How to Start Investing: 4 Steps to Investing for Beginners
Updated on: November 2022
Written by: Kelly Koeppel
What To Invest In?
For beginner investors, the first four investment types (stocks, funds, bonds, and real estate) are easy to understand.
How Should You Invest?
Buy and hold is the most popular investment strategy is pretty simple.
How To Start Investing
Many brokerage firms and online investing platforms have made getting started very easy and safe.
Why Start Investing Now?
If you’re a pre-retiree or retiree and consider yourself a beginner to the stock market and investing as a whole, that’s okay.
Take a deep breath. Relax. You’re not the only one.
Unfortunately, the U.S. ranks pretty darn low when it comes to financial education and literacy. According to Investopedia, the U.S. ranks 14th worldwide for financial literacy, meaning most American adults would get a “C+ at best” if financial literacy were graded.
The good news is that while the markets and investing can be very complicated, they don’t have to be. Everything you need to know is already out there, and we can help guide you in the right direction.
In this post, we’ll go over investing basics, like how to open a brokerage account so you can get started with investing your hard-earned money, safely grow your nest egg, and enjoy a well-deserved retirement.
What Can You Invest In?
According to the SEC, assuming you’re not an investment professional, an accredited investor is anyone who can check off at least one of the following boxes:
- Has a net worth over $1 million, excluding their primary residence, individually or with a spouse/partner.
- Has annual income over $200,000 (individually) or over $300,000 (married) in each of the last two years and can expect to earn the same or more this year.
If you can check off either of these boxes, then you qualify as an accredited investor, which means you’re able to access several alternative investment types exclusive to accredited investors (think hedge funds, private equity in startups, commercial real estate developments, etc.).
If you don’t work as a financial professional and can’t check off either of those boxes, you don’t qualify as an accredited investor, making you a retail investor. Most Americans would fall into this category.
As a retail investor, your options are limited. But that’s not necessarily a bad thing. Having too many choices as a beginner investor can leave you feeling the fear of missing out (FOMO), which can be crippling and counterproductive to safe and sound investing.
Here’s what all retail investors have access to:
- Stocks: includes publicly traded companies in the U.S. and ETFs.
- Funds: includes mutual funds, index funds, etc.
- Bonds: includes I-bonds, other government bonds, corporate bonds, etc.
- Real estate: includes REITs, crowdfunding, and physical real estate
- Derivatives: includes options, futures, etc.
NOTE: As a beginner investor, we recommend avoiding complex derivatives like options and futures as their price action can be confusing even to investment professionals. They also carry significant margin/leverage risks that are not advisable for beginners. We do not recommend these options if you are interested only in passive, long-term investing.
For beginner investors, the first four investment types (stocks, funds, bonds, and real estate) are easy to understand and tend to be “buy and hold” investment vehicles, which are far more beginner-friendly.
Before investing in anything, however, you should do your due diligence and research the type of investment strategy you think best suits your personality, goals, risk tolerance, etc.
Read our review of the Best Online Stock Trading Platforms for 2023Read More
How Should You Invest?
While we can’t tell you how to invest your money, as that would constitute financial advice, the most popular investment strategy is pretty simple:
- Buy and hold “blue chip” companies that you use yourself and believe in.
- Buy and hold lost-cost index funds that track large portions of the stock market, such as the S&P 500, the NASDAQ for technology stocks, or real estate funds.
This simple but enduring approach to investing has some very famous fans, including Jack Bogle, the founder of Vanguard, and Warren Buffett himself. The Oracle of Omaha once famously said that his favorite holding period for a stock is “forever.”
It’s no surprise that some of the richest men in the world made their billions by buying and holding. Not only does this strategy take far less effort to execute, but over the past eight decades, the magic of compound interest has also worked greatly in Buffett’s favor.
In fact, Buffett believes so strongly in the buy-and-hold strategy for the vast majority of Americans that he made a famous bet with NYC-based Protege Partners.
Over a 10-year period from 2008 to 2018, Buffett bet the money management firm that the S&P 500 (specifically, a cheap Vanguard S&P 500 index fund) would outperform a portfolio of five hedge funds with different strategies.
After 10 years had passed, Buffett had won by a landslide. The five hedge funds delivered 36.3% returns after fees were deducted, while the S&P 500 index grew 125.8%.
How To Start Investing on Your Own : 4 Steps for Beginners
Now that you know the basics about what you can invest in and why a buy-and-hold strategy works so well, you’re probably wondering how you can start investing on your own.
Just follow this simple, 4-step process to open up a brokerage account and get started on your investing journey. NOTE: Depending on the brokerage account you choose, these steps may vary slightly.
Step 1: Determine Which Brokerage You Want To Start With
Simply put, a brokerage account is where you go to buy and sell stocks, bonds, and funds.
Back in the day, you had to go to an office and see your stockbroker about it. But these days, you can open up a brokerage account and manage your portfolio online in just a few minutes.
The hardest part is picking the brokerage you want to work with. Different brokerages have different benefits, so it makes sense to do some research and compare your options.
The easiest way to figure out which brokerage account is right for you is to look at their fees and requirements, as well as what you will be able to buy and sell in that account.
That being said, there’s also nothing stopping you from opening up multiple accounts with different brokerages, so it’s hard to go wrong.
Step 2: Fill Out the New Account Application
No matter which brokerage you choose, their new account forms all look more or less the same and can all be filled out online. The brokerage you choose will ask you for a lot of identifying information, as well as your experience with investing in various types of securities.
Here are the most common things you’ll be asked for:
- Full name & social security number
- Username & password
- Phone number
- Email address
- Physical address
- What is your risk tolerance?
- What are your goals for investing?
- What are you interested in investing in?
- Do you want a margin account or a cash account?
- How much experience do you have with stocks, bonds, options, etc.?
- How do you plan on funding your account? (We’ll cover this one in Step 3.)
Don’t worry too much about how you should answer these questions—just answer them honestly. Your answers will be used to help lower your risk and protect your money.
For example, if you’ve never used a margin account (a.k.a leverage), you’d be better served with a cash-only account. Investing and/or trading with leverage isn’t recommended for most people. It also happens to be another investing strategy Warren Buffett avoids.
And if you don’t have any experience with options trading, you won’t be approved to trade options even if you did open a margin account.
Step 3: Fund Your New Account
Near the end of your new account creation process, your brokerage will ask you how you’d like to fund your new account and how much cash you’d like to deposit to get started.
Many brokerages used to have a minimum deposit requirement in the thousands. But with the rise of free, user-friendly brokerages like Robinhood, most U.S. brokerages no longer have upfront deposit requirements or trading fees.
The only thing you really have to decide is where the money you invest in your brokerage account will come from.
The easiest way to fund any brokerage account is by connecting to an online bank account. The connection process is usually very quick and straightforward. The brokerage will ask you for your bank account’s login credentials, and the magic of the internet will connect your two accounts behind the scenes.
Most brokerages will also instantly credit you with the amount you want to transfer from your bank. For example, if you decide you want to deposit $1,000 upfront and invest it immediately, a $1,000 credit will show up in your brokerage account before the money leaves your bank.
Step 4: Start Investing Today
Congratulations! If you’ve made it this far, you already know everything you need to start investing on your own.
If you’d like to learn more about investing and the types of investments you can access, please consult our Personal Finance educational resources.
Content on this site is for reference and information purposes only. Do not rely solely on this content, as it is not a substitute for advice from a financial advisor or accounting professional. Aging.com assumes no liability for inaccuracies.