with the possibility of market fluctuations, or do you want more stable, low-risk investments? Knowing which risks you’re willing to take will help you make investments you’re most comfortable with.
Two of the main variables you’ll want to weigh when determining your risk tolerance are interest and ROI.
Interest Rate
Interest rate is usually shown as a percentage of monetary growth on the principal amount. Initial investments, or the principal amount, grow because of their interest rate.
Return on Investment (ROI)
One of the major components of investing and why it works is the return on investment (ROI). A return on investment is a calculation that helps show how profitable the investment was.
When considering an investment, it's a good idea to calculate ROI first so you can determine how much money you can earn in the end.
How to Calculate Return on Investment (ROI)
ROI = (Value of the Investment – Cost of Investment) / Cost of Investment
Step 3: Open an Investment Account
Once you’ve determined your goals and assessed risk levels, it’s time to open an account. There are many kinds of accounts to consider, each with its own advantages. Pick an investment account based on your personal investment goals.
Individual Retirement Accounts (IRAs)
IRAs offer tax advantages for retirement savings. Traditional IRAs let you add pre-tax money, which can reduce your taxable income. Roth IRAs provide tax-free growth on your investments.
401(k) Plans
If your employer offers a 401(k) plan, you should seriously consider enrolling. These employer-sponsored retirement accounts often come with matching contributions, making them a great way to save for retirement while maximizing your savings.
Brokerage Accounts
Standard brokerage accounts are also known as taxable brokerage accounts or non-retirement accounts. They allow investors to hold many types of investments, such as stocks, mutual funds, bonds, and ETFs.
Health Savings Accounts (HSAs)
HSAs help you save for medical expenses. The money you put in your Health Savings Account is tax-exempt, and withdrawals for eligible medical costs are tax-free. Any unused funds also roll over year after year, making it a valuable tool for your health care needs.
Education Savings Accounts (ESAs)
Are you planning for your child’s college expenses? ESAs, like 529 plans, offer tax advantages for educational expenses. Contributions to the account accumulate tax-free, and withdrawals for eligible education expenses are also tax-free. These accounts make it easier to save for your loved one’s future education costs.
Custodial Accounts (UGMA/UTMA)
Custodial accounts let adults invest on behalf of a minor, like children or grandchildren. The funds belong to the child, but the custodian oversees the account until the child becomes an adult. These accounts offer flexible investment options and can be used for several purposes, like education or other financial goals.
Step 4: Choose Your Investments
When learning what investing is, it helps to understand the different types of investments. There are all kinds of investment types, all with different interest rates, risk tolerance, potential capital gains, and short-term or long-term uses.
Stocks
When learning how to start investing, you'll hear the terms stocks and shares used often. A stock is a small portion of ownership over a company. It may also be called a share. When you help fund a company with your own money, you are making a financial investment in that company.
A stockholder also financially owns a portion of that company. Many companies will have different tiers of investors to distinguish between small and major investors.
Mutual Funds
Mutual funds are a very common type of investment for beginners, so you might hear about them a lot when first learning about what investing is. A mutual fund is like an investment group. Instead of working alone in a single stock, you can join a mutual fund that allows you to invest in more places for less.
Mutual funds can be great for beginners or anyone who doesn't want to spend too much personal time managing their accounts.
Bonds
The term "bonds" is another term you'll hear a lot when learning how to invest. Bonds are a type of loan you give to either a company or the government. You purchase the bond, and that money is then lent to the organization that needs it. Later, you can get that money back plus interest.
Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs) are similar to mutual funds, but their value can change throughout the day, while mutual funds change on a day-to-day basis. ETFs can hold assets like stocks, bonds, currencies, and commodities.
Certificate of Deposit (CD)
A certificate of deposit (CD) is a kind of fixed-income investment. Fixed-income investments provide a certain amount of money at a specific time. A CD is like a savings account, but it’s locked for a period of time to accumulate interest. This could be a matter of 3 months or even up to 5 years.
Money Market Accounts
Money market accounts can also be called money market deposit accounts. They are similar to high-yield savings accounts but are actually high-yield deposit accounts. They let your deposits grow through interest rates. These rates often fluctuate based on the current market interest rates.
Real Estate Investment Trusts (REIT)
Beginners can invest in real estate by investing in a real estate investment trust (REIT). REITs are companies that own and operate commercial real estate. Commercial real estate houses businesses that bring in profit. By investing in REITs, you can take part in this profit, too. Investing in real estate is a great idea because this investment comes with a physical asset (the house, the building, the property) to secure the investment.
High-Yield Savings Accounts
A high-yield savings account has a higher rate of growth. These accounts are extremely safe investment forms because there is hardly any risk involved. Whether you're saving for the long or short term, for 30 years or five years, a high-yield savings account can help your money grow.
Corporate Bonds
Bonds are a way to lend money and accumulate interest on the money you lend. Corporate bonds are when you lend money to corporations. This bond money is a way of investing in a business while making your money back plus interest.
Common Stocks
Common stock is a type of stock that gives the shareholder ownership within a company. These stockholders help elect the board of directors that runs the company. Common stocks are a form of long-term stock that can have higher rates and, thus, higher capital gains.
Annuity
An annuity is a type of contract that outlines a sum of money to be paid to the annuity holder. This type of contract is often made between an individual and their insurance company.
Why Investing Is Important
Investing helps you reach long-term financial goals and make your financial future more secure. By investing wisely, you can make your cash work for you! Whether you’re saving for a home, planning retirement savings, or building a nest egg for the future, investing offers a path toward financial security and freedom.
Check City does not offer investment, advisory, or brokerage services and does not advise investors to buy or sell any specific stock. This article is meant to provide some basic information only about investing in general. For professional investment advice, reach out to a professional investment advisor or broker.
