how to start investing

How to Start Investing: A Beginner’s Guide

If you wait to start saving money until you’re 45, you’ll have to save three times more money than you would have if you had started when you were 25.

In other words, there’s no better time to learn how to start investing.

You might have thought about investing in recent years as the stock market rebounded, but like most people found it too complicated to start in earnest.

The key to learning how to start investing isn’t to dive in head first. It’s all about gathering the relevant information and putting one foot in front of the other.

Ready to get started? Keep reading to learn the basics of how to start investing.

How Much Money Do I Really Need?

The biggest barrier to entry for most new investors isn’t will, desire, or capability – it’s putting together the cash required to enter the field.

Fortunately, you don’t need as much money as you probably think you do because you have more options than the high-end brokers asking for a $25,000 deposit.

Discount Brokers

Some brokerages require a $1,000 minimum deposit to get started. These brokers are typically known as “discount brokers.”

A discount broker won’t charge the same kind of transaction fees that a traditional broker will. However, you also won’t be provided with the expert advice you seek.

For better or worse, each transaction will be up to you.

Keep in mind, even some discount brokerages require a greater minimum investment than a grand. You’ll likely need to hunt around to find someone who will take you and won’t charge you fees that will rob you of whatever returns you achieve.

Robo-Investors

Robo-investors are relatively new on the investing scene. Still, there a few key established players worth considering if you’re wondering how to start investing without a traditional broker.

A robo-investor is a sort of happy medium between a budget broker and a traditional firm. You’re not required to make all the decisions yourself, but you aren’t getting individual professional advice either.

You’ll be asked about:

  • Your investment interests
  • The kind of account you want
  • The most suitable time horizon
  • How aggressive you want to be

Then, the robo-investor will make investment decisions based on your personal preferences and the algorithm.

The biggest benefit of a robo-investor is that there is rarely any barrier to entry. The only requirement is being a U.S. citizen.

You’ll then be able to send money directly to your investment account straight from your existing bank account.

What Kind of Assets Should I Purchase?

Stocks, bonds, and mutual funds are some of the most easily recognized assets available for investors to purchase.

But there are dozens of different assets available to you depending on your brokerage and the amount of money you have to invest. Whether you’re looking to get in on real estate or buy individual stocks, navigating these assets requires a lot of work and professional advice.

If you’re learning how to start investing, head for some of the simpler assets: individual stocks and index funds.

Individual Stocks

Just because you’re a new investor doesn’t mean you should avoid individual stocks.

Not only is it easier to track the performance of individual stocks, but buying them allows you more control than you get with other funds.

You’ll determine how much you buy, be able to better predict your tax obligations, and be better able to look towards estate planning. Buying and selling in quick succession are also easier with individual stocks.

Not sure where to start?

Look for those that have demonstrated strong and steady performance over the years and see big things in the future.

Here are a few to consider:

  • Walt Disney Co.
  • Facebook
  • General Electric

Each of these has performed well in the past and are likely to invest in their own growth, which will help you succeed.

Index Funds

As a type of mutual fund, index funds are a popular asset for new beginners because they allow you to follow a market index rather than setting your sights on individual stocks.

Should I Tolerate Risk?

Risk is a fickle subject.

Whether you’re willing to risk it all or you’re happy earning a few hundred dollars a year, there is always risk involved in investments.

The waivers on every account you open will remind you of that.

Thus, an important part of learning how to start investing means determining what degree of risk is most suitable for your goals.

Making this calculation isn’t based on seeking the generally greatest reward. Instead, the right amount of risk is one in line with your investment goals.

For example, if you’re putting money in a 401k for the next thirty years, you can afford to be more aggressive. The market will go up and down, but you have thirty years to reach your ultimate goal.

But if you’re hoping to take $5,000 for your child’s college fund and grow it over the next few years, you’ll have more incentive to take on risk. But you’ll also have more to lose.

If you lose the $5,000, then you’re not only back to square one – you’re back to square 0.

Risk Tolerance vs Risk Capacity

To better understand what kind of risk best suits you before you learn how to start investing, you’ll compare your risk tolerance and risk capacity.

Simply put, your risk tolerance is your ability to withstand a loss without immediately selling or taking other action. When you’re more likely to stay put even when prices dip, you have greater risk tolerance.

Risk capacity is the amount you can lose before you start to struggle. For example, if you’re two years away from retirement, you have less time for your investments to rebound.

Risk capacity signals how much money you can lose in the market before your life is affected by it.

Conservative, Moderate, or Aggressive

Your risk tolerance and risk capacity determine whether you’re a conservative, moderate, or aggressive investor.

In many cases, these will be assessed using a questionnaire that measures your behaviors.

If you can’t afford to lose much and are a nervous investor, then you’d be classified as a conservative investor and your investment decisions would be assessed appropriately.

Able to stomach a few losses but aren’t willing to lose $6bn in a few hours like Jeff Bezos? You’re a moderate investor.

If you’re willing to play the long game to make the biggest bucks, you’re an aggressive investor.

Will There Be Fees Involved?

Investments aren’t just a free-for-all – you’ll pay fees whether you work with a personalized investment service or an algorithm.

In fact, part of being a successful investor is being able to identify the fees associated with your purchases and determine whether they’re fair.

Here are a few of the fees to keep an eye on when you’re learning how to start investing:

Transaction Fees

Transaction fees are assessed whenever a trade is made (buy or sell) and are standard when working with a brokerage.

The key is looking for a low transaction fee, particularly if you’re working with small amounts of money.

For example, if you pay $50 transaction fee on your $1,000 trade, it’s a substantial fee compared to $50 on a $20,000 trade.

Management Fees

Management fees are charged by advisors (both personal and online) who charge a certain fee for managing your account.

These fees are most often assessed as a percentage of the fund’s worth. However, smaller accounts are more likely to be assessed a flat fee.

Be wary that your fee doesn’t outweigh your dividends when you have a small account.

Custodian Fees

Custodian fees are an annual fee levied on your account commonly found on both brokerage and mutual fund accounts include IRAs.

These fees may cover the costs associated with IRS reporting.

Make sure you’re not paying more for holding your account than you’re able to make with your account.

You’ll also want to look out for surrender charges and front-end load fees associated with large transactions.

Do I Need to Pay Taxes On My Earnings?

The answer to the tax question thwarts a lot of those who have learned how to start investing because the answer is both yes and no.

It depends on the kind of account you have and whether you withdraw your funds that year.

In some cases, your investments will be exempt from federal and state taxes. For example, earnings from municipal bonds will be exempt from taxes in the state they are issued. Other government savings bonds may be exempt from state tax, but not federal tax.

If you’re earning money from rent or interest, you’ll need to include it on your tax return as ordinary income.

However, if you’re earning dividends, you may be able to avoid taxes if they are classified as capital gains.

Finally, if your foray into investing began with a 401K plan or a tax-deferred IRA, then you won’t pay tax on your earnings until you withdraw the money.

Now You Know How To Start Investing

Congratulations, you now have enough information to take your first steps in investing.

Learning how to start investing means juggling several balls at once. But it is the easiest way to put your savings to work for you. You just need to make sure your strategy is perfectly tailored to your goals.

Do you have any basic tips for new investors? What have you learned along the way? Share your stories in the comments below.

2 Comments

Comments are closed.