Investing for Beginners: The Ultimate Guide

You have your first job that pays enough for you to live on your own and support yourself. Congratulations! You should feel good about your newfound success and responsibility. After taking a weekend (or two) to celebrate, it's time to start thinking about your future.

While it may be tempting to use your newfound wealth to pay down a big chunk of student debt, or to splurge on a shiny new car or a flat-screen TV, it's worth considering making some small, regular investments to help get you ahead of the curve. Your very next paycheck is a great time to start.

Your new salary may initially feel like a fortune to you, but trust us, it can disappear quickly, especially if you live in the city. Life is expensive, and without proper care, you can soon find yourself living paycheck to paycheck (or even in debt) without much to show for it.

One of the best ways to get started investing is to automatically set aside a fixed amount of your income from each paycheck and to pretend the money was never there to begin with. Make it the first thing you do. The money is out of sight, out of mind, and you can budget the rest of your paycheck accordingly.

Remember, even a small amount taken from each paycheck - say, $50 - will go a long way toward giving you financial freedom and a multitude of life options down the road.

Lastly, for those thinking a little bit bigger, there is the possibility of getting involved in real estate, even without a tremendous amount of capital. It does generally require making one relatively large payment (as opposed to the smaller paycheck by paycheck contributions recommended above for other types of investing) and a tremendous amount of time and sweat equity. It can be very worth the trouble and risk, however.

Here's our guide to investing for beginners.‚Äč

Why Invest, Especially Now?

1. Compound Interest

Compound interest is the young investor's best friend. It only requires three simple ingredients to work its magic:

  • Solid Investments
  • The patience to not touch the investments
  • The time necessary (we're talking decades) for interest to accrue

Compound interest works by allowing an investment the time to earn interest on interest.

What starts as relatively minor gains over the course of the first few years turns into exponential gains the longer the principal and interest go untouched. In order to get the maximum benefit, however, you must be committed to maintaining the principal while reinvesting the interest. Otherwise, you're allowing a large chunk of future earnings to slip away.

Compound interest alone is more than enough reason to begin investing as soon as possible.

Einstein Compound Interest Quote

2. Matching 401(k) Contributions

Many companies, non-profits and government organizations will match a portion of contributions an employee makes to their retirement account. The amount is usually somewhere between three to six percent of the employee's annual salary.

Make sure to find out what your employer offers in terms of its benefits package, and if matching 401(k) is included, it is highly recommended that you take advantage of it. You can simply have them deduct your contribution from your paycheck so that you won't be tempted to spend that money on something else.

A matching 401(k) allows you to earn free money for your retirement each year that you work for your employer. And often times the longer you stay with your employer, the more they are willing to match. What's not to like about that!

3. Time Is Money

Many of us wish to have active, well-rounded lives. We don't want to be sitting in an office cubicle working twelve hours a day in order to make additional money. A need for more time away from the office becomes even more important as you get older and take on a family, home ownership or (gulp) an all-consuming golf habit.

Simply put, investing allows you to put your money to work instead of you. You can even earn money while taking a nap. This isn't to say that investing is easy or without setbacks, it just means that there is a demonstrably effective way for you to make money without having to be at the office pouring over paperwork 24/7.

As you get older and your investments grow, you will have greater flexibility to do the things you want to do. Many people get stuck working a job they hate because they don't have any other options. A strong investment portfolio can help you take control of your own life, instead of having your life dictated by a job.

What Are Your Investment Options?

There are a myriad of investment options available to you and not simply the ones listed below, which are popular choices for beginners. There is also gold, futures, options, forex and several others.

No matter what type of investment you are drawn to, it's always important to know the details of what you're getting into and to be as comfortable and prepared as possible before laying any money down.

1. Stocks

When you buy stock, you're buying partial ownership of a company, even if the amount you have invested is tiny compared to the company's overall value. This ownership gives you the right to vote at shareholder's meetings (in some cases) and to earn a profit, called dividends, which the company will occasionally earmark for you, the investor.

Your prosperity as an investor is tied directly to the performance of the company you have invested in. This means that the right investment can yield you substantial profits, while the wrong investment can cause you to lose it all. It's easy to think that by simply making an investment, you'll automatically see a return on your money, but that's not the case.

Many well-established companies, such as Coca-Cola and General Electric, have stood the test of time and been strong, stable earners for long-term investors. These types of companies, though they carry a little risk - as all companies do - are fairly safe bets for first time investors looking for long-term results. Even though the stock prices for these companies fluctuate in the short term (sometimes more than we would like), they have a strong track record of bouncing back and performing well.

This graphic shows the value of Coca-Cola's stock price over the years. Imagine if your great grandparents, or even your parents would've invested in Coca-Cola when they were young!

Coca Cola Stock Price History

There are also plenty of stocks available for investors who are willing to risk a high probability of losing it all in exchange for the possibility of a big payoff. If you are truly serious about investing for your future, it's wise to limit these risky investments to a small percentage of your overall investment portfolio. No more than 10% is pretty standard.

Lastly, no matter what types of stock you choose to invest in, whether very risky or relatively safe, you should always have reasons for doing so. Taking the time to research and to get to know a company before investing will greatly improve your chances for success.

2. Bonds

A bond is categorized as a fixed-income security. It's essentially a loan to a company or government organization which they then agree to pay back with interest at some future date.

Now, if you've ever loaned money to an unreliable friend, you may look at this arrangement and shake your head. However, in the financial world, bonds are often held by very large, reliable organizations like the US government.

In fact, bonds are often considered one of the most risk-averse options for an investor, and because of this, the potential returns are generally less than other forms of investment. However, bonds can be a great way to add stability to your portfolio, especially if you're taking on substantial risk elsewhere.

3. Mutual Funds

A mutual fund is a compilation of bonds and stocks that is managed by a professional, regulated by the industry and sold to the public as a single fund. Mutual funds make up a large portion of many retirement plans throughout the US.

As discussed earlier, there is always risk associated with investing, especially in the stock market. A mutual fund helps to limit risk through diversification. In other words, all your eggs aren't in one basket.

Mutual Funds

An added benefit is that the person or people who decide the makeup of the mutual fund have expertise in the markets. You can save a great deal of time by researching a mutual fund's prospectus instead of having to do your own research on a bunch of different assets.

A downside of mutual funds is that investors have to pay additional fees in exchange for the management of the mutual fund. Therefore, theoretically, you make less than you would have if you had chosen the grouping of investments yourself. Some people like to have control over every aspect of their investment experience, while others are willing to delegate responsibility at a cost. It all depends on your investment style and how much time and energy you're willing to expend.

4. Real Estate

Real estate is property that's the land itself and anything of value built on it. It also includes any type of resource found on top of the land, such as timber, or underneath, such as oil.

While the high cost of many real estate investments makes it harder for many young people to invest, there are still ways to get into real estate for relatively cheap. One popular option is by doing what is called a "live-in flip."

You make a small down payment on a cheap property and fix it up while you live in it. Instead of hiring out, you put in your own sweat equity and you eventually sell the property for a profit. You then use that money you made as a down payment for your next property.

Another possible real estate investment is to put a down payment on an affordable double-family home. You live in one of the homes while you rent out the other. If you work it right, you can use the rent you make to pay down the mortgage, which means you're essentially living "rent-free."

Many people also choose to make real estate partnerships. It's a way to pool resources, to split the risk and to divide up the time-consuming tasks that often come with being a property owner. If you've ever seen shows like Flip or Flop, that's usually the approach those investors use.

If you're going into a real estate partnership, you'll want to know and trust the people you decide to go into business with. You also have to know and understand yourself. If you don't like giving up some control, a collaboration might not be the best option.

Of all of the types of investments we've talked about so far, real estate generally requires the most time and effort to pull off. However, you can make some really good money in a relatively short amount of time if you do the proper homework before purchasing a property and if you're willing to put in the work required to fix a place up.

Realtor.com put together a great infographic that breaks down the top college towns for real estate investors. If you're in any of these areas, start doing some research ASAP.

Best College Towns For Real Estate Investors

That's a good overview of some of the best ways to start investing for beginners. In order to give you some more insight into getting started with investing, we decided to answer some common questions below.

Is Investing "Gambling?"

Whether investing is considered gambling or not mostly depends on the approach of the investor. If you use all of your investing money to buy a stock that you have never heard of and know nothing about, that would qualify as gambling.

However, if you have read the article this far, you are likely interested in becoming a conscientious investor. And a conscientious investor knows that through diversification, constant research and patience, there is an excellent chance for a successful return on investment (ROI) and almost no risk of going completely broke.

The most important thing to remember is that investing is not a get-rich-quick scheme. You should be thinking in terms of decades and not hours, days or weeks. If you take that approach, you can relax and enjoy the years long process of creating a strong investment portfolio.

Where Do I Trade?

Stocks and bonds are traded on markets all over the world. The two main stock markets in the US are the New York Stock Exchange (NYSE) and NASDAQ. There are some subtle differences between the two.

The NYSE employs an auction style where brokers are physically at the stock exchange. They buy and sell stocks on behalf of clients. NASDAQ employs a dealer based trade, which means that stocks are sold directly to investors over the phone or on the internet.

NASDAQ employs a dealer based trade, which means that stocks are sold directly to investors over the phone or on the internet.

The NYSE also has a minimum shareholder size requirement for companies to trade on their exchange. NASDAQ offers stock from smaller companies that don't have enough shareholders to qualify for trade on the NYSE.

How Do I Trade?

The first step is to find a broker. You can find a broker online, in person, or both. It's a great idea to do an online search for various brokers and to read customer reviews before making a choice. If you find an in-person broker, visit their office for a short chat. The most important thing is to be comfortable with the broker you've chosen.

Some of the more popular online brokers are Etrade, Scottrade and Schwab.

Another popular option (especially for beginners) is to use an app like Acorns or Robin Hood. These apps make the process a lot easier.

Acorns works by connecting to your bank account, and rounding up your purchases to the nearest dollar. It deposits the extra change into a pool of stocks, similar to a mutual fund. You can learn more about how Acorns works here.

Robin Hood gives you more control over your investments. You pick and choose your stocks like you would with an online broker, but the simple layout and buying process makes it great for people just starting out. Plus, you don't have to pay any commissions or fees to trade like you do with the brokers we mentioned above.

Robinhood

$0.00

Per Trade Commission


$0.00

Minimum Deposit

E*Trade

$7.99 - $9.99

Per Trade Commission


$500

Minimum Deposit

Schwab

$8.95

Per Trade Commission


$1,000

Minimum Deposit

Scottrade

$7.00

Per Trade Commission


$500

Minimum Deposit

Once you've found a broker, you'll be required to fill out some paperwork. After that, there may be a minimum deposit, or not. It all depends on the broker. It's good to find out whether there's a minimum deposit requirement before you fill out the paperwork. Once you've made a deposit, you shouldn't feel pressure to make trades. Take your time and go at the pace that's best for you.

You want to make sure that you know the commission you'll be charged by the broker for making trades. This varies from broker to broker, depending on if you use a full-service or discount broker. Full-service can be very expensive per trade (up to hundreds of dollars) while discount is relatively inexpensive (as low as a couple dollars).

The amount you pay will determine the type and quality of service you receive from the broker. Full-service often provides financial advice and retirement planning. At a bare minimum, the cheapest of brokers will execute your trades for you and give you a little bit of attention.

Many investors are now making trades exclusively over the internet. They open an account at one of many reputable brokers online (like the ones we mentioned earlier), are charged a fee per transaction and have complete control over the trades they make without having someone execute the trades for them.

They tend to read books, magazines and article for financial advice, and basically make a go of it without assistance.

Do I Need a Financial Adviser?

This one is totally up to you as the individual investor. Most beginning traders are dealing in such small sums and so few different assets that it's not worth the price to have an adviser.

As your investments grow and you diversify more and more, it can be very helpful to have an adviser to help steer you in the right direction, especially as you approach retirement.

If you do plan for whatever reason to invest larger amounts right away, it might be a good idea to have an adviser to lean on for advice.

The earlier you start investing, the better. Don't be intimidated by fancy jargon or think you have to have a ton of money to start.

Whether you choose to join your company's 401K plan, open an investment account or something else, the most important thing is to take action sooner rather than later. You don't want to look back in 10 years and think of all the money you missed out on because you didn't start earlier.

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