How to Start Investing | Investing for Beginners
- A large sum of money is not required to start investing.
- Know your risk tolerance. Investing your money will always come with a [win or lose] risk. It is essential to know how much risk you are willing to take on when managing your portfolio.
- An investment account is not the same as an emergency fund. Make sure you have sufficient funds set aside to cover an emergency before you start investing and risking your money.
- A common starting point for new investors is investing with tax-advantaged retirement accounts.
Are you ready to start investing but unsure of where to begin? Regardless of your age, it is never too early or late to get started. As investing becomes a growing hot topic due to social media and mobile apps, more and more people want to invest.
While many options are available, there is no one-size-fits-all when choosing the right investing approach. However, there are few general rules of thumb that will allow you to start investing intelligently on your own.
Go From Consumers to Owners in Your Favorite Companies
As a new investor, it is essential to research your potential investments before risking your hard-earned money. One simple way to research is by examining your behavior and your use of products or services.
For example, if you own multiple Apple products and are satisfied with your products, it may be wise to invest in Apple stock. Another example is purchasing Spotify stock due to noticing that your family members and friends use Spotify and rave about it.
Look to invest in public companies that have products or services that you or your loved ones consume often. Based on the price per share, this is an excellent way to go from being just a consumer of your favorite brand to having ownership of your favorite brand.
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One of the biggest investing mistakes is following the crowd without doing your own research. There are many groups online that can help you increase your knowledge of stock market investing. Some of these groups are free, and some come at a cost.
Regardless, as a new investor, you should not take financial advice from just anyone on the internet. You may receive unsolicited advice from people who will encourage you to buy stocks from “Company X” or invest in “Company Y” to get rich quickly. It is not worth risking your money if you have not done proper research.
Keep in mind that by investing all of your money in stocks you know nothing about, you are risking it all and could end up losing every penny. This is why investing in well-known, established companies with a low individual stock price will allow you to minimize your investment risk and grow your wealth with peace of mind.
If you are eager to grow your knowledge surrounding stock market investing, there are many reputable resources you can learn from for free. For example, financial news outlets such as Yahoo Finance or CNBC Markets or modern investing apps like Public will keep you updated on stock market news and prices.
Recommended Read: Understanding Investing: What is the Stock Market?
Investment Accounts Can Grow Your Wealth
An investment account is a type of financial account held at a financial institution that contains cash or securities, including stocks, bonds, and exchange-traded funds (ETFs). A popular and common investment account is a retirement account. By opening a retirement account, such as a Roth IRA or a 401K, you may be able to save hundreds or thousands of dollars on taxes each year.
A Roth IRA account is one of the most popular retirement investment accounts, as its requirements are easy to meet. A Roth IRA, also known as a Roth Individual Retirement Account, allows you to take your after-tax dollars, invest them, and withdraw any gains and remaining balances completely tax-free.
To qualify for a Roth IRA, you must be receiving earned income, with a yearly individual limit of $140,000 or a limit of $208,000 for married couples. If your income surpasses this amount, you are not eligible. In addition, you are allowed to contribute up to $6,000 a year. If you are 50 or older, you can contribute up to $7,000 per year.
There are plenty of options to choose from when opening a Roth IRA. Traditional banks, traditional investment firms, and many brokerage ﬁrms offer Roth IRAs with zero costs to open an account.
Using tax-advantaged retirement accounts to invest will allow you to save hundreds, if not thousands of dollars, on taxes. Someone who has $1 million in their Roth IRA will be able to withdraw their money tax-free once they reach 59 and a half years old. On the other hand, someone who has $1 million in their brokerage account, such as Robinhood, will have to pay taxes on all of their capital gains when they decide to withdraw their money.
Invest with Small Dollar Amounts
You don't need a large sum of money to start investing. Some stock market investing platforms such as Public or Betterment allows you to invest in any stock or ETF with as little as $1. This is called micro-investing. If you cannot pay for the total share, you can invest small amounts of money to buy partial shares, known as fractional shares.
For example, one (1) Apple share cost $154.30 (as of September 5, 2021). If a new investor wants to purchase one share but does not have enough money to buy the total share, they can buy a partial share with the money they have. Even if the investor only has $10, they can still participate in micro-investing and invest the $10 towards the Apple stock.
Another way to invest in well-known company shares while diversifying your portfolio is to invest in index funds or mutual funds. Mutual and index funds allow investors to own or track a basket of different stocks grouped together without having to purchase each stock individually. One example of an index fund is the S&P 500 Index, which tracks 500 of the largest publicly traded companies in the United States, including Apple, Google, Nike, and many more.
Recommended Read: What is Index Fund Investing?
Investing Comes with Risk. Know Your Risk Tolerance.
Knowing your risk tolerance is an important reality to have as a new investor so that you are aware and comfortable with potential losses. To minimize the risk, you can diversify your investment portfolio. For example, instead of investing in the same one (1) or two (2) stocks, consider investing in a mixture of stocks, bonds, ETFs, mutual funds, and index funds.
There is a common saying of "high risk can equal high reward," which means investors who are comfortable with high risk may sometimes see high returns. However, they also may potentially see high losses. As you learn and set your risk tolerance for investing, it is essential to know which investments may be riskier than others, such as cryptocurrencies and NFTs.
Although cryptocurrency and NFTs are gaining more popularity within the investing community, just like any other investment that carries high volatility. Therefore, those interested should research or talk with a certified financial advisor to ensure investing in either is the right choice for their situation.
Determine your risk tolerance and see what type of investing works best for you.
Recommended Read: From Bitcoin to Blockchain. What Exactly is Cryptocurrency?
An Investment Account is Not an Emergency Fund
An investment account is not the same as an emergency fund, so don’t treat it as such. Therefore, before you begin your investing journey, make sure you have sufficient funds in case of an unexpected situation, such as a job loss or reduction of income.
For working adults, a great beginning target amount is $1,000 in a high-yield savings account. Once you reach that goal, you should start preparing an emergency savings fund with 3-6 months worth of living expenses.
Once your emergency fund is complete, you will be able to begin investing confidently and comfortably. An emergency fund in place will eliminate any worry about needing to withdraw funds from your investments, which in return will allow your investments to grow with zero interferences.
The Benefits of Investing and Growing Your Wealth
Investing, especially if starting at an early age, provides one with many financial benefits. One of the benefits of investing is potentially receiving dividend payouts. (Not all stocks pay dividends.) Dividends are when a company's board of directors distributes part of the company's earnings or profits to its shareholders. Depending on how many shares you own as an investor, your dividend payout will vary.
Another benefit is potentially seeing significant returns or growth on your investments. Based on the growth, you can decide if you want to sell your shares or hold them for potentially higher returns. If you sell shares or receive dividends in your investment accounts, you can choose to reinvest that money to continue growing your wealth.
Disclaimer: This article is intended as educational information and is not investment advice. We recommend consulting a certified, professional financial advisor or do your own research before investing in any type of investment.