The Best Way to Start Investing

Written by Catherine Alford

If you want to learn how to start investing, the best place to start is to understand basic investing terms. Investment companies tend to use financial lingo that seems intimidating at first. Luckily, with time and research, you can easily learn the basics.

Once you do, you’ll be well on your way to making your first investment. The steps below outline the most basic and common forms of investing and are a great place to start for someone new to the investing world.

How to Start Investing

Step 1: Learn About Stocks

stocksStocks are the building blocks of investing. If you can learn and understand what a stock is, you can better understand some of the more complex investing topics in the future.

Simply put, a stock is a share of a company. If you own one share, one stock, in Apple, Tesla, Disney, Nike, or any other business in the stock market, it means you own one small portion of that company.

When a company does well, your stock could be worth more. Companies increase revenue by creating new products, offering new services, and expanding to new industries.

As companies generate more revenue, they become more valuable. So, you might buy one share of Apple today for $215, but that share could be worth $300 in a year once Apple grows and releases new products. If the value of the stock increases, you might choose to sell your share and make a profit.

The downside of owning a lot of individual stocks is that many financial experts consider it risky to own many individual shares in one company. After all, it’s hard to predict the future, even when it comes to some of the most well known companies in the world. If a company tanks, gets bad press, or causes some big calamity, the stock price could plummet.

Additionally, whenever you buy stocks, you typically have to buy it through a brokerage company. There’s usually a fee to buy and sell individual stocks. It can get expensive. That’s one reason why many financial experts recommend investing in mutual funds, like index funds, instead of investing heavily in individual stocks.

Step 2: Learn About Mutual Funds

Now that you have a basic understanding of what a stock is, it’s time to learn about mutual funds. As mentioned previously, investing in only individual stocks is considered risky. So, many investors choose instead to invest in a mutual fund.

A mutual fund is usually a group of stocks that include a percentage of many different companies.

A mutual fund is essentially a group of stocks, bonds, or other securities. One mutual fund share might include a small percentage of many different companies. The other benefit to a mutual fund is that typically, someone called a mutual fund manager chooses where the money will go.

To put it another way, one share of Microsoft stock contains only Microsoft. But, one share of a technology focused mutual fund might contain a small percentage of Microsoft, Apple, Intel, Adobe, and more. The benefit is that if one of these companies has a bad day or a bad week in the market, the other companies represented in the fund might be having a great week, which could balance it out.

Mutual funds help to spread out risk. Instead of putting all of your money in one basket, so to speak, you can instead put your money in a mutual fund that’s professionally managed.

You can buy mutual funds through a brokerage firm, but pay attention to the management fees. Some companies that are known for low management fees, especially when it comes to their branded funds, are Vanguard, Fidelity, and Charles Schwab.

When researching mutual funds, you might come across something called an index fund. These are just a type of mutual fund that tries to mimic a certain index. For example, the S&P 500 is an index that tracks how well the top 500 companies in the U.S. are doing. You might come across a fund called a Vanguard 500 Index fund or a Schwab S&P 500 index fund. These funds mimic the S&P 500 meaning that if the actual S&P 500 is up 5% one week, your index fund should theoretically be up around 5% that week as well.

Step 3: Learn About Bonds

If you’re interested in an even more conservative investing option, you could consider investing in bonds.

A bond is essentially a loan that you make to a company or to the government. You’ve probably come across bonds before. For example, your grandparents might have given you savings bonds for Christmas or your birthday growing up.

There are many different types of bonds, but the principle is the same. The government, whether it’s local or federal, or businesses use bonds to raise money. The bond is a loan, made by you, and bonds typically have a set maturity and interest rate. Because you’re the one loaning money, you get paid interest. Typically, you could earn better returns in the stock market than with bonds, but the benefit of a bond is it has a guaranteed return, whereas the stock market does not.

Step 4: Learn About Alternative Investments

real estateInvesting in the stock market isn’t the only way to make your money grow. In fact, there are many different types of alternative investments you can consider. Alternative investments are investments outside of the traditional stock market.

For example, real estate investing is an alternate form of investing. Many real estate investors make their money from buying multiple homes and renting them out. Some real estate investors flip homes or buy commercial real estate that they rent out to businesses.

Some people are angel investors, meaning they invest in businesses. Others invest in art, jewelry, or gold. You can also invest in land, livestock, and even wine.

Another form of alternative investing is peer-to-peer lending, where you formally loan money to other people through a peer-to-peer lending company.

Of course, just like any investment, you should do considerable research before putting your money towards alternative investments. Many alternative investments are for experienced investors who want to diversify their portfolios. Still, it’s important to mention them to help you understand the differences between traditional and alternative investments.

How to Start Investing With Only $100

You might think that you have to have thousands of dollars to start investing, and that might have been true in the past. However, these days, there are numerous different companies that allow you to invest with $100 and sometimes even less.

As a point of fact, you can make $100 in a garage sale or by spending the weekend side hustling. So, this is an amount that just about anyone can gather together to make their first investment.

So, how do you invest your $100 once you have it? Well, you’ll need to choose an investment company you trust to buy and sell on your behalf. Consider the reputation of a company and ask detailed questions about their fees before choosing one.

Some companies charge fees for making a trade, and some don’t. If you don’t mind paying a fee to take all the guesswork out of investing, you can also research robo-advisors, which handle investing decisions for you. With some robo-advisors you can open an account with less than $100. There are also numerous investing apps available on the market today that make investing easy and accessible to just about anyone. Again, be wary of high fees when it comes to apps and newer investing companies. Some truly offer low fee or fee free investing, while others charge pretty high fees on accounts with low balances.

Everyone Has to Start Somewhere. Also, Don’t Panic

Ultimately, everyone has to start somewhere, but if you have a willingness to learn and an interest in growing your money, you can absolutely learn how to start investing today. Now that you’re familiar with a few key investing terms and understand the right questions to ask when shopping for the best brokerage firm for you, you should be well on your way to earning your first return.

It’s impossible to predict whether the stock market will go up or down. Therefore, it’s best to look at historic returns.

Keep in mind that sometimes new investors worry about poor returns or worry about losing their money. And, the truth is, it’s impossible to predict what the stock market will do. What you can do, however, is educate yourself by looking at historic returns over a certain period of time.

Even if you have a year or two of bad returns, the market historically also recovers. People who took all their money out of the market during the bottom of the 2008/2009 recession endured major financial losses. However, people who left their money in the market at that time typically saw their returns come back after a couple of years.

Investing isn’t about short term wins. It’s truly about the long game. Don’t let a bad month or a bad year deter you from investing your money in the market. Instead, take your time to learn about the best form of investing for you. Use it as a learning experience all while watching your wealth grow over the long term.