How To Start Investing for Beginners: 7 Easy Steps – Seeking Alpha

If you want to learn how to get started investing, the good news is that it’s easier than most people think. Check out our investment guide for beginners and find out how to start investing money now.

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Nattakorn Maneerat/iStock via Getty Images

Nattakorn Maneerat/iStock via Getty Images
The best way to start investing is with the basics on how investing works. Beginners don’t need an elaborate plan before investing but it’s smart to cover key points, such as how much money is needed to get started investing, discovering what type of investor you are, gauging risk tolerance, and choosing the best investment account types.
Investing in capital markets means buying and holding investment securities, such as stocks, bonds, or mutual funds, that can outpace inflation over time. Put simply, investing is a way to make your money work so that it’s worth more tomorrow than it is today.
For example, when an investor buys and holds stocks, their money can grow through stock dividends, which are payments to shareholders that can come in the form of additional shares of stock, and through price appreciation, which is the stock price going up over time. Over time, these returns have a compounding effect, which Albert Einstein has called the eighth wonder of the world.
Saving and investing are both ways to set aside money for the future; however, saving money is different from investing money. Saving involves setting aside money in safe, low interest-bearing accounts for short-term use. Investing involves building wealth for long-term goals, such as retirement, with assets that are more volatile and have higher risk of loss but potential for higher returns.
When comparing trading vs investing, both styles may utilize some of the same investment securities, such as stocks or exchange-traded funds (ETFs), but there are key differences, such as holding period, risk parameters, frequency of transactions, and security analysis.
In the U.S. you have to be 18 years old to buy stocks through your own investment account but adults can open minor accounts for younger children. But age isn’t the only determining factor for deciding when to start investing. The best time to start investing is when you are financially ready.
You may be ready to start investing if:
The amount of money you need to start investing generally depends upon the type of investment account you are using and the type of investments you want to buy. Therefore, the minimum amount to get started investing may be a range from as little as $10 or as much as $3,000 or more.
For example, to start investing in your employer’s 401k plan, you can typically start with as little as 1% of your pay. However, if you start investing with a mutual fund in a brokerage account, you may need a minimum initial investment that typically ranges from $100 to $3,000 or higher.
To get started investing, there are general steps that beginners will follow. Within each step, investors may customize for style and objectives. Steps to begin investing include setting goals, determining what type of investor you are and choosing the best brokerage, the account type and investments to reach your goals.
Before you buy your first investment, you’ll need to establish a goal, such as college savings or retirement, and a timeline that will serve as an estimated number of years to reach the goal. The goal and timeline can then help to choose an account type and suitable investments.
Following the SMART acronym for setting investment goals can work as a good outline. SMART stands for:
For example, reaching $1 million for retirement by investing $300 per month, averaging an 8% return for 40 years is a SMART goal.
Before you know what kind of investments to choose, you’ll need to discover what kind of investor you are. To do this, you’ll need to gauge your tolerance for risk, determine your risk capacity, decide if you want to take an active or passive approach, and consider whether or not you’ll help.
Risk tolerance is a measure of how much risk you’re comfortable taking with investments. For example, if you have a high risk tolerance, you’re generally comfortable accepting a high degree of risk in exchange for the possibility of receiving high returns on your investments. But if you’re risk averse, you would be more comfortable with lower risk investments that may produce lower returns.
After gauging risk tolerance, investors need to gauge their risk capacity, which is how much of their money they can afford to invest. In different words, risk capacity, which is sometimes called objective risk tolerance, is an amount you can invest that won’t break your budget. Generally, 10% of income is a healthy beginning target for long-term investing.
Risk capacity can also refer to the amount of risk that an investor can objectively bear, independent of their risk tolerance. A young investor with a stable salary and low expenses may have the capacity to take more risk, even though their tolerance for risk is low.
The active vs passive investing decision is a matter of style and preference. Active investing involves actively choosing stocks or other assets to invest in, as well as active management of investments, while passive investing involves more of a buy-and-hold strategy with passive investment selection, such as index funds.
Are you a do-it-yourself kind of investor or might you prefer to enlist the help of an investment advisor or financial planner? It’s important to explore this part of your investing personality and preference before choosing the type of account and the type of broker you’ll end up using.
Choosing the right kind of investment account is nearly as important as choosing the best investment types (stocks vs. bonds) for your goals. The decision about investment account types will depend upon a few key factors, such as taxation, income, and whether or not you have access to an employer-sponsored retirement account.
For beginning investors, a 401k plan or a 403b plan offered by their employer can be the best way to start investing. Most of these plans have similar features and benefits, such as automatic payroll deduction, choice of pre-tax or Roth after-tax contributions, a selection of about 10-15 mutual funds, and the ability to contribute up to $20,500 per year in 2022, plus another $6,500 for investors age 50 or over.
For investors wanting a supplemental or alternative retirement account to a 401k an individual retirement account, or IRA, can be a smart choice. A pre-tax traditional IRA can be a good choice for investors who expect to be in a lower tax bracket when making withdrawals in retirement. A Roth IRA is generally a better choice for younger people who are expecting to be in a higher tax bracket in retirement. A SEP IRA is an option for self-employed individuals needing higher contribution limits than other IRAs.
While a brokerage account is generally taxable to the account owner, there are no contribution limits, no penalties for withdrawals, and greater flexibility than other investment and savings vehicles, such as retirement accounts. Brokerage accounts can be held by an individual, jointly with other individuals, and can be opened for minors (UGMA or UTMA).
A broker, also called a brokerage, is a firm that offers investment accounts, investment securities, and if needed, assistance in trading (the buying and selling) of securities for their accounts. Investors may choose a discount online broker, a full service broker or advisor, a robo advisor service.
A discount brokerage is ideal for investors who want to manage their own investment portfolio for a reduced cost. Typical discount brokers offer online access and the account owners place their own trades, many of which are at no cost.
Investors who prefer advice for a fee can open a trading account with a full-service broker. A typical full service broker will be paid by commissions on trades or sales charges, called “loads,” on mutual funds.
A typical independent advisor, such as a Registered Investment Advisor, or RIA, may charge a fixed fee for a specific service or they may charge an ongoing fee based on a percentage of assets under management. The client may choose their own brokerage and open their own accounts or the advisor may choose the brokerage and open accounts on behalf of the client.
As the name suggests, a robo advisor service works without the need for direct human contact. A typical robo advisor service begins with the client completing an online survey with information that gauges risk tolerance and identifies investment goals. The robo advisor then automatically buys investments that are suitable for the client, based upon the information collected.
Once your risk tolerance is identified and investment accounts are open, you’re ready to select your investment options. It’s generally a good idea to diversify risk, which means to own a combination of different asset types, which are primarily stocks, bonds, and cash.
Once an investor has identified what type of investor they are, their range of risk aversion or risk tolerance may define them in one of three broad categories, including aggressive, moderate, and conservative. These investor type categories help to determine a suitable mix of assets, which are primarily stocks, bonds and cash.
Note: The above asset allocations are simplified examples, based upon investor types, according to standard risk tolerance guidelines. Each investor is unique and thus may require unique allocations. Proper diversification will also include a range of industry and sector representations within the stock mix, as well as a range of bond types, depending upon the individual’s risk profile and investing goals.
Mutual funds, index funds, and exchange-traded funds ETFs, collectively known as “funds,” can be smart investment types for a first time investor or an experienced investor. Since funds can include dozens or hundreds of securities, such as stocks or bonds, in a single packaged security, they offer convenience and diversification.
Before placing trades in your investment account, you’ll need to fund it with cash. This is typically done with a simple form completed online that will connect your bank account with your brokerage for electronic funds transfer. Once connected, you can transfer single fixed amounts or you can set up recurring amounts to transfer periodically, such as monthly.
Whether your investing style is active or passive, building a portfolio and managing it can be a simple process. You may start with automation, which is not only convenient but can help you reach your goals and can be part of a dollar-cost averaging strategy.
By necessity, a 401k or 401b plan is automated through payroll deduction. But accounts that you manage, such as a brokerage account or IRA, will require you to automate manually.
As for building a portfolio, your risk tolerance and financial goals can direct the asset allocation (mix of stocks, bonds, cash, or other assets), and the specific investment selection. Once the portfolio is established and you’re set up with automation, the minimal requirement for management is to rebalance the portfolio periodically, such as once per year. If you want a completely automated portfolio construction and portfolio rebalancing, a robo advisor service may be a consideration.
The main reasons to start investing is to fund a large, long-term financial goal, such as education savings or retirement. A non-specific reason to start investing is to build wealth over time. Investing is necessary for outpacing inflation, which can erode at your purchasing power over time.
Since interest rates on student loans are typically lower than the average rate of return on a diversified portfolio of stocks and bonds, the general guidance is to invest, while continuing to pay down student debt.
If the interest rate on the credit card is higher than your expected rate of return on your investment, it’s generally wise to pay off the credit card before investing. This is because paying off debt has a similar impact on your finances as investing. Thus, paying off a credit card with an interest rate of 18% is better than investing your money in stocks that might average 8-10%.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.


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