If you’re a beginner investor, or if you haven’t quite gotten started – perhaps because you think you need a lot of money or you’re not sure what the best investment is – you’ll need to learn the basics. That will eliminate many of the myths and even convince you there’s no reason not to be investing.

Almost everyone knows Warren Buffet is one of the richest men in the world, like $100 billion rich. But did you know he began investing with just $228? He used it to purchase six shares of Cities Services preferred stock – three for himself and three for his sister.

Everyone has to start somewhere, and that start is usually a modest one. Maybe you won’t ever be the next Warren Buffet, but you’ll have to get started – from wherever you are now – if you hope to begin building real wealth.

Investing is all about setting realistic investment goals and then creating a plan to help you reach them. Fortunately, there are plenty of investment choices and tools to help you get the job done. We’re going to cover them all in this guide.

It’s also important to be aware of the risks that are inherent to investing. First, there’s an inverse relationship between risk and reward. The higher the potential reward, the greater the risk associated with an investment. But you can diversify around the risk, minimizing it while also getting the benefit of the gains it can produce.

Finally, you’ll need to keep your expectations grounded in reality. As Warren Buffett says, make investments that you understand.

Investing isn’t really about getting rich quick, but more about getting rich slowly. It’ll take plenty of discipline and a whole lot more patience. But the long-term rewards will more than justify the effort.

Investing 101 Guide

Why is investing important?

This is a beginner’s guide, so while there are multiple reasons for investing, here we’ll cover six of the most important:

1. Building long-term wealth. Millions of Americans live paycheck-to-paycheck. Investing is the best long-term solution to the trap.
2. Preparing for retirement. Even if you have Social Security and a pension, having income from your investments will provide an even more secure future when you can no longer work.
3. Meeting shorter-term financial goals. This can include making a down payment on a house or preparing for your children’s education.
4. Minimizing the need for credit. The more money you have saved and invested, the less reliant you’ll be on high-interest debt.
5. Having money to pass on to your children. The stronger the start your kids will get in life, the better their lives will be. You can help by building investments to pass on to your children or even to be ready to help them as they get out of life’s starting gate.
6. As a strategy for dealing with inflation. Developing investment income streams is one of the best ways to prepare for the higher prices that the future might bring.

Next to your career, investing is probably the single most important financial activity you’ll participate in during your lifetime. While your career will provide for your immediate financial needs, investing is a process of building wealth for future obligations.

How to Start Investing as a Beginner

Investing as a beginner starts with establishing priorities. Two of the most important are goals and time horizons. Start by making a list of future financial goals, such as a robust retirement account or a Roth IRA, then add a workable time horizon for financing each. For example, while retirement still may be 30 or 40 years away, preparing for your children’s college education may be just 10 or 15 years out.

Next, consider the types of investments that are likely to work best for you. For most investors, the best returns will come from the stock market. That may mean committing most of your funds to the market. But before you do, spend some time learning how the stock market works. Just as you invested time learning your career, you should do no less with the stock market.

Risk tolerance. Before you begin making any big investment decisions, you’ll first need to determine how well you tolerate the risk of losing money – if only in the short run. That will help you to develop the right portfolio allocation between equity investments (stocks, real estate, etc.) and fixed income.

Vanguard offers their free Investor Questionnaire that can help you determine your risk tolerance. It will also recommend a portfolio allocation based on your tolerance level.

Invest as little or as much as you want with a Robinhood portfolio.

Start Investing

Types of Investments

As a beginning investor, there are five primary investments you should consider:

Stocks 

These are shares of ownership in companies. That gives you the ability to invest in the most popular businesses and products in the economy. They tend to be high-risk/high-reward investments.

We’ll talk a little more about stocks in a minute.

Bonds

These are debt securities issued by corporations and governments. They pay a fixed rate of interest, and you are guaranteed to get a return of your principal when the bond matures.

But before investing in bonds, it’s important to learn what is a bond. There are multiple types of bonds, bond issuers, and even bond funds. In addition, it’s important to know the difference between bonds and stocks, if only because some bonds behave a lot like stocks.

We’ll also cover bonds later in this post.

Mutual Funds

These are investment pools that hold stock, bonds, or both. Generally speaking, investing in ETFs (exchange-traded funds) is the better choice. Since they’re typically index-based funds, they generally have low-cost fees and are designed to track the market.

Mutual funds, on the other hand, invest in securities, such as bonds, stocks, or short-term debt. They usually have fees as high as 3% and are actively overseen by a fund manager. Active management can result in big losses since few can outperform the market.

Crypto

This is a digital asset that has grown to become one of the major

stock market alternatives. In recent years, they’ve even outperformed stocks. But this is also one of the very riskiest types of investments with a high degree of volatility.

If you’re interested, you should learn how to invest in Bitcoin in 2022, since Bitcoin is by far the most popular crypto. But you should also look at some of the other 10 best cryptocurrencies to invest in.

Crypto has really evolved in the past decade, and there are different ways to play this market. You can read more about 4 Ways I’m Making Money with Crypto to see what I mean.

See below for more information about crypto as an investment class.

Real Estate

This is an excellent equity diversification in addition to stocks. Much like stock trading, it has the potential for both generating income (from rents) and long-term capital appreciation. The problem with real estate is the large chunk of investment capital needed to buy individual properties.

But there is a workaround if you want to invest in real estate, even as a beginner. Scores of real estate crowdfunding platforms have sprung up, offering investing to investors at all levels. One of the best is Fundrise. With an investment of just $500, you can begin investing in the lucrative commercial real estate sector.

Read on to find out more about real estate investing.

Investing for Beginners

Before we get into specific investments, let’s first look at the impact of investing, even with a very small amount of money. I started my own investment journey while I was still in college. It was only $25 per month, but it was a start, and that’s what’s important. Once you begin, it’s just a matter of maintaining the discipline to continue, and increasing your contributions as your income expands. You can do the same thing!

Let’s look at three investment scenarios, with various monthly contributions over multiple timeframes and at different investment rates of return:

1. Average Annual Investment Return: 5% (even mix of stocks and bonds)

2. Average Annual Investment Return: 7.5% (mostly stocks, less bonds)

3. Average Annual Investment Return: 10% (100% stocks)

Admittedly, that’s a lot of numbers. But that’s exactly what investing is – a numbers game.

Just to make a point, let’s focus on a single row of numbers. Look at the second table, the one with an average annual investment return of 7.5%. That portfolio might look something like 70% stocks and 30% bonds, which would be considered a moderately aggressive investment mix.

Let’s zero in on the $500 monthly contribution row. That works out neatly, because it adds up to $6,000 per year, which is the amount of an annual IRA contribution for investors under 50.

Look across the row and see the impact of a 7.5% annual return on that contribution level. After 20 years, it’s over $270,000. But your out-of-pocket contributions in that same timeframe will be $120,000. That’ll be like getting $150,000 in free money!

In 30 years, you’ll have over $645,000, with contributions of just $180,000. That’ll be like getting $465,000 in free money!

After 40 years, you’ll have well over $1.4 million, on contributions of $240,000. That’ll be like getting more than $1.26 million in free money!

And after 50 years – well, I think you get the picture. But it all starts with regular contributions of even modest amounts of money, made consistently over many years.

That’s the “secret” of investment success.

The Five Major Investment Classes

Now that you have an idea of the math behind investment success, let’s look at the five major investment classes you’ll use to make it all work.

Stocks

You can open a brokerage account with no money at all and begin investing in stocks with just a few dollars. That’s because you can purchase what are known as fractional shares. These are slices of higher-priced stocks, that enable you to spread a relatively small investment across several different companies.

Stocks aren’t in a single investment either. For example, you can choose to invest in growth stocks, dividend stocks, or even penny stocks – among others.

Growth stocks are investments in companies that typically pay no dividends. Instead, profits are plowed back into the business to expand operations and sales. These stocks have greater volatility than dividend stocks, rising more rapidly in bull markets and falling more dramatically in bear markets.

Dividend stocks pay regular dividends, with a substantial amount of profits being distributed to shareholders. These stocks tend to be more stable than growth stocks, price-wise, rising less in strong markets, but falling more modestly in declining markets. But along the way, you’ll get the benefit of the cash flow from the dividends.

Finally, penny stocks might be classified more as speculations than investments. They don’t really trade for pennies, though they can. Instead, the term generally refers to stocks that trade at less than $5 per share. They have such low prices, either because they are upstart companies or older companies that have fallen on hard times.

The speculation side of penny stocks is that they can produce outstanding returns if the issuing company is successful in either growing itself or recovering from whatever crisis caused the stock price to fall. However, the reality is that most penny stocks produced poor returns, being long on promise and short on delivery. If you’re going to invest in these stocks, it’s best done with only a very small percentage of your portfolio. The basic rule applies: don’t invest with money you can’t afford to lose.

But stocks are one of the more difficult investment choices, especially for a beginner. Choosing the right stocks to invest in is not easy and will require a considerable amount of time and research effort.

Let’s summarize stocks with a table showing the many different types of stocks:

Bonds

These securities are typically available in minimum denominations of $1,000, though you can invest in U.S. Treasury securities with as little as $100. Investing is typically done through a brokerage account.

Much like stocks, bonds are higher on the difficulty scale than other investments. Because of the minimum investment amounts, you’ll need a larger portfolio to build a diversified bond allocation. Funds are a better way to invest in bonds.

Funds

Mutual funds usually have a minimum investment requirement

of anywhere from $1,000 to $3,000. But you can invest in ETFs for no more than the price of a single share. If the ETF is trading at $50, that will be the minimum investment required. Either type of fund is available through an investment broker.

Funds are an easier way to invest and are strongly recommended for beginners. With just a small amount of money, you can buy into a professionally managed fund invested in hundreds or even thousands of securities.

Index Funds. There is no way to invest directly into an index like the S&P 500 or the Dow Jones Industrial Average index but there are Index Funds open for investment. These funds track an index and only make adjustments to the portfolio to simulate the mix of holdings in that particular index. Several of the largest Fund Companies market these funds to the investing public as a Mutual Fund or as an Exchange Traded Fund (ETF). These low-cost funds are attractive because most professional money management firms find it difficult to match the returns of the Index most closely resembling the strategy of their fund. There are many different categories of these funds available enabling the investor to have a widely diversified portfolio.

Crypto

You can open an account with a cryptocurrency exchange, often with no money at all. But most set a minimum investment based on either a flat dollar amount or the price of the crypto you want to invest in. A good example of a crypto exchange is Coinbase or BlockFi, where you can not only trade cryptos but also earn high interest in your current holdings.

Real Estate

This is potentially the most difficult investment class, at least if you are buying the property directly. But a lot of that risk is removed if you instead invest small amounts of money in real estate crowdfunding platforms, like Fundrise.

How to prepare for investing

Ironically, the best way to prepare for investing is to start with an emergency fund. That’s money you hold in a safe savings account that will be used only to cover emergency expenses or income disruptions. Not only will it cover those contingencies, but it will also avoid the need to liquidate your investments.

Next, you’ll want to set good financial goals and habits. Successful investing requires discipline, and the combination of clear-cut goals and positive routines is best adopted early.

Have a plan to fund your investments on a regular basis. If you’re not a saver by nature, you’ll need to develop a budget. To do this, you can take advantage of the best free online budgeting tools. Choosing the right one will be critical in deciding how to cut expenses. You’ll need to do that so that you’ll have the cash to continue investing consistently.

One of the very best and most popular budgeting tools is YNAB. It uses a five-step process that will help you to get ahead of your finances, so you will be in a better position to save and invest on a regular basis.

Below we’ll discuss different tools you can use to start DIY investing – though you might want to look into hiring a brokerage firm or a financial advisor if you want professional advice.

Investment apps

Investment apps not only give you the ability to automate your investing activities, they often also include research tools, educational resources, and access to a wide range of investment choices. Most don’t require a minimum deposit or charge steep fees and commissions.

You may have heard, for instance, of the Robinhood app. It was designed specifically as an investment app where you can trade stocks, ETFs and cryptocurrency on the same platform, all commission-free. While its mobile app is intuitive and easy to understand by beginners, the company has been subject to several data breaches.

Other investment apps, such as Charles Schwab may be best suited to more seasoned investors, thanks to its real-time data, advanced research tools, and access to foreign markets. As a full service brokerage, it provides an ample selection of investment options, and doesn’t charge commissions on ETFs, stocks, options, or mutual funds.

Robo-advisors

Robo-advisors are online, automated investment platforms that provide professional investment management for a very low fee. That includes creating a portfolio based on your risk tolerance and goals, and rebalancing it periodically to maintain target allocations.

This is considerably different from financial advisors, who are certified experts that provide advice and guidance on a wide range of financial topics, from retirement planning to tax laws to asset management — aside from investment strategy and investment advice.

You should investigate the best robo-advisors, since there are now dozens of competitors in the space. One of the very best is Betterment. Not only do they provide investment management, but they also offer interest-bearing savings and other financial services.

As robo-advisors continue to develop and advance, different varieties are coming into existence. One excellent example is M1 Finance. It’s a robo-advisor that provides complete investment management free of charge. But it allows you to choose the individual stocks and ETFs that will be in your diversified portfolio.

Stocks

Stocks (and bonds), as well as funds, can be invested in through popular investment brokers. Two of the most popular are E*TRADE and Ally Invest. Each offers commission-free trades on stocks and ETFs, as well as comprehensive trading platforms.

High-yield savings

One of the best places to park emergency funds and short-term savings is in high-yield savings accounts. They pay many times more interest than local banks and credit unions. You should investigate the best high-interest savings accounts so you can earn the highest interest possible on your idle cash.

401(k)

If your employer offers a retirement plan, like a 401(k), 403(b), 457 or TSP plan, you should participate. It will give you an opportunity to invest tax-deductible funds into a tax-sheltered investment account. Many employers also provide a generous matching contribution.

If you’re unfamiliar with how to manage the funds in a 401(k) plan, you can use a dedicated retirement plan robo-advisor like blooom. For a low flat fee, they’ll provide automated management of your plan, including selection of funds with the lowest expense ratios.

Caution to New Investors

If you’re new to investing – or even if you’ve been doing it for a while – it’s mission-critical to avoid detours. That can include participating in get-rich-quick schemes or investing in anything you don’t really understand.

For example, even though we covered penny stocks above, these are not a preferred investment for new investors.

I speak from personal experience on this topic. I once lost $5,000 on a penny stock – this is no joke! (Losing big money on an investment is never a laughing matter; a good learning experience, maybe – but never a joke!)

I got caught up in a discussion with a client about a penny stock company that was allegedly cutting some promising deals. He was enthusiastic about the company, and I allowed myself to get wrapped up in his excitement. It seemed like it could be one of those once-in-a-lifetime investments, where a relatively small investment turns into something really big.

I won’t bore you with the details, but it was a comedy of errors. The stock was a lot more expensive than it seemed (largely because there’s very little public information on penny stocks), and I ended up taking a big loss on the same day I bought it.

Believe it or not, my experience with a penny stock is hardly unique. It’s the most typical outcome when people “invest” in these raw speculations.

And Then There are Crypto Scams…

Speaking of raw speculations, crypto is another area where you can lose money and a lot of it. As interest in crypto has grown so have crypto scams.

I’m happy to say it wasn’t me, but I feel bad for a buddy of mine who got caught in one of these traps. It seems he met a girl on a dating app who lived outside the US (that was a big red flag that got missed early). He became sufficiently comfortable with her that he allowed her to convince him to invest through her preferred crypto trading platforms.

It was a complicated scam, and easy enough to miss upfront. But the long and short of it is that my budy was transferring his crypto into two accounts, one that was legitimate, and another that was anything but.

The girl succeeded in convincing him that they were on a path to romance – oh, and by the way – if you deposit $5,000 per month into the (illegitimate) account, they’ll guarantee daily profits on your investment.

You can probably guess how that turned out. Before the episode ended, my buddy lost his entire investment held with the bogus crypto platform.

It happened to him, and it could happen to anyone. It’s a new industry, growing rapidly and adding new exchanges and services all the time. Some of them are legitimate, but others are legitimate scams.

The takeaway is to guard your money carefully when you invest. Naturally, you’ll want to get the best return on your money, but understand that also makes you vulnerable to bad investments and scams. Keep your eyes open, do your research, and always remember the time-honored saying: if it sounds too good to be true, it probably is.

Bottom Line

When you first begin investing don’t expect it to necessarily be smooth sailing. That’s especially true if you invest during a bear market. Your portfolio may begin declining almost immediately.

But you should understand that market declines are perfectly normal. You should be prepared to hold your investment positions through the decline. If you do, you’ll be rewarded with higher gains when the next bull market begins to develop. Over 10 years or more, rises and declines will almost certainly break in your favor.

One of the best ways to minimize the risk of market declines is through diversification. You can do this by holding a percentage of your portfolio in either short-term bonds, high-interest savings, or a combination of both.

And when you commit to the long-term use of this formula, you’ll watch your wealth gradually improve. The combination of regular investment contributions and investment earnings is the best way to build long-term wealth.

Armed with the information in this guide, the only thing holding you back is getting started. Don’t let money be an obstacle since you can open many different investment accounts with no money at all. And you can begin investing with as little as $50, $100, or $500.