Investing 101: How to Start Investing
breaking down what it is and the best ways to do it
Gone are the days when hiding money in a mattress counted as a financial safety net. Tech companies are shaking up the finance industry by making it easy for anyone to start investing almost instantly.
Want to start earning money on the stock market without lifting a finger? Use a Robo advisor app. Are you a house flipper looking for someone to buy your property? Use an iBuyer.
If you’re ready to start investing, here is an overview of the most common ways to invest and how to get started today.
Investing in Stocks
If you prefer to get started investing on your own, you can open a brokerage account at any time. You’ll have access to mutual funds or individual stocks that meet your investment goals. There are dozens of brokerage account options available to help you get started trading.
Some accounts require high minimum balances to get started. But if you only have a little money to work with, you can start investing in stocks using trading apps.
These mobile phone apps help you start an investment portfolio with individual stock trades or automatic investing. Apps like Robinhood, Acorns, and Betterment allow you to start investing for as little as $1.
These apps aren’t meant to replace your employer-sponsored retirement accounts. Individual stock purchases are a way to supplement your investment income and provide a more diverse portfolio.
The Acorns app was one of the first fractional investing apps available. Acorns work by taking all of your spare change and automatically investing it into the stock market.
This is a great tool for people who need automated ways to save money. You won’t retire early off Acorns but it is a great tool for boosting up your emergency savings fund.
Newer features in the app allow you to boost the amount you save with each transaction.
A robot advisor invests your money automatically using an algorithm. Betterment is an app that uses robot advising to automatically invest in stocks depending on your investment level.
Investors with more than $100,000 to invest use Betterment Premium where they can work with certified financial advisors by phone if needed. There is no minimum investment amount for a standard Betterment account.
Robo advisors are helpful because they help you diversify your investment accounts. Betterment focuses on ETFs, or exchange-traded funds, across 12 different asset classes.
The Robinhood app is known for its no minimum account balance and free trade options. The app even starts you off with a share of free stock to kickstart your portfolio.
Link a bank account to the app to transfer money so you can start trading. There are no robot advisors with a basic Robinhood account so you’ll need to research each stock before you make a purchase.
Each time you invite a friend to use the Robinhood app, you earn free stock.
Frequently Asked Questions
Learn the investing basics
What is the stock market?
The stock market is an exchange where you can buy and sell businesses. Businesses are sold in units called shares.
The price of these shares changes throughout the day depending on a wide range of factors like recent news, available shares, and company profits. Investors look for opportunities to buy into businesses that will profit over the long term so their money can grow.
The stock market exchange dates back to 13th century Venice when money lenders sold debts to investors. It was a way for business owners to grow their businesses without the help of traditional banks.
Today, the stock market provides a similar benefit to companies looking for ways to raise capital. A company that goes ‘public,’ or begins selling shares on the stock market, can raise money by allowing anyone to purchase its stock.
What are different ways to invest?
Anything that offers you an opportunity to earn a profit on your money is an investment. Here are a few of the most common ways to invest your money:
One of the most common ways to invest your money for retirement is in the stock market. Stock prices range from just a few dollars to hundreds of thousands per share.
The price of a stock depends heavily on what happens on Wall Street day-to-day, but expect your investment to fluctuate over time.
The bond market is another way to make money. It’s an option to buy IOUs from companies instead of shares.
Bonds come with fixed interest rates so you know how much you’ll make in advance. There are risky bonds and conservative bonds available, depending on your investing goals.
Buying and selling property for a profit is called real estate investing. Real estate investors specialize in property types ranging from commercial to residential.
People make money investing in real estate in the following ways:
- Renting or leasing properties
- Flipping properties
- Wholesaling properties
- Real estate development
The type of real estate investment you choose should be based on your level of expertise and financial resources. If you have millions to invest, you’ll look at different investment strategies than someone with only $500.
Many real estate investors start by networking with other local investors to learn about the market and hear about property deals. Attend a local Real Estate Investors Association meeting to hear about the local real estate market and what it takes to get involved.
Starting your own business or investing in someone else’s business is a form of investing. You are considered an investor as long as there is a plan in place that allows you to earn a profit on the money you contribute.
Individual investors who contribute to startups are called Angel Investors. Angel Investors often have an area they specialize in based on personal or career interests.
You can become an Angel Investor by deciding the type of businesses you want to invest in and your risk tolerance. Your risk tolerance is the amount you feel comfortable losing.
There are no guarantees when putting your money into someone else’s business. In some situations, you might have to be an accredited investor before you can participate in a business opportunity.
This protects you and the business owner from future legal problems. To become an accredited investor, you must earn more than $200,000 per year or have a net worth of at least $1 million.
A savings account that offers an interest rate is a type of investment. Though the return is small compared to other investment vehicles, savings accounts can bring decent returns as long as the interest rate is more than the average rate of inflation.
Certificates of Deposit (CDs)
A certificate of deposit is a savings product that works similar to a savings account. You put money aside for a set amount of time and gain interest on the balance.
How can you start investing?
You’re technically investing as soon as you put money into a bank account that pays you interest. But this amount of money won’t mean much for your overall investment portfolio.
To get started, you need an investment strategy that helps you reach your financial goals. One of the top reasons people invest is to save money for retirement.
Often, your employer gives you a retirement account like a 401(k) or annuity with your benefits package. Employers might also contribute to the 401(k) by matching your contribution or simply putting money into the retirement account each pay period.
With these accounts, you have control over how the money gets invested. Typically, the employer gives you the option to decide how much of your earnings you want to contribute.
Are you required to use your employer’s retirement account option? Usually, the answer is no.
You can skip a 401(k) if your tax benefits are better elsewhere. It’s important to do your research to learn which retirement accounts offer the best tax advantages for you.
What is a 401(k)?
Most people enroll in a 401(k) through an employer. This type of retirement plan is named after a section of the U.S. Internal Revenue Code.
Each year, you can contribute up to $19,500 if you’re under the age of 50. If you’re over 50, you can add as much as $26,000 to your 401(k) plan from your taxable income.
The money you earn on your investment in a 401(k) is tax-deferred which means you don’t owe any taxes on your profits until after start withdrawing money. You’ll have to pay penalty fees if you try to withdraw money from a 401(k) before you retire.
You are responsible for choosing the specific types of investments in your 401(k) accounts. For example, you can choose to put most of your money in federal government bonds or low-risk mutual funds if you are a conservative investor.
What is a 403(b)?
The 403(b) retirement plan is similar to a 401(k) except its only for employees of the public sector and some nonprofits. If you work for any of the following organizations, you might be eligible to grow your money using a 403(b):
- public education organizations
- some non-profit employers
- cooperative hospital service organizations
- self-employed ministers
What is a traditional IRA?
Traditional IRAs are individual retirement accounts available to anyone who earns income. You can’t contribute more than the amount of income you earn in a year.
You receive a tax deduction for any money you put into an IRA. Once you start withdrawing money from this account, you have to start paying income taxes on the amount.
You’re required to start taking distributions after you turn 70 1/2.
What is a Roth IRA?
You pay taxes on the amount you contribute to an IRA, but it grows tax-free. Once you retire and begin taking out money, you don’t owe any income taxes on withdrawals.
Roth IRAs are a good investment because you can keep adding money to the account as long as you have earned income even after age 70. There is no required distribution age with a Roth IRA.
Should I start investing on my own?
The only downside to trading individual stocks is that the burden of research falls on you. With a mutual fund, you get a mix of stocks that represent a certain category of companies.
For example, the S&P 500 tracks the top 500 companies on the stock market. You don’t have to choose which businesses you think will be successful because an index fund that tracks the S&P 500 gives you access to the profits of 500 businesses.
How to invest in the greater good?
Millennials are helping to grow a new category of investing called social impact investing. This is an investment approach that factors in how a business impacts the environment and social issues in addition to its profitability.
If you’re interested in making sure you earn money while giving back to society, you should consider impact or ESG investing. ESG stands for environmental, social and governance issues.
Companies in the ESG category usually only meet one or two of the criteria. For example, Nike stock is considered an ESG investment because they meet the environmental impact requirements.
Nike has an executive team dedicated to making sure the company makes sustainable choices. These are the types of forward-thinking decisions social impact investors look for when choosing where to put their money.
Do I need a financial advisor to get started?
A good financial advisor can be a major help you first start investing. Meeting with an advisor for a consultation will help you learn the basics of opening accounts and how to set retirement goals.
But be careful when choosing a financial advisor. Some professionals who call themselves advisors are salesmen for a specific investment product.
This could mean working with someone who doesn’t necessarily have your best interest in mind. Look for a certified, fee-only financial advisor once you decide to start investing.
These advisors won’t receive a commission on any of the products they recommend and should put your needs before their own.
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