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Making Smart Investments: A Beginner’s Guide

• Matthew Blume

Reduce the risk factor, increase the reward factor, and generate meaningful returns.

If you make smart decisions and invest in the right places, you can reduce the risk factor, increase the reward factor, and generate meaningful returns. Here are a few questions to consider as you get started.

• Why should you invest? At a minimum, investing allows you to keep pace with cost-of-living increases created by inflation. At a maximum, the major benefit of a long-term investment strategy is the possibility of compounding interest, or growth earned on growth.
• How much should you save vs. invest? As a guideline, save 20% of your income to to build an emergency fund equal to roughly three to six months’ worth of ordinary expenses. Invest additional funds that aren’t being put toward specific near-term expenses.
• How do investments work?    In the finance world, the market is a term used to describe the place where you can buy and sell shares of stocks, bonds, and other assets. You need to open an investment account, like a brokerage account, which you fund with cash that you can then use to buy stocks, bonds, and other investable assets.
• How do you make (or lose) money? In the market, you make or lose money depending on the purchase and sale price of whatever you buy. If you buy a stock at $10 and sell it at $15, you make $5. If you buy at $15 and sell at $10, you lose $5.

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• MB Matthew Blume  is a portfolio manager of private client accounts at  Pekin Hardy Strauss Wealth Management . He also manages the firm’s ESG research and shareholder advocacy efforts. He earned a B.S. in electrical engineering from Valparaiso University and an MBA from Northwestern University’s Kellogg School of Management. Matthew is a CFA charterholder.

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In this video, review the concepts discussed in strategic diversification. Circle back to determining trade risk, account risk and position size.

From the buy and hold strategy to constant mix, learn what position strategies work best for exchange traded funds. Gain in-depth insight about percentage risks and portfolio value to help you better understand the complexities of ETFs.

Stock ETFs have positive benefits for traders. For example, ETFs allow investors to track stocks in a single industry. By doing this, investors gain exposure to a myriad of equities and limited company-specific risk associated with single stocks. In this video, learn how to better navigate stock ETFs by implementing dollar cost averaging, which allows the investor to buy stocks at the average price during a certain period in time.

What will I learn?

Build an investment portfolio focused on creating real,   long-term wealth, navigate   exchange traded funds ,   dividend stocks , and other trading instruments, diversify and when to rebalance during   bull or bear markets, make   your own investment decisions   based on research and market trends, generate   dependable, consistent income   with dividends, while reducing portfolio volatility, this course includes:, over   78 lessons   of on-demand video, exercises, and interactive content, downloadable worksheets to use while you invest, lifetime access   to course so you can watch and re-watch whenever you want, this course is for:   beginner investors, even with small amounts of money, looking to take investing into their own hands..

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Investing: An Introduction

A beginner’s guide to asset classes

• Search Search Please fill out this field.
• The Investment Risk Ladder
• Invest Sensibly, Suitably & Simply

Asset Class Expectations Given the Economic Environment

• Asset Classes FAQs

The Bottom Line

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

• Investing: An Introduction CURRENT ARTICLE
• Stock Market Definition
• Primary and Secondary Markets
• How to Buy/Sell Stocks
• Market Hours
• Stock Exchanges
• How to Start Investing in Stocks: A Beginner’s Guide
• What Owning a Stock Means
• The Basics of Order Types
• Position Sizing
• Executing Trades
• When to Sell a Stock
• Income, Value, Growth Stocks
• Commissions
• Investing and Trading Differences
• Stocks vs. ETFs
• Stocks vs. Mutual Funds
• ETFs vs. Mutual Funds
• What Is a Bond?
• Bond Yield Definition
• Basic Bond Characteristics
• How to Buy a Bond
• Corporate Bonds
• Government Bonds
• Municipal Bonds
• Options vs. Futures
• Essential Options Trading
• Diversification
• Measuring Investment Returns
• Corporate Actions
• Stock Fundamentals
• Essentials of Analyzing Stocks
• Evaluating Company Financials
• Technical Analysis

The investment landscape can be extremely dynamic and ever-evolving. But those who take the time to understand the basic principles and the different asset classes stand to gain significantly over the long haul.

The first step is learning to distinguish different types of investments and what rung each occupies on the risk ladder.

Key Takeaways

• Investing can be a daunting prospect for beginners , with an enormous variety of possible assets to add to a portfolio.
• The investment risk ladder identifies asset classes based on their relative riskiness, with cash being the most stable and alternative investments often being the most volatile.
• Sticking with index funds or exchange-traded funds (ETFs) that mirror the market is often the best path for a new investor.
• Stocks tend to have higher yields than bonds, but also greater risks.
• Many investment specialists recommend diversifying one's portfolio.

Understanding the Investment Risk Ladder

Investopedia / Joules Garcia

Here are the major asset classes, in ascending order of risk , on the investment risk ladder.

A cash bank deposit is the simplest, most easily understandable investment asset—and the safest. It not only gives investors precise knowledge of the interest that they’ll earn but also guarantees that they’ll get their capital back.

On the downside, the interest earned from cash socked away in a savings account seldom beats inflation. Certificates of deposit (CDs) are less liquid instruments, but they typically provide higher interest rates than those in savings accounts. However, the money put into a CD is locked up for a period of time (months to years), and there are potentially early withdrawal penalties involved.

A bond is a debt instrument representing a loan made by an investor to a borrower. A typical bond will involve either a corporation or a government agency, where the borrower will issue a fixed interest rate to the lender in exchange for using their capital. Bonds are commonplace in organizations that use them to finance operations, purchases, or other projects.

Bond rates are essentially determined by interest rates . Due to this, they are heavily traded during periods of quantitative easing or when the Federal Reserve —or other central banks—raise interest rates.

Mutual Funds

A mutual fund is a type of investment where more than one investor pools their money together to purchase securities. Mutual funds are not necessarily passive , as they are managed by portfolio managers who allocate and distribute the pooled investment into stocks, bonds, and other securities. Most mutual funds have a minimum investment of between $500 and $5,000, and many do not have any minimum at all. Even a relatively small investment provides exposure to as many as 100 different stocks contained within a given fund's portfolio .

Mutual funds are sometimes designed to mimic underlying indexes such as the S&P 500 or the Dow Jones Industrial Average. There are also many mutual funds that are actively managed , meaning that they are updated by portfolio managers who carefully track and adjust their allocations within the fund. However, these funds generally have greater costs—such as yearly management fees and front-end charges—that can cut into an investor’s returns.

Mutual funds are valued at the end of the trading day, and all buy and sell transactions are likewise executed after the market closes.

Many investment specialists advise their clients to diversity into a wide range of securities rather than focusing on just a few stocks.

Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) have become quite popular since their introduction back in the mid-1990s. ETFs are similar to mutual funds, but they trade throughout the day, on a stock exchange. In this way, they mirror the buy-and-sell behavior of stocks. This also means that their value can change drastically during the course of a trading day.

ETFs can track an underlying index such as the S&P 500 or any other basket of stocks with which the ETF issuer wants to underline a specific ETF. This can include anything from emerging markets to commodities, individual business sectors such as biotechnology or agriculture , and more. Due to the ease of trading and broad coverage, ETFs are extremely popular with investors.

Shares of stock let investors participate in a company’s success via increases in the stock’s price and through dividends . Shareholders have a claim on the company’s assets in the event of liquidation (that is, the company going bankrupt) but do not own the assets.

Holders of common stock enjoy voting rights at shareholders’ meetings. Holders of preferred stock don’t have voting rights but do receive preference over common shareholders in terms of the dividend payments.

Some investments, such as hedge funds, are only permitted to wealthy investors.

Alternative Investments

There is a vast universe of alternative investments, including the following sectors:

• Real estate : Investors can acquire real estate by directly buying commercial or residential properties. Alternatively, they can purchase shares in real estate investment trusts (REITs). REITs act like mutual funds wherein a group of investors pool their money together to purchase properties. They trade like stocks on the same exchange.
• Hedge funds : Hedge funds may invest in a spectrum of assets designed to deliver beyond market returns, called “alpha.” However, performance is not guaranteed, and hedge funds can see incredible shifts in returns, sometimes underperforming the market by a significant margin. Typically only available to accredited investors, these vehicles often require high initial investments of $1 million or more. They also tend to impose net worth requirements. Hedge fund investments may tie up an investor’s money for substantial time periods.
• Private equity fund : Private equity funds are pooled investment vehicles similar to mutual and hedge funds. A private equity firm, known as the "adviser," pools money invested in the fund by multiple investors and then makes investments on behalf of the fund. Private equity funds often take a controlling interest in an operating company and engage in active management of the company in an effort to bolster its value. Other private equity fund strategies include targeting fast-growing companies or startups. Like a hedge fund, private equity firms tend to focus on long-term investment opportunities of 10 years or more.
• Commodities : Commodities refer to tangible resources such as gold, silver, and crude oil, as well as agricultural products. There are multiple ways of accessing commodity investments. A commodity pool or "managed futures fund" is a private investment vehicle combining contributions from multiple investors to trade in the futures and commodities markets. A benefit of commodity pools is that an individual investor's risk is limited to her financial contribution to the fund. Some specialized ETFs are also designed to focus on commodities.

Order your copy of Investopedia's What To Do With $10,000 magazine for more wealth-building advice.

How to Invest Sensibly, Suitably, and Simply

Many veteran investors diversify their portfolios using the asset classes listed above, with the mix reflecting their tolerance for risk . A good piece of advice to investors is to start with simple investments, then incrementally expand their portfolios. Specifically, mutual funds or ETFs are a good first step, before moving on to individual stocks , real estate, and other alternative investments.

However, most people are too busy to worry about monitoring their portfolios daily. Therefore, sticking with index funds that mirror the market is a viable solution. Steven Goldberg, a principal at the firm Tweddell Goldberg Wealth Management and longtime mutual funds columnist at Kiplinger.com, further argues that most individuals only need three index funds : one covering the U.S. equity market, another focused on international equities, and the third tracking a broad bond index.

More hands-on investors, however, may want to choose their own asset mix when crafting a diversified portfolio that fits their risk tolerance, time horizon, and financial goals. This means that you can try to capture excess returns by tilting your portfolio weights to favor certain asset classes depending on the economic environment.

Let's first consider the relative performance of stocks and bonds, which historically have shown somewhat of an inverse correlation:

• When the economy is strong and growing, with low unemployment, stocks tend to perform well as consumers spend and corporate profits rise. At the same time, bonds may underperform as interest rates rise to keep track with economic growth and inflation. When inflation is high, fixed-rate bonds may also fare comparatively worse if the coupon rate is below the rate of inflation.
• When the economy is turning sour and recession hits, unemployment rises and people stop spending as much, hurting corporate profits. This, in turn, can weigh down on stock prices. But, as interest rates fall in response to a sagging economy, bonds may outperform.

Most financial professionals recommend a portfolio mix consisting of stocks and bonds, as described above. Other asset classes, too, may favor certain economic conditions; however, not all asset classes are suitable for investors.

• Real estate: A strong economy and low unemployment can lead to a robust housing market, which may benefit real estate investments. However, rising interest rates can put a damper on mortgage borrowing.
• Commodities: Inflationary environments can lead to an increase in the prices of certain commodities, making them a favorable asset class to use as an inflation hedge.
• Alternative investments: Private equity, venture capital, hedge funds, and other non-traditional investments may outperform in an environment of low interest rates and high liquidity. These types of investments, though, are not always available to individual investors and may require a significant outlay of cash and feature lower levels of liquidity.
• Gold: Gold is considered as a safe haven asset and it performs well in times of economic uncertainty, geopolitical tensions and during inflationary environment. This was especially the case during the COVID19 pandemic, which saw gold rise to all-time highs during the Spring of 2020.
• Cash and cash equivalents, (e.g. money market funds and CDs): These also tend to perform relatively well in uncertain or volatile economic environments is because they, too, are considered to be a safe haven. Investors may turn to cash as a way to preserve their capital and limit downside exposure to risk during bear markets. However, in a stable and low-inflation environment, cash will not usually provide returns as high as other asset classes such as stocks or bonds - but the stability and the low risk make a small allocation to cash an attractive option for investors seeking preservation of capital or for short term liquidity needs.

What Are the Different Asset Classes?

Historically, the three main asset classes are considered to be equities (stocks), debt (bonds), and money market instruments. Today, many investors may consider real estate, commodities, futures, derivatives, or even cryptocurrencies to be separate asset classes.

Which Asset Classes Are the Least Liquid?

Generally, land and real estate are considered among the least liquid assets, because it can take a long time to buy or sell a property at market price. Money market instruments are the most liquid, because they can easily be sold for their full value.

What Asset Classes Do Well During High Inflation?

Real estate and commodities are considered to be good inflation hedges , because their value tends to rise as prices increase. In addition, some government bonds are also indexed to inflation, making them an attractive way to store excess cash.

Investment education is essential—as is avoiding investments that you don’t fully understand. Rely on sound recommendations from experienced investors, while dismissing “hot tips” from untrustworthy sources. When consulting professionals, look to independent financial advisors who get paid only for their time, instead of those who collect commissions. And above all, diversify your holdings across a wide swath of assets.

Financial Industry Regulatory Authority. “ Certificates of Deposit (CDs) .”

Investor.gov. “ Bonds .”

Federal Reserve System. “ The Fed Explained: What the Central Bank Does ,” Page 24.

Investor.gov. “ Mutual Funds .”

U.S. Securities and Exchange Commission. “ Investor Bulletin: Index Funds .”

Financial Industry Regulatory Authority. “ Mutual Funds .”

U.S. Securities and Exchange Commission. “ Mutual Funds and Exchange-Traded Funds (ETFs) – a Guide for Investors .”

Financial Industry Regulatory Authority. “ Exchange-Traded Funds .”

Investor.gov. “ Stocks .”

Investor.gov. “ Real Estate Investment Trusts (REITs) .”

CFA Institute Research Foundation. “ Alternative Investments: a Primer for Investment Professionals ,” Pages 147-148.

CFA Institute Research Foundation. “ Alternative Investments: a Primer for Investment Professionals ,” Pages 14-15.

Investor.gov. " Private Equity Funds ."

Investor.gov. “ Commodities .”

Kiplinger. “ The Only Three ETFs You Need .”

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Decide how much support you want while investing, build your own portfolio, invest with a professionally managed portfolio, work one-on-one with an advisor, determining your asset mix, your asset allocation is shaped by four main factors.

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• How much readily available cash you need access to (also called liquidity)

Asset allocation: An essential guide

Is diversification the same as asset allocation, asset allocations for three different risk levels.

Why risk tolerance and time horizon matter

Read the full article

Finding investments that support your asset allocation, fixed income and bonds, cash and cash equivalents, did you know, want to learn more about building a portfolio, what is volatility.

Weathering periods of volatility

Maintain your focus during volatile days, what can you do when the markets get volatile, 4 things every long-term investor should know, psychology of investing, managing your emotions and avoiding common pitfalls.

Even the financial pros know they can't "time the market"

Rebalancing your portfolio, how your asset allocation could change over time.

What is portfolio drift?

Reasons to rebalance your portfolio.

• Your asset allocation has changed due to portfolio drift
• Your financial goals have changed or you've reached a financial goal
• You've reached a new life stage and have a different risk tolerance

Why is it important to periodically revisit your asset allocation strategy?

Tax considerations to keep in mind, tax-aware investment strategies you should consider, 4 tax moves to consider early in your career, common questions, what is the difference between saving and investing, what is compounding, what are the nasdaq, s&p 500 and the dow, ready to get started, 1  choose an account type, 2  decide how to invest, 3  have questions, you may also like.

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Investing is one of the best ways to see solid returns on your money.

How much you should invest depends on your financial situation, investment goal and when you need to reach it.

Open either a taxable brokerage account or a tax-advantaged account like an IRA, depending on your goal.

Pick an investment strategy that makes sense for your saving goals, how much you're investing and your time horizon.

Understand your investment choices — such as stocks, bonds and funds — to build a portfolio for your goals.

Rent, utility bills, debt payments and groceries might seem like all you can afford when you're just starting out, much less during inflationary times when your paycheck buys less bread, gas or home than it used to. But once you've wrangled budgeting for those monthly expenses (and set aside at least a little cash in an emergency fund ), it's time to start investing. The tricky part is figuring out what to invest in — and how much.

As a newbie to the world of investing, you'll have a lot of questions, not the least of which is: How much money do I need, how do I get started and what are the best investment strategies for beginners? Our guide will answer those questions and more.

Here are five steps to start investing this year:

1. Start investing as early as possible

Investing when you’re young is one of the best ways to see solid returns on your money. That's thanks to compound earnings, which means your investment returns start earning their own return. Compounding allows your account balance to snowball over time.

At the same time, people often wonder if it's possible to get started with a little money. In short: Yes.

Investing with smaller dollar amounts is possible now more than ever, thanks to low or no investment minimums, zero commissions and fractional shares. There are plenty of investments available for relatively small amounts, such as index funds, exchange-traded funds and mutual funds.

If you’re stressed about whether your contribution is enough, focus instead on what amount feels manageable given your financial situation and goals. “It doesn't matter if it's $5,000 a month or $50 a month, have a regular contribution to your investments,” says Brent Weiss, a certified financial planner in St. Petersburg, Florida and the co-founder of financial planning firm Facet.

How that works, in practice: Let's say you invest $200 every month for 10 years and earn a 6% average annual return. At the end of the 10-year period, you'll have $33,300. Of that amount, $24,200 is money you've contributed — those $200 monthly contributions — and $9,100 is interest you've earned on your investment.

» Learn more about micro-investing

There will be ups and downs in the stock market, of course, but investing young means you have decades to ride them out — and decades for your money to grow. Start now, even if you have to start small.

If you're still unconvinced by the power of investing, use our inflation calculator to see how inflation can cut into your savings if you don't invest.

In this episode of NerdWallet's Smart Money podcast, Sean and Alana Benson talk about how to get started investing, including digging into your attitudes around investing and different types of investing accounts.

2. Decide how much to invest

One common investment goal is retirement. As a general rule of thumb, you want to aim to invest a total of 10% to 15% of your income each year for retirement. That probably sounds unrealistic now, but you can start small and work your way up to it over time. (Calculate a more specific retirement goal with our retirement calculator .)

If you have a retirement account at work, like a 401(k) , and it offers matching dollars, your first investing milestone is easy: Contribute at least enough to that account to earn the full match. That's free money, and you don't want to miss out on it, especially since your employer match counts toward that goal.

For other investing goals, such as purchasing a home, travel or education, consider your time horizon and the amount you need, then work backwards to break that amount down into monthly or weekly investments.

» Learn more: IRA vs. 401K retirement accounts

3. Open an investment account

If you’re one of the many investing for retirement without access to an employer-sponsored retirement account like a 401(k), you can invest for retirement in an individual retirement account (IRA), like a traditional or Roth IRA .

» Looking to start saving for retirement? See our roundup of the best IRAs.

If you're investing for another goal, you likely want to avoid retirement accounts — which are designed to be used for retirement, and have restrictions about when and how you can take your money back out.

Instead, consider a taxable brokerage account you can withdraw from at any time without paying additional taxes or penalties. Brokerage accounts are also a good option for people who have maxed out their IRA retirement contributions and want to continue investing (as the contribution limits are often significantly lower for IRAs than employer-sponsored retirement accounts).

» Get the details: How to open a brokerage account

4. Pick an investment strategy

Your investment strategy depends on your saving goals, how much money you need to reach them and your time horizon.

If your savings goal is more than 20 years away (like retirement), almost all of your money can be in stocks. But picking specific stocks can be complicated and time consuming, so for most people, the best way to invest in stocks is through low-cost stock mutual funds, index funds or ETFs.

If you’re saving for a short-term goal and you need the money within five years, the risk associated with stocks means you're better off keeping your money safe, in an online savings account, cash management account or low-risk investment portfolio. We outline the best options for short-term savings here .

If you can't or don't want to decide, you can open an investment account (including an IRA) through a robo-advisor, an investment management service that uses computer algorithms to build and look after your investment portfolio.

Robo-advisors largely build their portfolios out of low-cost ETFs and index funds. Because they offer low costs and low or no minimums, robos let you get started quickly. They charge a small fee for portfolio management, generally around 0.25% of your account balance.

» Get the details: How to invest $500

5. Understand your investment options

Once you decide how to invest, you’ll need to choose what to invest in. Every investment carries risk, and it’s important to understand each instrument, how much risk it carries and whether that risk is aligned with your goals. The most popular investments for those just starting out include:

A stock is a share of ownership in a single company. Stocks are also known as equities.

Stocks are purchased for a share price, which can range from the single digits to a couple thousand dollars, depending on the company. We recommend purchasing stocks through mutual funds, which we'll detail below.

» Learn more: How to invest in stocks

A bond is essentially a loan to a company or government entity, which agrees to pay you back in a certain number of years. In the meantime, you get interest.

Bonds generally are less risky than stocks because you know exactly when you’ll be paid back and how much you’ll earn. But bonds earn lower long-term returns, so they should make up only a small part of a long-term investment portfolio.

» Learn more: How to buy bonds

Mutual funds

A mutual fund is a mix of investments packaged together. Mutual funds allow investors to skip the work of picking individual stocks and bonds, and instead purchase a diverse collection in one transaction. The inherent diversification of mutual funds makes them generally less risky than individual stocks.

Some mutual funds are managed by a professional, but index funds — a type of mutual fund — follow the performance of a specific stock market index, like the S&P 500. By eliminating the professional management, index funds are able to charge lower fees than actively managed mutual funds.

Most 401(k)s offer a curated selection of mutual or index funds with no minimum investment, but outside of those plans, these funds may require a minimum of $1,000 or more.

» Learn more: How to invest in mutual funds

Exchange-traded funds

Like a mutual fund, an ETF holds many individual investments bundled together. The difference is that ETFs trade throughout the day like a stock, and are purchased for a share price.

An ETF's share price is often lower than the minimum investment requirement of a mutual fund, which makes ETFs a good option for new investors or small budgets. Index funds can also be ETFs.

» Learn more: How to buy ETFs

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Investing: A Beginner’s Guide

Investing is the process of buying assets with an intention of holding for more than one year.

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity  Associate for Tailwind Capital  in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an  MBA  in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

Currently an investment analyst focused on the  TMT  sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a  BS  from The Tepper School of Business at Carnegie Mellon.

• Investing: A Beginner's Guide - An Overview

Investing: A Beginner’s Guide: Why Should I Invest?

• Beginner's Guide To Investing: Where To Invest?
• Beginner's Guide To Investing: Various Types Of Investing
• Principles Of Investing For Beginners

Mutual Funds & Exchange-Traded Funds (ETFs)

Investing: a beginner's guide - an overview.

Investing is buying assets to hold for more than one year. The support can be securities, commodities, tangible assets, etc.

In this article, we will focus only on the financial aspect of investing, considering the importance of time and energy, as they help us in decision-making.

Many retail investors have little financial understanding and need to be financially literate.

Financial literacy not only includes:

• Investing also includes better management of money and debt.
• Planning an annual family budget.
• The ability to differentiate and invest in various financial instruments for diversification. 

Financial literacy plays a crucial role in family planning, like making a balanced budget, buying a home, budgeting an emergency fund, funding children's education and marriage, or their retirement plans.

It's a human tendency to question 'why' when we ask someone something to do. By now, you might be wondering why I should even invest. We have tried to answer that. 

To understand why we should invest, let's take the example of a person 'A' who has never invested and compare this situation with a person 'B' who has been investing for the past 20 years.

For the sake of simplicity, let us consider that the person has invested only in equity. Let's assume that 20 years ago, both of these guys had a monthly income of 5,000$.

If we consider somewhere around, 3,000$ was spent every month on living. Person' A' has not invested, whereas Person' B' has invested his balance of 2,000$ if we assume that his portfolio has given a return of 15% per annum.

Let's make a few simple assumptions.

• Consider their annual salary increased at a rate of 10% 
• The Inflation rose 5% yearly, which increased spending by 5%.

Now let's compare their net savings after 20 years:

Now, if we compare the savings of both these persons, we can quickly figure out how investing has enabled Person B' to gain much more than he could have without investing.

It is one of the examples where I have considered equity as the way to invest, but in reality, you have many more options, and we will discuss all possible forms of investing in the next section.

Beginner's Guide To Investing: Where To Invest?

To answer where exactly to invest, we will look at all the various opportunities we have in different asset classes, which include:

Equity Investing

• Fixed Income
• Commodities 
• Other Asset Classes

A person has to choose the best asset class that suits the individual's risk and return temperament, considering some diversification.

We will look at these asset classes in detail further, but before diving into understanding these asset classes, let's look at some essential things we need to know before investing.

It might look straightforward to invest, but everything comes with a price. Therefore, we need to look at every aspect before investing. Here are some of the essential considerations for anyone who wants to invest.

• Identify the reason

You need to identify why you want to invest. Your investment decision may be for the following reasons:

• Grow your money
• Retirement purpose
• Child's education
• Child's marriage

And the list goes on. It may be whatever, but you need to make a goal and take the necessary steps to achieve that.  

• Risk and return

Investing in the equities/stock market is an excellent option if you know its risks. It's a general belief that the higher the risk, the higher the return.

• Bonds and FDs

Fixed Income is a perfect option if your target is not to multiply your savings but to ensure it is protected. Fixed Deposits and Bonds offer a fixed interest rate for your principal amount, but often these rates fail to beat Inflation.

Beginner's Guide To Investing: Various Types Of Investing

Discuss these asset classes in detail, along with their pros and cons. Then, investors usually allocate their money using a technique known as Asset Allocation.

They believe investors should be diversified among various asset classes, and an optimal portfolio should contain a mix of all different asset classes.

Let's understand this with an example; consider that a young professional working in a software company may be able to take a higher risk than an older person who is about to retire.

Generally, aggressive investors allocate 75% of their savings in equity and the remaining 25% to relatively less volatile investments, which include gold, silver, and Fixed Income.

Similarly, a defensive investor like an old-age person may wish to invest 80% of his savings in low-volume instruments such as fixed income and precious metals. On the other hand, he might invest only 20% of his savings in equity.

The ratio in which every person invests in different asset classes may vary depending on their risk appetite.

Investing through equity is the most widely used form of financing. It involves buying and selling shares of publicly listed companies on the stock exchange.

The New York Stock Exchange( NYSE ) and the National Association of Securities Dealers Automated Quotation System ( NASDAQ ) are two highly traded significant stock exchanges in the US.

Investing in the stock market can be done by directly trading stocks through a stock broker. It acts as an intermediary between investors and the stock exchange. Usually, there are 2 kinds of stock brokers:

• Full-service brokers: Provide services other than buying and selling shares that help clients make better investment decisions, like research reports and portfolio management advice.  
• Discount brokers: Services are restricted to buying and selling shares.

Investors usually make their investment decisions regarding any trade through fundamental and technical analysis. These are 2 ways to study the performance of any company and its stock price.

The stock price is determined by the supply and demand in the market; the more the need, the cost of stock increases, and the less demand decreases.

Usually, a company's performance determines the demand and supply, but sometimes the sentiments in the market drive the demand and supply, which causes the price movement.

Some companies pay dividends regularly to share the profits with shareholders.

• It provides an opportunity to create a high Return On Investment(ROI) if invested over the long term.
• It can serve as an alternate source of Income through dividends.
• Higher returns come with higher risks. Investing in stocks is risky; there is a high possibility of a negative Return On Investment if a company goes bankrupt.

Fixed Income Instruments

These financial instruments offer fixed-rate interest payments at low risk over a certain period as per the contract; the return is usually low as the risk is low. Some of the most popular kinds of fixed-income instruments:

• Banks offer fixed Deposits.
• Bonds issued by government/corporate companies.
• Public Provident Fund or PPF.

The government or corporations issue bonds to raise funds to finance operations or projects of the company.

All bonds have different credit ratings issued by credit rating agencies. Classified mainly as investment-grade bonds and non-investment-grade bonds.

The interest paid for bonds could be quarterly, semi-annual or annual intervals, varying from company to company. Finally, the capital is returned to the investor at the maturity period.

• Investing in fixed instruments helps diversify your portfolio.
• Steady Income throughout the bond periods acts as a source of Income till its maturity.
• Low rate of return
• Fluctuations in interest rates make trading bonds before maturity risky.

Real Estate Investment involves transacting (buying and selling) commercial and non-commercial land/Buildings.

It is significantly less volatile compared to equity or fixed-income investments. Typical examples would include transacting in sites, apartments, and commercial buildings.

You can also invest in real estate without purchasing a physical asset by investing in REITs.

Real Estate Investment Trusts(REITs) provide a way to have some real estate presence in your portfolio by allowing retailers to invest in companies that operate income-producing tangible estate-related assets. 

By investing in REITs, you become a property shareholder, and you are entitled to earn regular Income produced through commercial properties, shopping malls, apartments, and hotels.

There are two sources of Income from real estate investments: Rental Income and Capital appreciation of the investment amount.

To invest in rental properties, you have to become a commercial property or a house owner to rent. It would help if you also managed other responsibilities like paying the mortgage, paying taxes, finding tenants, etc.

To invest with the expectation of capital appreciation, one must identify undervalued properties that have the potential to increase their market value with some repair and update or buying in a booming market, holding it for some time, and then selling at a higher price.

The real estate sector is significantly less volatile and can create huge returns if invested long-term. However, it also has high transaction costs, high maintenance costs, and low liquidity.

Everything You Need To Master Financial Modeling

To Help You Thrive in the Most Prestigious Jobs on Wall Street.

Commodities

Commodities include metals, crude oil, energy, and food grains. Investors can purchase items directly through the market or indirectly through mutual funds and exchange-traded funds that invest in commodities of your interest.

Investments in gold and silver are considered one of the most popular investment avenues. Gold and silver, over a long-term period, have appreciated and were able to beat Inflation.

• It offers leverage in the futures market which can make much money with significantly less investment if invested smartly. 
• It protects against Inflation.
• Commodity markets are very volatile.
• Factors like exchange rates, interest rates, and the global economy affect commodity prices.
• High leverage can sometimes lead to higher losses.

Everything You Need To Master Financial Statement Modeling

To Help you Thrive in the Most Prestigious Jobs on Wall Street.

Principles Of Investing For Beginner's

Understanding certain principles that help you make better investment decisions, provide better returns, and minimize losses is essential.

Discipline is key to learning any skill; following these principles makes you a disciplined investor.

1. Risk and Opportunity The first principle you must understand is that risk and return are directly proportional. Therefore, investors should realize all the risks involved in the investment.

2. Fundamental Analysis While investing in equity, investors need to study the company and its sector. Investors should have complete knowledge of the company's business model before investing.

Tools for Fundamental Analysis:

• Annual Report
• Investor Presentations
• News related to the sector

3. Technical Analysis

Technical analysis is a popular technique that helps you make trading decisions. It enables you to develop a point of view on a particular stock or index and define the trade, keeping in mind the entry, exit, and risk perspectives. 

It helps you determine: 

• When to buy and when to sell
• Risks involved
• Expected reward and loss

Technical analysis is the study of charts and identifying patterns in them. It is helpful in short-term trades. 

4. Invest Regularly

It is essential to understand that investing regularly can help you utilize the corrections in the stock market. Most people try to time the market but fail; it's vital to know that the time spent in the market is more important than trying to time it.

It is recommended to invest in equities for the long term. Long-term investing helps your investment compound, and it can create a huge amount of return.

Even after mastering technical analysis and being able to understand the global cues, it's very difficult for you to time the market. 

Dollar-cost averaging ( DCA ) is one of the best ways to invest in equities, wherein a fixed sum is regularly invested into a security or a basket of securities. DCA eliminates market timing and gives a structure to your investments.

DCA is also beneficial for retail investors who don't have large sums of money; they can accumulate large sums if continue over extended periods of time.

These are a few popular ways of investment that allow investors to invest in multiple assets simply by investing in an (MF)Mutual Fund or ( ETF ) Exchange Traded Fund .

• Mutual Fund: It is a type of investment instrument that invests in a basket of stocks handled by a fund manager who is legally compelled to work in the best interest of mutual fund shareholders.
• ETFs : Exchange Traded Funds are also a basket of stocks, tracking an index or some group of commodities, etc, but unlike mutual funds, we can directly invest in them through the stock exchange .
• Investing for Beginners Conclusion: Investing in an Education in Investing

Investing without having complete knowledge about the investment is risky. It's very important to invest in knowledge that will reap better benefits than any sought investment.

Researched and authored by Pranav Kanjarla | LinkedIn

Reviewed and Edited by Aditya Salunke  |  LinkedIn

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Introduction to Investing

Many people just like you turn to the markets to help buy a home, send children to college, or build a retirement nest egg. But unlike the banking world, where deposits are guaranteed by federal deposit insurance, the value of stocks , bonds , and other securities fluctuates with market conditions. No one can guarantee that you’ll make money from your investments, and they may lose value.

The U.S. Securities and Exchange Commission enforces the laws on how investments are offered and sold to you. Protecting investors is an important part of our mission. We cannot tell you what investments to make, but this website provides unbiased information to help you evaluate your choices and protect yourself against fraud.

What kinds of investment products are there?

Are you headed in the right direction.

Visit the Roadmap to Saving and Investing

A few people may stumble into financial security. But for most people, the only way to attain financial security is to save and invest over a long period of time. You just need to have your money work for you. That’s investing.

Knowing how to secure your financial well-being is one of the most important things you’ll ever need in life. You don’t have to be a genius to do it. You just need to know a few basics, form a plan, and be ready to stick to it. There is no guarantee that you’ll make money from investments you make. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money. For more information, SEC’s publication Saving and Investing: A Roadmap To Your Financial Security Through Saving and Investing .

How the Markets Work

The stock market is where buyers and sellers meet to decide on the price to buy or sell securities, usually with the assistance of a broker : Let's take a closer look at what you need to know about how stocks are traded.

The Role of the SEC

The U.S. Securities and Exchange Commission enforces the laws on how investments are offered and sold to you. Protecting investors is an important part of our mission.

Retirement and Retirement Plans

For most Americans, a retirement savings plan, which you build over time during your working years, is an essential part of securing your retirement. Learn what you can do, while employed and once retired, to make the most of your investments.

Retirement Plans

Learn about retirement plans and how to maximize your benefits.

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Understand the investment implications that come with a job change and related terminology such as lump sum distributions and rollovers .

Find out how to manage your life's savings.

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Managing Lifetime Income

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Investing 101: Learn How to Buy Stocks Like a Pro

Investing in stocks can offer an excellent means of wealth accumulation over time, but it can also be intimidating for beginners. This guide aims to empower you with the knowledge and practical techniques needed to make informed decisions and build a successful investment portfolio. Whether you're a young professional, a seasoned investor, or someone looking to secure their financial future, understanding the stock market and learning how to buy stocks like a pro can be a game-changer.

From how to buy stocks, to diversification, risk mitigation, and the difference between fundamental and technical analysis, find everything you need to begin your stock market journey with confidence. 

Why Should You Invest in Stocks?

• Understanding the Stock Market's Basics

Selecting an Online Brokerage

Establishing your financial goals, stock research and analysis techniques, initiating your first stock trade, trading strategies, regulatory considerations, transaction costs, brokerage commissions, bid-ask spread, building a diversified stock portfolio, asset allocation, sector diversification, geographic diversification, rebalancing, concluding tips for building your investment portfolio.

• Frequently Asked Questions 

Investing in stocks offers several potential benefits, including:

• Long-term growth potential : Historically, stocks have outperformed other asset classes, such as bonds and cash, over the long term, providing the opportunity for substantial wealth accumulation.
• Compound returns : By reinvesting dividends and capital gains, you can harness the power of compounding, allowing your money to grow exponentially over time.
• Inflation hedge : Stocks can act as a hedge against inflation, as companies can often pass on increased costs to consumers, helping to preserve the purchasing power of your investments.

However, it's important to recognize that investing in stocks also carries risks, including market volatility, company-specific risks, and the potential for losses. Diversification across asset classes and investment types, plus a long-term investment horizon can help mitigate these risks.

Understanding the Stock Market’s Basics

Stocks represent ownership in publicly traded companies. When you buy stocks, you become a shareholder and have a claim on a portion of the company's assets and profits. Stock prices are determined by supply and demand in the market, reflecting investors' collective perception of a company's future performance and growth prospects.

Stocks are traded on stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq. These exchanges provide a platform for buyers and sellers to come together and execute trades. Stock prices fluctuate during the trading day, reflecting the constant ebb and flow of buy and sell orders.

With the proliferation of online trading platforms , investing in stocks has become more accessible than ever before. When choosing an online brokerage, consider the following factors:

• Commissions and fees : Seek brokers with low trading commissions and account fees, as these costs can cut into your returns over time. Low-cost index funds typically have fees of 0% to 0.03%.
• Investment products and services : Evaluate the range of investment products offered, such as stocks, exchange-traded funds (ETFs), mutual funds, and options , as well as the availability of research and educational resources to make informed investment decisions. 
• Trading platforms and tools : Check out the user-friendliness and functionality of the trading platform, including charting tools, real-time quotes, and mobile access. The best trading platforms will include extensive charting and research tools plus historical data.
• Account minimums and account types : Consider the minimum account balance requirements and the availability of different account types such as individual, joint, and retirement accounts. Many brokerage accounts have no account minimum, so you can start with what you've got and build up gradually. 
• Customer service and support: When you need help, you want a brokerage that can offer exceptional support that can answer your questions or troubleshoot issues. You can look for brokers with responsive and knowledgeable customer service teams and availability through various channels like phone, email, and chat.

Popular online brokers for stock purchases include Fidelity, Charles Schwab, E*TRADE, and TD Ameritrade, among others. Compare their offerings to choose the one that best suits your investment needs and preferences.

Before investing in stocks, it's crucial to establish precise financial goals and understand your risk tolerance. Ask yourself:

• Goals : What are your investment objectives? Are you saving for retirement, building an emergency fund, or investing for a specific goal like a down payment on a house?
• Timeline : What is your investment time horizon? The longer your time horizon, the more aggressive you can be with your stock investments, as you'll have more time to ride out market fluctuations.
• Risk tolerance : Are you comfortable with the potential for significant short-term losses, or do you prefer a more conservative approach? What is your risk tolerance? Discover more about trading psychology . 
• Available assets : Look at your investment budget based on your overall financial situation and investment goals. How much can you afford to invest in stocks? 

Once you've defined your goals and risk tolerance, you can create an investment plan tailored to your needs.

Before investing in any stock, conducting thorough research and analysis is essential. Investors use different analysis techniques, including fundamental and technical analysis as well as various stock screeners. 

While fundamental analysis is the most common investment strategy, it's important to learn the basics and study fundamental analysis techniques to get comfortable accessing stocks. Technical analysis is primarily used by large investment firms or professionals with access to extensive tools to perform these complex analyses.  

Here is an overview of research and analysis techniques to consider. 

• Fundamental analysis: Evaluating a company's financial health, competitive position, management team, and growth prospects by studying its financial statements, industry trends, and other qualitative factors.
• Technical analysis : Analyzing historical price and volume data to identify patterns and trends that may predict future price movements.
• Stock screeners : You can use online tools to filter stocks based on specific criteria, such as valuation metrics, industry sectors, or performance indicators. This combines some of the fundamental or technical analysis techniques into a simplified screening process. 
• Company news and analyst reports : Regardless of the other analysis techniques you use, it's important to stay up-to-date with company news, news releases, as well as analyst ratings and recommendations.

Conducting thorough research enables more informed investment decisions and potentially identifies undervalued or promising stocks. In addition to these techniques, you can place a portion of your portfolio in a low-cost index fund, which aims to track or mimic the overall stock market. In this way, you'll own a small portion of the top 500 companies, giving you a degree of built-in diversification. 

Once you've chosen an online brokerage and identified a stock you want to buy, it's time to place your first trade. Here's a step-by-step guide:

• Open a brokerage account : Complete the account opening process, providing personal and financial information. Opening a brokerage account can happen in even a day. 
• Fund your account : Transfer funds from your bank account to your brokerage account, ensuring you have enough cash to cover your desired stock purchase. Transfers can take up to three business days or may transfer in as little as a day. 
• Place a market order : A market order is an instruction to buy or sell a stock at the best available price in the current market. This type of order is executed immediately, but the price may differ slightly from the last quoted price. If you don't see how to place a market order in your brokerage account, you can speak with customer service to understand the specifics of your platform. 
• Place a limit order : A limit order allows you to set a specific price at which you're willing to buy or sell a stock. The order will only execute if the stock reaches your specified price or better. You can place limit orders for the current market price, or place the order at a lower price in case the price drops. 
• Monitor your trade : After placing your order, keep an eye on its status and track the stock's performance. Continue to monitor stocks, companies, and overall performance, and readjust your portfolio as needed. 

It's essential to understand the different order types and their implications before placing trades. Several brokers provide educational resources and practice accounts to aid in getting comfortable with the trading process. Below, you'll find an overview of trading strategies.

There are various trading strategies you can employ when investing in stocks, each with its risks and possible rewards:

• Buy-and-hold : This long-term strategy involves buying stocks and holding them for an extended period, typically years or decades, to benefit from long-term growth and compounding returns. Buy and hold is one of the strategies used by conservative investors interested in long-term time horizons. 
• Day trading : Day traders aim to profit from short-term price movements by buying and selling stocks within the same trading day, capitalizing on intraday volatility. This is typically the highest-risk trading strategy unless you have extensive day trading experience. You can learn more about how to begin day trading .
• Swing trading : Swing traders hold stocks for a few days to several weeks, attempting to capture short-term price swings and trends. While swing trading carries less risk than day trading, without strong analysis and market understanding, this also carries significant risk. 
• Options trading : Options contracts give investors the right, but not the obligation, to buy or sell a stock at a predetermined price within a specific time frame. Options allow you to (potentially) profit on both down and up market swings. You can find brokers for options traders . 

Each strategy requires different skill sets, risk tolerances, and time commitments. It's essential to understand the risks and potential rewards before embarking on any trading strategy.

The stock market is regulated by various government agencies and industry organizations to ensure fair and transparent markets. Key regulatory bodies include:

• Securities and Exchange Commission (SEC) : The SEC oversees the U.S. securities markets, enforcing laws and regulations to protect investors and maintain market integrity.
• Financial Industry Regulatory Authority (FINRA) : FINRA is a self-regulatory organization that oversees and regulates brokerage firms and their registered representatives.

Investors should familiarize themselves with relevant regulations, such as insider trading laws, disclosure requirements, and anti-fraud provisions, to ensure compliance and avoid potential legal issues.

By understanding and minimizing transaction costs, you can maximize the potential returns on your stock investments. Even an extra 1% saved annually could lead to significant additional growth over decades. When investing in stocks, it's essential to consider the various transaction costs that can impact your returns, including:

Most brokers charge a commission or fee for executing trades, which can vary depending on the broker, account type, and trade size. The standard commission for full-service brokers is between 1% to 2% of assets under management (AUM). Other brokerages can be significantly less. 

The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). This spread represents an implicit cost for investors. The bid-ask spread is also a measure of market liquidity impacted by market risks that can widen when the market is highly volatile.

Capital gains on stock investments are subject to taxation, with the rate depending on your income level and the holding period of the investment. Whether you have realized or unrealized capital gains will also affect your tax filings. You can find a comprehensive guide to how your investments are taxed . 

Diversification is a key principle of successful investing, as it helps mitigate risk by spreading your investments across different asset classes, sectors, and individual stocks. By diversifying your stock investments, you can potentially reduce overall portfolio risk, improve stability of returns, and enhance long-term performance. Strategies for building a diversified stock portfolio include:

Allocate your investment capital across different asset classes, such as stocks, bonds, and cash, based on your risk tolerance and investment objectives. For example, a more aggressive portfolio might consist of 80% stocks and 20% bonds, while a more conservative portfolio might be 60% stocks and 40% bonds. A risk-averse or retirement portfolio might reverse the aggressive portfolio and contain 20% stocks or index funds and 80% bonds. 

Even within asset classes, it's important to diversify. Invest in stocks from various sectors, such as technology, health care, finance, and energy to reduce the impact of industry-specific risks. Or even consider investing a small portion of your portfolio in cryptocurrency . 

For example, you can invest in sector-specific exchange-traded funds (ETFs) or by carefully selecting individual stocks across different industries. You can also choose index funds that track the wider market like the S&P 500, which aims to track the 500 largest companies in the U.S. market. You can also check out the best stocks under $100 . 

Consider investing in both domestic and international stocks to capture global growth opportunities and reduce concentration risk. International investments can provide exposure to different economies, currencies, and market cycles, potentially enhancing portfolio diversification and providing new opportunities for returns. 

Periodically review and rebalance your portfolio to uphold your preferred asset allocation and risk profile. Over time, your portfolio's asset allocation may drift from your target due to the performance of different asset classes. Rebalancing involves selling assets that have grown in value and reinvesting the proceeds into underperforming assets to realign with your desired allocation.

Investing in stocks is a journey that requires preparation, perseverance, and a willingness to learn from your experiences. However, with discipline, patience, and a solid understanding of the market, investment principles, and analysis techniques, investing in stocks can be a powerful wealth-building tool. 

Successful investing is not about getting rich quickly; it's about consistently making well-informed decisions based on strong research and analysis skills, managing risk, and allowing time and compound returns to work for you. 

Stay committed to your investment plan, continue learning and adapting, and don't let short-term market fluctuations deter you from your long-term goals. By embracing the challenges and opportunities that come with stock investing with the principles in this guide, you'll be well on your way to achieving your financial goals. 

Frequently Asked Questions 

Can i buy stocks with $100.

Yes, you can buy stocks with $100 or even less. Many brokers allow you to open an account with a relatively small initial investment, and some even offer fractional share trading, allowing you to buy portions of expensive stocks.

What type of stock is best for beginners?

For beginners, it’s often recommended to start with well-established, large-cap companies with a proven track record of profitability and stability. These stocks tend to be less volatile and can provide a solid foundation for a portfolio. Additionally, index funds or exchange-traded funds (ETFs) that track major indexes like the S&P 500 can be a good starting point for diversification.

What is the safest stock to buy?

There is no such thing as a completely safe stock, as all investments carry some level of risk. However, stocks of well-established companies with strong financials, consistent earnings, and a history of paying dividends are generally considered safer investments. Examples include blue chip stocks, consumer staples, utilities, and healthcare companies. Diversification across different sectors and asset classes is also crucial for mitigating risk.

About Alison Plaut

Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.

How To Invest In Stocks: A Step-by-Step Guide for Beginners

I nvesting in the stock market is one of the best ways to create wealth over time. If you’ve never invested, all the names and numbers you hear in the news about stocks might seem like gibberish. But with some research, you can unlock the meaning behind confusing stock terms and learn just how important — and easy — it is to begin investing, regardless of how much money you have .

Check Out: 4 Genius Things All Wealthy People Do With Their Money

How To Invest In Stocks

Here’s how to get started with investing in stocks:

• Decide what kind of investor you are.
• Decide where to open a brokerage account.
• Open a brokerage account.
• Start early.
• Decide whether to invest in stocks or stock funds.
• Manage and diversify your portfolio for long-term success.
• Consider your finances over the long term.

Your investments should be separate from your savings or emergency accounts . Reserve the latter for short-term goals and unexpected debt. Your investments should be for long-term goals, such as retirement.

To help you build up your investment funds fast, stick to the old investment axiom to “pay yourself first.” Before you spend money on discretionary expenses, divert some of your income toward your investments. This ensures that you still have the necessary funds to pay your bills.

1. Decide What Kind of Investor You Are

Your investing goals and risk tolerance will help you decide which stocks to buy and at what price. Consider what you want to do with your money: purchase real estate, produce income, maximize capital appreciation, etc. Then, figure out how much time you have to meet your goals.

Risk tolerance refers to how much money you’re willing to lose on an investment in exchange for the potential of greater gains. The stock market is unpredictable, so your risk tolerance decreases with time. Someone who plans to retire in 35 years has more time to recover from a dip in stock prices than someone who has five years until retirement.

Once you’ve considered your financial situation, your risk tolerance and the amount of money you’re willing to invest, decide how you want to invest.

There are two primary categories of investors: hands-on and passive.

Hands-On Investor

A hands-on investor builds a portfolio by choosing investments either alone or with a financial advisor’s help. This option offers more control over the portfolio’s structure and appeals to individuals looking to maximize gains. It is also more time-consuming for the person who has to research the available investment choices.

Passive Investor

Passive investors don’t choose individual stocks. Instead, they match the performance of specific market indexes like the S&P 500 or Dow Jones Industrial Average. This approach tends to lessen volatility and provide a more stable return over time, but it comes with less growth potential.

2. Decide Where To Open a Brokerage Account

Investors can open a brokerage account in any of several places, including traditional and online brokerage firms such as Charles Schwab, Fidelity and Robinhood.

Full-Service Broker

Full-service brokers provide a wide range of services and professional guidance for nervous or inexperienced investors. For example, a full-service broker offers investment advice, makes stock recommendations and provides access to initial public offerings. They might also offer financial planning and wealth/asset management services, sell insurance and provide banking services. In exchange for this high level of service, you’ll have to pay commission and other fees.

Examples of full-service brokers include Merrill, Morgan Stanley and Goldman Sachs.

Discount Broker

Discount brokers provide fewer services than full-service brokers do. Although they don’t offer investment advice, for a fee they can execute trades on your behalf — or you can execute your own online trades from a self-directed investment account using the brokerage’s online trading platform. The benefit of a discount broker is that you’ll pay lower fees and might trade commission-free.

Fidelity and Schwab are two of the best-known discount brokers. Robinhood, which facilitates trades through its popular mobile app, is also a discount broker. There’s no charge to open an account, and trade minimums are just a few dollars.

Robo-Advisor

A robo-advisor automates your investments. It’s a fully online process that begins with the platform asking you a series of questions about your budget, your investment priorities and goals, and how often you want to invest. Once you’ve set up your account and added a payment method, the robo-advisor selects a portfolio of stocks on your behalf and continues to make investments according to the schedule you set.

Some discount brokers, such as Fidelity and Schwab, have a robo-advisor. Other robo-advisors include Betterment and Acorns .

3. Open a Brokerage Account

Opening a brokerage account is just as easy as opening a checking or savings account .

To open an account with a full-service broker, you can schedule an appointment to speak with an advisor in person. The advisor can help walk you through the different account options available to decide what’s best for you.

To open a brokerage account online, visit the brokerage’s website and complete the online application.

You’ll have to provide the following personal information:

• Social Security number
• Driver’s license or passport information
• Employment status
• Contact information
• Additional financial information, such as your bank’s name and your bank account number

In addition to providing personal information, you will also need to answer questions about the type of account you want and how you plan to manage it.

4. Start Early

The best way to succeed as a beginning investor is simply to start early. The earlier you begin investing, the more time you have for your returns to compound — and this can be the single biggest contributor to your long-term success. 

Take, for example, the case of an investor who begins investing $300 per month at age 20 and earns a 7% annual return until age 65. At that point, the investor’s account value will be approximately $1.14 million. But if someone waited until age 30 to begin investing that $300 per month, even if they earned a 9% annual return — a significant boost — they’d still only have about $882,000. The point is that even with a portfolio that earns less money, starting early can result in a larger ultimate account value.

5. Decide Whether To Invest In Stocks or Stock Funds

Purchasing individual stocks isn’t the only way to invest. Investors can also buy shares of mutual funds or exchange-traded funds. Funds are a great way for beginning investors to get their feet wet because they take some of the guesswork out of building a portfolio.

Here’s a closer look at all three options:

Individual Stocks

Individual stocks give you the most control and flexibility over your portfolio. You can invest in any publicly traded company you want, and buy as few or as many shares as you want — or simply invest a few dollars in fractional shares if your budget is tight.

The benefit of investing in individual stocks is the opportunity for significant growth if the stocks you pick turn out to be winners. The downside is risk. Stock markets are volatile and unpredictable, and the information needed to make good choices can be hard to digest. That’s why you should never invest more than you can afford to lose.

Mutual Fund

A mutual fund pools money from many investors to create a portfolio of stocks and other equities. The funds are professionally managed, but you don’t need a full-service broker to buy shares in one — you can do your own trades on your broker’s trading platform or app.

There are several types of mutual funds to choose from:

• Actively managed fund: The fund manager buys and sells securities with the goal of outperforming the market or a segment of the market.
• Index fund: The fund tracks a certain benchmark index, such as the S&P 500, by investing in the securities included in the index or by investing in comparable securities to replicate the index’s returns.
• Target-date fund: The fund invests in a selection of securities that changes as the target date approaches. The target date usually refers to a retirement date, so the mix of securities becomes more conservative as time goes on.

The primary benefit of a mutual fund is its diversity — chances are that at least some of the fund’s holdings will perform well, even during down times. However, mutual funds have management and other fees, and you can’t trade them instantly like you can stocks. Trades are executed at the end of the day, for whatever the price is at that time. The minimum investment is usually $1,000 for index funds and $3,000 for actively managed funds.

Exchange-Traded Fund

ETFs pool money from many investors just like mutual funds do, but ETFs trade like stocks . ETF prices, like stock prices, change throughout the day. You can purchase full shares or fractional shares. As long as you place buy and sell orders when markets are open, your trades are executed immediately.

Which Is the Best Option for Beginning Investors?

The truth is that most beginning investors shouldn’t consider investing significant amounts into individual stocks. As mutual funds and ETFs can provide instant diversification, particularly to a small portfolio, they are usually the best options to consider for beginning investors. As portfolios grow and investors build more knowledge, they can consider investing in individual stocks if they’re willing to put in the time and effort to research stocks that match their investment objectives and risk tolerances.

6. Manage and Diversify Your Portfolio for Long-Term Success

The key to success as an investor depends on your ability to lessen the risk by researching the investments that best meet your needs, diversifying your portfolio and keeping track of its performance.

Here’s how:

• Choose a mixture of stocks, bonds and other short-term investments that match your investment goals and risk tolerance.
• Meet with a financial advisor regularly, such as every six to 12 months, to review and evaluate your investments’ performance.
• Rebalance your portfolio as needed by selling investments in over-weighted categories and buying investments in under-weighted categories.
• Change your asset allocation as you get closer to retirement if you’re falling short of your financial goal.

Stock prices will rise and fall in reaction to factors you cannot control. But taking steps to manage your portfolio — either on your own or with assistance — can help you reach your financial goals.

7. Consider Your Finances Over the Long Term

Even if you seek a financial planner’s advice, you make the ultimate decisions about your investments. Avoid making rapid investment decisions without considering how they fit into your bigger plans. Here’s what you can do to get started:

Set a Budget and Stick To It

You have to treat your investment money the same way as you do your bills, like your mortgage, rent or utilities. Force yourself to pay this “bill” every single month. Most advisors suggest that you “pay yourself first” by putting money into your investments before you even pay your other bills. This way, you won’t get caught trying to invest whatever money is left over after you pay your bills and spend your discretionary income, which is a trap many people fall into.

Discuss Plans With a Financial Advisor

A financial advisor can discuss investment options with you and help you determine what’s best for your situation. A licensed professional can help you drill down and discover what your real investment objectives and risk tolerance are. Advisors can also provide emotionless counsel during times of market sell-offs.

Focus on Long-Term Growth Instead of Short-Term Gains

Keeping an investment for an extended period can save you money in transaction fees and capital gains taxes. As long as you’re investing in a solid company, the investment will likely increase in value over time. As famed billionaire investor Warren Buffett has often said, “Our favorite holding period is forever,” meaning that once you pick the right stocks, you should sit back and let them do the work for you, rather than trying to trade in and out and time the market. 

Automate Your Investments

Investing is not a one-and-done process. Rather, it’s something you should do on a regular basis. Getting in the habit of saving 20%, 15%, 10% or even 5% of your income on a monthly basis is one of the cornerstones of long-term investment success, and the best way to do this is to automate your investments.

Not only will you be continually pumping up the value of your account, but you’ll be taking emotion out of the equation. It’s human nature to avoid investing in stocks or other investments when they are down sharply in price, but that’s the best time to pick up additional shares, when they are cheap. Automated investing helps keep you in the market and continually builds up your account value.

Daria Uhlig contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com : How To Invest In Stocks: A Step-by-Step Guide for Beginners