May 3, 2023
How to Start Investing
Investing means buying securities, like stocks, bonds, mutual funds, and exchange-traded funds (ETFs), to make money as they grow in value over time. Investors generally create a portfolio made up of various securities, and often hold them for years or even decades. Traders, on the other hand, generally buy and sell securities rapidly to generate many small profits as prices rise and fall. If the idea of day trading makes you sweat, rest assured: investing is generally much simpler and less stressful.
Why investing is so important for your future
Many experts agree that investing is a critical component of a brighter financial future. About 58% of Americans own stock (Gallup, 2022), and many invest in other types of investments as well. Here are some of the most common reasons people invest:
- Retirement. In 2021, 75% of non-retired Americans had some retirement savings, and many put those dollars into investment accounts. Investing could help your nest egg grow faster than saving alone (Federal Reserve, 2022).
>>Learn more: Calculate how much you’ll need to retire
- Combatting inflation. Money loses buying power over time: an item that cost $100 in 1950 would cost over $1,248 today in 2023. Investors aim for returns that match or outpace inflation. Savings accounts, even interest-bearing ones, often don’t.
>>Learn more: How inflation works
- Lowering tax burden. Retirement and college savings accounts offer tax advantages that could lower your taxable income, and some investment profits are taxed at the lower capital gains rate of 0-15%.
>>Learn more: How taxes on stocks work
- Growing wealth through passive income. Investing puts your dollars to work for you. You might earn passive income through dividends, as well as returns when you sell securities that have increased in value.
>>Learn more: Passive income streams
When should you begin investing?
As a general rule, the earlier you start investing, the more wealth you can build. How? The power of compounding.
Imagine you invest $100 and earn a 5% return annually. In the first year, you’d earn $5. When you re-invest those earnings, you’d earn interest on $105 the next year, for a return of $5.25. Every time your money makes money that you re-invest, it increases your balance, as well as the return on that balance.
The longer your money compounds, the greater the effect. Let’s say you start with $100 and contribute $25 a month for 20 years, earning an average rate of 5%. After 20 years, you’d have deposited $6,100 and your balance would be over $10,000. And after 50 years, you’d have contributed $15,100 and your balance would be almost $64,000.
>>Learn more: Calculate compounding over time
Signs you’re ready to invest
In addition to finding out how to start investing, you may want to first determine if you’re ready. Here are some indicators that the time may be right:
- Disposable income. If you can pay all your bills with a bit left over, it might be time to put your dollars to work. If you’re not currently budgeting, now is the perfect time to get started.
>>Learn more: How to make a budget
- No high-interest debt. Let’s say you earn 5% on your investment, but you owe 18% interest on a credit card balance. That cancels out your return and then some, so it may be wise to pay down high-interest debt before you invest.
>>Learn more: How to get out of debt
- An emergency fund. Do you have three to six months of expenses in savings? If not, tying up all your extra cash in investments might force you to liquidate fast in case of an emergency, which may cause you to lose money on your investments.
>>Learn more: How to start emergency and rainy-day funds
- Clear financial goals. Both investing and saving can be important ways to set aside money for the future; they each serve different functions. Setting goals and determining the right financial tools for meeting them lay a solid foundation.
>>Learn more: How to create your financial plan
How much money do you need to invest?
Contrary to what many people assume, you don’t need a large amount of money to start investing. In fact, you can often get started with as little money as a dollar. While shares of stock and other securities can be costly, many brokerages sell them by the slice via fractional shares. Some also offer low- or no-fee accounts.
Once you start investing, you’ll likely want to keep adding money to your accounts, especially if you have long-term goals like retirement. Many experts recommend investing 10-20% of your income on an ongoing basis. The 50/30/20 budgeting method, for example, allocates around 20% of your budget to savings and investments.
For many people, however, 10-20% is out of reach. Investing whatever you can afford, especially if you start early, could still enhance your financial health in the long run.
>>Learn more: How much you should be investing
Discovering your investing approach
Every investor has a different style, which is influenced by many factors. Finding the approach that works for you hinges on determining your investment goals, your budget, your tolerance for risk, and how hands-on you want to be in managing your investments. Keep in mind, too, that your approach will likely change as your life circumstances shift.
Assessing your risk tolerance
All investment involves risk, including the risk that you could lose money. But the level of risk each person is comfortable with is very personal. Your age, income, financial goals, and other factors play a role. Investors typically sort risk tolerance into three categories:
- Conservative. A conservative investor values stability over the potential for higher returns. Asset allocation is likely to be 40% stocks and 60% bonds.
- Moderate. Moderate investors aim to balance stability with higher reward potential. Typically, they allocate 60% to stocks and 40% to bonds.
- Aggressive. Aggressive investors feel comfortable taking big risks and hope to earn big rewards. They usually allocate 80% to stocks and 20% to bonds.
>>Learn more: Determine your risk profile
Active vs. passive investing
Are you a hands-on or hands-off investor? Each approach comes with risks and benefits.
Hands-on, active investors tend to focus on short-term gains; they usually spend substantial time maintaining their portfolios and trade more frequently. Active investors may also try to beat the stock market by choosing specific stocks that may outperform leading indexes like the S&P 500. Even professional fund managers, however, don’t beat the market reliably. Active investing can be a higher risk and involve more fees due to the frequency of trading.
Passive, hands-off investors usually practice a buy-and-hold investment strategy: they hold their investments for long periods of time, seeking a long-term return. They frequently invest in index funds that aim to mimic the performance of the market overall. Many build a diversified investment portfolio, often with the support of a robo-advisor, so that losses in one area are offset by gains in other areas in order to ride out the risks of market volatility. Passive investing is often recommended for long-term goals like building wealth for retirement.
|Active investing (hands-on)||Passive investing (hands-off)|
|High volume of trades||Buy-and-hold approach|
|Hands-on portfolio management||Less frequent portfolio management|
|Tends to focus on individual securities||Tends to focus on a diversified portfolio|
|Higher risk||Lower risk|
|Geared toward short-term returns||Geared toward long-term returns|
>>Learn more: How passive investing works
Different ways to invest your money
Investors can choose from a variety of accounts and investments, each with different opportunities and limitations. You don’t have to pick just one. Many people have multiple investment accounts for various needs, and it’s important to diversify your portfolio with a variety of investments.
>>Learn more: How you can diversify your portfolio in 2023
Types of investment accounts
Choosing the right type of investment account can help you get the features you need. Depending on your goals, you might choose a standard brokerage account or a tax-advantaged retirement or education savings plan.
- Taxable brokerage accounts. A brokerage account allows you to buy and sell virtually any investment. Adults can also create custodial accounts for children.
>>Learn more: How to open a brokerage account
- Employer-sponsored retirement plans. This category includes 401(k), 403(b), SEP Individual Retirement Accounts (IRAs), and SIMPLE IRAs. Employers often make a matching contribution.
>>Learn more: Roth IRAs vs. 401(k)s
- Individual retirement accounts (IRAs). If you don’t have an employer-sponsored plan, or if you want to invest more, a traditional or Roth IRA can help you save for retirement and reap tax advantages.
>>Learn more: Traditional vs. Roth IRAs
- 529 education savings plan. Saving for your child’s education? A 529 savings plan may offer flexibility and tax advantages.
>>Learn more: Custodial accounts vs. 529 savings plans
Types of investments
|Investment type||What it is||Volatility||Performance profile|
|Stock||A piece of ownership in a company||Generally higher||Value tends to rise and fall; may trend up over the long term. May pay dividends.|
|Bond||A loan to a company or government paid back with interest||Usually lower||Growth tends to be slow and steady.|
|Mutual fund||A basket of investments, like stocks, bonds, and other securities||Varies||Profile reflects fund composition. Offers some diversification. May pay dividends.|
|Exchange-traded fund (ETFs)||A basket of investments, like stocks, bonds, and other securities||Usually lower, as many are passive index funds||Profile reflects fund composition. Offers some diversification. May pay dividends.|
|Cryptocurrency||A decentralized currency with no set value||Usually very high||Price spikes and dips rapidly.|
The table above reflects general information on volatility and performance profiles. But there is tremendous variation within each investment type. Value stocks, for example, tend to be relatively stable, while “junk bonds” can be quite risky. That’s why it’s important to research stocks, funds, and any other securities before investing.
>>Learn more: Different types of investments
Start soon, but think long-term
When you first learn how to start investing, it can feel overwhelming. But it doesn’t have to be complicated to begin putting your money to work. The Stash Way® can help: it’s all about investing what you can afford on a regular basis, building a diversified portfolio, and investing for long-term growth. And you can get started with as little as $5.
Investing made easy.
Start today with any dollar amount.
Common questions about investing
Is investing in the stock market risky?
Investing in stocks always involves risk. While you can make money by investing in stocks, bonds, funds, and other securities, you can also lose money, especially if your investments lose value. By diversifying and doing careful research before you purchase securities, you can reduce your risk.
How do I invest money in the stock market?
You can invest in the stock market by purchasing stocks, bonds, mutual funds, and exchange-traded funds (ETFs), as well as other securities. You can make these purchases by setting up an investment account with a brokerage, either online or through an investment app.
How much money do you need to invest in stocks?
You may think you need a large sum of money to start investing in order to buy pricey stocks or other investments, but you can start with as little as $1 thanks to fractional shares. As their name implies, these are fractions of full shares that can help you start investing, sometimes with just a few dollars.
What is the difference between trading and investing?
Trading is the process of buying and selling stocks, which usually takes place over the short term. Investing generally implies buying stocks or bonds and holding onto them over a longer period of time.
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1Example is a hypothetical illustration of mathematical principles, and is not a prediction or projection of performance of an investment or investment strategy
*For Securities priced over $1,000, purchase of fractional shares starts at $0.05.
Stash does not monitor whether a customer is eligible for a particular type of IRA, or a tax deduction, or if a reduced contribution limit applies to a customer. These are based on a customer’s individual circumstances. You should consult with a tax advisor.
This material has been distributed for informational and educational purposes only and is not intended as tax advice. Consult with your tax professional.
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