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Investing for Beginners: Considerations and Ways to Get Started

By Michael Flannelly · July 26, 2022 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Investing for Beginners: Considerations and Ways to Get Started

Investing can be a great way to secure your financial future, but it can also be an intimidating minefield for the uninitiated. Fortunately, modern technology has made it easier to start an investment portfolio. You could get started today if you have an internet connection and a bank account.

It’s worth understanding what you’re doing before you put your money into the nebulous financial markets. You’ll want to know the basics of investing, from the different types of investments to the various strategies you can make money from them. With this knowledge, you should have a good idea of what sorts of investments are right for you and how to get started.

Why Is Investing Important?

Investing is important because it helps you build wealth. Investing is simply the process of putting your money into assets that have the potential to grow in value over time. Doing this may increase your wealth and achieve financial goals, like saving for retirement.

You may wonder why you’d want to risk putting your hard-earned money in the financial markets, where it has the chance to decline, rather than simply stashing it in a savings account or even under your mattress. It’s because inflation can eat away at your money’s purchasing power if you don’t invest.

Your money sitting in a savings account earning little interest will eventually decrease in value because of inflation. The money you put into the market may be at risk, but it also has the potential to grow. By investing, you can ensure your money keeps up with inflation or even outpaces it. And historically, the market tends to increase, even accounting for significant stock market crashes like the Great Depression and the 2008 crisis.

💡 Recommended: How to Protect Your Money From Inflation

Of course, that doesn’t mean there’s no place for a healthy savings account, especially for money that you need in the short term.

Many people hold off putting money into the financial markets because they believe common investment myths, like that you have to be an expert or that you need to devote a lot of time to your finances. But even novices can set aside a little time and money to start investing.

Things to Consider as a Beginner Investor

There are a few important pieces of information you want to determine and understand before you begin investing.

Investment Goals

You want to establish your financial goals before you start investing. Since investments have such strong growth potential over time, many people use their portfolio’s gains to fund future financial goals, like purchasing a home or retirement. Figuring out which investment strategy is right for you starts by assessing and understanding your goals, because they’re not the same for everyone.

Time Frame

After establishing your investing goals, you can think about how long it may take you to reach them. For example, investing for your retirement nest egg will likely take longer than investing to save money for a downpayment on a house.

Determining these time horizons for investing involves taking your age into account. A younger investor saving for retirement has a longer runway to achieve their goals and, thus, can take more risks, like investing in stocks or cryptocurrencies, to meet those goals. In contrast, an older investor will likely employ a conservative investment strategy, like investing in low-risk bond funds, to protect their portfolio’s value from declining at a time when they are less able to afford it.

Risk Tolerance

Every investor must determine the amount of investment risk they are willing and able to accept in their investing decisions. This risk tolerance is essentially the loss an investor can withstand in their portfolio. Age, investing goals, and income may contribute to your risk tolerance.

Certain assets, like growth stocks, commodities, and cryptocurrencies, are risky investments, while bonds and blue chip stocks are considered less risky. With increased risk comes the potential for higher returns, albeit with the possibility of significant losses.

Portfolio Diversification

Portfolio diversification involves investing your money across a range of assets, like stocks, bonds, and real estate, rather than concentrating all of it in one area. After all, you don’t want to put all your financial eggs in one basket. By diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.

4 Types of Investments for Beginners

There are a wide variety of investment options available to beginner investors. Some people may invest in cryptocurrencies or commodities, while others may be interested in annuities and penny stocks. However, the following assets are generally best suited for the beginning investor.

1. Stocks

When you think of investing, you probably think of the stock market. A stock gives an investor fractional ownership of a publicly-traded company in units known as shares. Investing in stocks as a beginner can be an ideal way to build wealth.

Investors make money on stocks through capital appreciation, dividends, or both. Capital appreciation occurs when you buy a stock at one price, then sell it for a higher price in the future. The company may pay dividends if it distributes part of its profits to its shareholders.

💡 Recommended: How to Invest in Stocks: A Beginner’s Guide

2. Bonds

Bonds are loans you make to a company or a government — federal or local — for a fixed period. In return for loaning them money, they promise to pay you periodic interest and, eventually, your principal at the end of the period.

Bonds are typically backed by the full faith and credit of the government or large companies. They’re often considered lower risk than stocks.

However, the risk varies, and bonds are rated for quality and creditworthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered some of the least risky investments. However, they also tend to have lower returns.

💡 Recommended: How to Buy Bonds: A Guide for Beginners

3. Mutual Funds and ETFs

A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry, or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.

Exchange-traded funds (ETFs) are similar to mutual funds, but the main difference is that ETFs are traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day.

Mutual funds and ETFs allow investors to diversify their holdings in one investment vehicle.

💡 Recommended: ETFs vs. Mutual Funds: Learning the Difference

4. Real Estate

Many initially invest in real estate by purchasing a home or a rental property.

If owning a home is out of reach for you, you can also invest in a real estate investment trust (REIT), a company that operates in the real estate business. You can trade a REIT on a stock exchange like you would a stock. With a REIT, an investor buys into a piece of a real estate venture, not the whole thing. There’s less responsibility and pressure on the shareholder when compared to purchasing an investment property.

Investment Strategies for Beginners

An investment strategy is a plan that outlines how you will invest your money. An ideal strategy should consider your financial goals, risk tolerance, and time horizon. Here are two recommended strategies for beginner investors.

Buy and Hold

Investors practicing buy and hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so can help curb the tendency to panic sell, and it can also help minimize fees associated with trading, which can boost overall portfolio returns.

A buy and hold strategy can be difficult as you witness the market’s volatility, where the value of your portfolio declines during certain periods. However, market fluctuations are a natural part of the market cycle. Rather than get nervous and be tempted to sell when prices drop, a buy and hold strategy will keep you in the markets if you can afford it. If you sell when prices are low, you may lock in losses and miss out on a likely market rebound.

Dollar-Cost Averaging

Dollar-cost averaging is a strategy that helps individuals regularly invest by making fixed investments on a regular schedule regardless of price.

For example, say you want to invest $1,000 every quarter in stock ABC. Each quarter, the price of that stock will vary — sometimes it will be up, sometimes it will be down. The amount of money you invest remains the same, so you buy fewer shares when prices are high and more shares when prices are low.

A dollar-cost average strategy can help individuals access a lower average share price and help them avoid emotional investing.

When Should You Start Investing?

It’s ideal to start investing as soon as possible, as long as you have established an emergency fund and paid off high interest debts. The earlier you start, the more time your money has to grow. It’s better to start investing when you’re young, setting aside a little bit of money each month toward your portfolio, rather than wait until you’re older and have to invest a more significant portion of your income to meet your goals.

Additionally, when you start investing when you’re young, you can more easily benefit from compounding returns. Compound returns mean any gains you earn are reinvested to earn additional returns.

How Much Money Do You Need to Start Investing as a Beginner?

You can start investing with as much money that fits your budget and financial goals. The amount of money you need to start investing as a beginner can vary depending on the type of investment you want to make. For example, if you want to buy shares of a company, you will need to have enough money to cover the cost of the shares. If you want to invest in a mutual fund, you will need to have enough money to cover the minimum investment amount.

Fortunately, you can invest with only a few bucks at a time these days because many brokerage firms offer fractional share investing, allowing investors to buy smaller amounts of a stock they like. Instead of purchasing one stock at the value for which the stock is currently trading — which could be $1,000 or more — fractional share investing makes it possible to buy a portion of one stock. Investors can utilize this to use whatever dollar amount they have available to purchase stocks.

How to Start Investing

If you are ready to start investing and want to build a portfolio on your own, you can follow these steps:

Step 1: Open an Investment Account

You will need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks, mutual funds, and other securities.

You can also utilize an employer-sponsored retirement plan, like a 401(k), or an individual retirement account to make your investments. One benefit of retirement investment accounts is that they are tax-advantaged, meaning your investments can grow tax-free within the accounts. However, you may have to pay taxes when withdrawing money from the account.

💡 Need more help? Follow our guide on how to open a brokerage account.

Step 2: Do Your Research

It’s important to research different companies, funds, and assets to find a diversified selection of investments that fit your desires and priorities. Diversification will help to reduce your risk and maximize your returns.

Step 3: Invest and Monitor Your Portfolio

Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio are performing well based on your investment strategy.

Keep in mind that investing is a long-term game; it’s important to be patient and resist the urge to sell when the markets are down. If you stick to your plan and invest for the long haul, you’ll be more likely to reach your financial goals.

The Takeaway

Learning how to invest doesn’t have to be complicated. Like many things in life, it takes time and experience to gain the knowledge to do it successfully. As long as you begin sooner rather than later, you can start building wealth to meet your financial goals.

If you want to learn everything you can about the markets and have control over your portfolio, SoFi’s all-in-one online investing platform might be the choice for you. With SoFi Invest®, you can trade stocks and ETFs with no commissions for as little as $5.

Want to learn more about how SoFi may be able to help you reach your long-term financial goals? Get started with SoFi Invest today.

FAQ

What are the most popular investment options for beginners?

Some popular beginner investments include stocks, mutual funds, and exchange-traded funds (ETFs).

What are some simple investment strategies for beginners?

Some common investment strategies for beginners include buy and hold and dollar-cost averaging. Many beginners may also employ an index investing strategy, buying ETFs and mutual funds that track a benchmark index, like the S&P 500.


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