How to Start Investing

Investing For Beginners - How Do I Start Investing?

For those of you wondering how to get started investing, I’m writing this short and hopefully practical guide to help get you started.

The first thing you need to do is realize that there is no “perfect” way or time for you to start. And there is no “perfect” product for you to start investing in. The best investment choices that you have are the one’s that you are comfortable with and the one’s that you choose yourself. With that said, you can always choose better when you’re educated, so once you get started, keep practicing and you should get better in no time.

Indeed, as your investments grow, so will your knowledge of how to invest. Start simple and as you learn and save more money, expand and diversify the types of investments you have. There are thousands and thousands of choices that you can make, so to get started you’ll have to come up with a simple plan. Here’s my advice on how to create your plan:

Determine Your Goals and Needs.

Depending on what your goals are, you will utilize different investment tools. Here are the first questions to answer. If you are saving for one or more of these goals, then prioritize them and allocate your investment money among the various investments.

Are You investing for the short or medium-term?
If so, you’ll want to open a traditional brokerage account, or maybe even use your local bank. If you are investing for the short-term (less than a year), then you are probably best off if you purchase a CD at your local bank or park your money in a money market savings account. If you are investing for the medium-term or long-term, you’ll want to open a brokerage account. Opening a brokerage account is as easy as filling out and mailing in an online form, and can be done by almost anyone.

Are You investing money that you will want access to before retirement?
If so, do not invest the money in a tax-deferred account, but rather follow the advice from the previous goal.

Are You Saving for retirement?
If so, you’ll want to utilize as many tax-deferred investments as possible, including any 401K, 403B, IRA or Roth IRA that you qualify for. 401K and 403B plans are only available through your employer. These are the most beneficial tax-deferred plans available. If you are eligible for these plans you should start investing in them immediately, and contribute as much as you can each paycheck and each year. The difference between an IRA and a Roth IRA is that an IRA is tax deductible the year that you create it. Also, if you already participate in a 401K or 403B plan, you are usually unable to contribute to a traditional IRA. In a traditional IRA your money grows at a tax-deferred rate but when you sell it you’ll have to pay taxes on the full amount. On the other hand, with a Roth IRA you are taxed on your contribution the year you make the deposit, but you will never have to pay taxes on the money when you take money out.

Are You saving for children’s college?
If this is one of your specific goals, then you can invest money in a 529 plan (either a prepaid tuition plan or a savings plan) or a Coverdell IRA (formerly know as Educational IRA). Also, see collegesavings.org to find out what plans your state offers.

Open an Account.

Once you know which types of accounts you want to start investing in, the next step is to open up an account. Here are the basics of opening up each account:

Certificates of Deposit – You can do this through your local bank. Enter your bank and ask the teller about opening a CD account. They will put you in touch with the right person.

Discount Brokerage – The fastest, easiest and cheapest way to open a brokerage account is to open it through a discount brokerage. Even better, open it at an online discount brokerage. Our recommended favorites (in order), are E*Trade, Schwab.com and Ameritrade. Ameritrade is the cheapest, E*Trade is inexpensive but offers more options and a better interface than the rest (you can get bank accounts, research reports and other services), and Schwab.com is the most expensive but offers you to pay for additional services like advice, research reports and other full-service options.

Full Service Brokerage – These include companies like Morgan Stanley, American Express, Edward Jones, Merrill Lynch, Prudential Financial. These brokerages provide you guidance, advice and research reports, but they are much more expensive but their brokers can often push you toward investments you may not be comfortable with. Instead of charging a flat fee for trades, they usually charge a commission-based fee structure that can be much more expensive. Also, they charge annual maintenance fees on your account of sometimes hundreds of dollars. Be waery of these accounts unless you really need the extra guidance.

401K, 403B – These plans are ONLY offered through your employer. Find out if your employer offers one of these plans (or any other tax-deferred, stock investment or other plan) by contacting your Human Resources department. They will give you the forms needed to sign up.

Traditional IRA – You can open one of these with almost any brokerage or discount brokerage. I recommend doing it yourself with a discount broker like E*trade or Ameritrade. E*trade doesn't’t charge a monthly fee and offers decent tools to help you choose your investments. If you want a little more guidance, you can open a discount brokerage account with Charles Schwab, who will give you personal guidance for additional fees.

Roth IRA – This type of account can be opened the same was as a Traditional IRA.

Coverdell IRA (Educational IRA) – You can open at many brokerages, including E*Trade or Schwab.com.

529 plan – Check with your state to see which plans are offered. Check out www.collegesavings.org to find more information about the plans in your state. Some of these accounts are also offered by online brokers including E*Trade and Schwab.com.

Other plans – Many other specialized, small-business or self-employed plans also exist. Such plans include SEP IRAs, Rollover IRAs, Custodial IRAs, QRP / Keogh, Simple 401k, profit-sharing, money purchase and other plans.

Start Investing.

Once your account is open and funded (follow the instructions from your broker to learn how to fund your account), it is time for you to make your first investment(s). Here are some tips:

Choose your risk level to invest in. Decide on how much risk you are willing to take, and on how much risk you are comfortable with. The longer your time horizon, the more risk you should take. The more risk you take, the higher your return should be. When you take risk, make sure you try to diversify within your risk level. For example, if you are investing in medium risk, large cap investments (like Fortune 500 companies or S&P 500 companies), either buy several stocks or buy a mutual fund that invests in a broad array of these companies.

Choose your asset class(es) to invest in. Do you want to buy money market accounts (or CDs), stocks, bonds or real estate. If you have a long term investment horizon (over 15 years), then there is no need to invest in bonds yet. Most investors are best suited to buying stocks. Stocks include individual companies, stock market tracking stocks (like the QQQ or SPiDERs), and of course mutual funds.

If you are starting out with only a small amount of money, don’t worry too much about diversifying your investments. Start by buying a single mutual fund investment in the risk category you are interested in. To find a suitable mutual fund, check with your brokerage to see what they offer. Most brokerages give you access to thousands of funds. (See How to Select An Investment below on how to select one.)

As your investments grow and you invest more and more money, start to diversify your investments to include investments from multiple risk categories (preservation, income, growth, aggressive growth) and asset classes (money markets/CDs, stocks, bonds).

The next Free Finance Tip is about how YOU Can Retire Early. Or you can go to Free Finance Tips.

Other Items

Other Items