The Complete Investing Beginners Guide

One of the single best ways to grow your money is from investing. When we talk about investing, we don’t just mean playing the stock market or flipping real estate. Anytime you expend money on anything whatsoever and hope to get back more than you originally spent, that’s an investment.  This article is intended to be an investing beginners guide to the basics of investments.

There are so many routes to take when investing that getting started can be overwhelming if you’ve never done it before and don’t know where to start. If you currently have a retirement account like an IRA or a 401k, you’re already investing. If you loan your friend $100 and pay you back $120, that original $100 was an investment.

Let’s be clear. We can’t sit here with one article and explain how to master the stock market. If it were that easy, then everybody would be getting rich. Also, although we describe many investment mediums, we encourage everyone to read our Investment Basics: How To Buy And Sell Stocks below, even if you don’t plan on trading stocks. A lot of the basics covered in that section translates to the other areas covered in this guide.

Our main goal with this investing beginners guide is to show you how making smart decisions, with consistent and regular contributions, over time can far outpace what you will earn with a modest income-generating career throughout your working life. And who knows, you may get lucky and end up buying stock in the next Apple or Google along the way!

What You Need To Do Before You Start Investing

The whole point of investing is to plan for the future and maybe create some additional passive income along the way. There are two things that you need to take care of before you go down this path. Otherwise, all of your efforts may be in vain. The only investment exception to the two rules below would be making contributions to your 401K or IRA.

Pay Off High-Interest Debt

I know, I know. Paying off debt isn’t nearly as exciting as finding the next big stock market win. But investing while you’ve got $5,000 of credit card debt sitting there at 19% is just bonkers.

Over the last century, the average return of the S&P 500 (the 500 largest companies traded on the stock market) is about 12%. Earning a 12% return is meaningless if you owe someone else 19% on borrowed funds.

Emergency Nest Egg/Savings

One key factor in investing is that, over time, exponential growth should take place. The longer you leave your money there, the more it will grow. This can literally mean the difference between having $100,000 at retirement and having $1,000,000.

If you’re investing and an emergency comes up that requires you to liquidate your investments, it will cost you much more in the long run than if you had already created an emergency fund. Ideally, everyone’s emergency fund should have enough for them to live off for 3-6 months should a life-changing event occur, such as a job loss.

The 2 Questions Beginning Investors Need To Answer

1. How much do you want to invest? This answer will vary from person to person, and what you say now may change 6 months into the future. Maybe you’ve finally got $1,000 set aside to play with aggressively, or maybe you want to take $10 each week and dip your feet into the stock market.

Some of the investment methods below have minimum startup amounts. Don’t let that deter you. Save up your contributions in a high-yield savings account until you meet the required minimums.

2. What kind of investor do you want to be? Are you looking into some of the safer “set it and forget it” options, or were you looking to take a lump sum and try out some aggressive options, regardless of the risk associated?

Whenever you open up an account with certain firms and brokerages, they will ask you what kind of investor you want to be. They may also ask you if your goals are more long-term or short-term.

Investing Beginners Guide Basics: How To Buy And Sell Stocks

Whenever you buy stock in a company or shares, you are literally buying a piece of that company. If you own even one share in Google, you now own part of Google. Nearly every single American on the Forbes top 500 list made their wealth by owning shares of businesses.

Think about it, if you had invested $1,000 into Apple back in 2000. Your investment today in 2020 would be worth well over $100,000. A mere $10,000 investment would have made you a millionaire by now.

Anybody can buy stock in a publicly-traded company on the stock market and own a piece of it.

There are two types of stocks: Preferred and Common. Most people are talking about Common stocks whenever they talk about owning shares in a company. Because we’re covering just the basics, we’re only going to discuss Common stocks.

How do stocks make you money?

For Common stocks, money is made whenever the value of the stock you buy goes up, and you sell it for a profit. Most of the money made from buying shares in a company is made so with regular contributions over a long period of time.

If you had $1,000 that you put into the stock market and contributed $100 more each month for the next 20 years, you would have invested a total of $25,000. If we use the same 12% average from the S&P 500 that we mentioned above, your original $25,000 would be worth $96,109.22.

Think about it; if you went 10 additional years (30 years total), it would now be worth $319,559.14! All of that from a simple contribution of 100 bucks a month.

Why do stock prices go up and down?

The stock market has its own supply and demand system in place. If there’s a huge demand for a company’s stock and everybody is buying it, the price will go up.

If Elon Musk announced that he would convert all taxi cabs in New York City into Tesla’s over the next 2 years, then everyone would want to buy stock in Tesla. This demand would cause the price of Tesla stock to shoot up.

What are stock dividends?

Oftentimes some companies send out quarterly payments to everyone who owns shares in that company. These payments are known as dividends. If a company has annual payments of $0.20 per share, you will receive $0.05 for every share you own four times a year.

This may not seem like much until you realize that over time someone’s retirement account may have 250000 shares of a stock like this which is now bringing them $50,000 per year in dividend payments. Dividend investing is a strategy, and it is a great way to balance a retirement portfolio.

How do you find stocks to invest in?

The first rule of thumb is to always invest in the company itself, not their stock symbol. If someone tells you to buy XYZ, don’t just do it because they said to do so. Look up what company XYZ is and learn about that company.

You can look back at the S&P 500 to see what some of the bigger, more popular companies on the market are and how they’re doing.

Investing in an entire market sector is an option. Maybe you want to invest in multiple companies that produce clean energy. (read below about diversification)

Another great way for new investors to find companies to invest in is by paying attention to their surroundings, both online and in the real world. What products or services are your friends and family using more of? What’s getting a lot of hype on social media? This gets you in the habit of doing your own research, also known as Due Diligence.

Because you cannot predict the future, you need to diversify the stocks you buy. Get a nice mixture of stocks from different companies across different industries. What if you had only invested in airlines and the travel industry? The Covid19 pandemic would have trashed your portfolio and likely turned you off from investing totally.

How do you buy stocks?

The most common way is with a brokerage account or even by using an investment app. Robinhood is great for beginners. Different companies have different fees and minimums. Robinhood has no fees or minimums. Fidelity, TD Ameritrade, E*Trade, and Charles Schwabb also offer fee-free trading options on their apps. The main difference between the different apps and platforms is that some have more features and resources available.

The way these apps typically work is that you link a funding source, like your bank account or debit/credit card, and deposit money into your brokerage account. Once the funds are available in your brokerage account, you can execute trades to buy shares of stock in a company.

Whenever you decide to sell a stock, the funds are put back into your brokerage account, where you can then use them to buy more stocks or move the money back into your bank account.

Using a stockbroker to buy stocks is a great idea, but you will have some pretty hefty fees and commissions. The amount of training, experience, and resources that help power a successful stockbroker makes them worth their weight in gold. These guys make money whether your portfolio is successful or terrible. However, it is in their best interest to make you as much money as possible.

The U.S. Securities and Exchange Commission, who oversees best investment practices and enforces federal investment laws, has a wonderful guide on picking a good stockbroker so you know what to look for prior to letting someone else control your money and investments.

Investing Beginners Guide Basics: What Are Bonds? How Do They Make Money?

As a consumer, whenever we need to borrow money, we shop online, call our bank, or finance the purchase with something like a car loan or by using a credit card. What happens when a large entity — a huge corporation, a major city like New York or LA, the federal government — needs to borrow money? They can do so with bonds.

There are corporate, municipal, and government bonds. The specifics behind them all vary, but their primary purpose is the same: to raise money now with the promise of paying interest over time and returning the money later.

How do bonds work?

Anytime somebody buys a bond, they are loaning money out to another entity trying to raise capital. In exchange for this loan, the entity issuing the bonds promises to pay a fixed interest rate over a set period of time and then return the original investment amount at a predetermined date.

Example: You might be able to buy a 10 year, $10,000 bond, paying 4% interest. So over the course of the 10 years, you will receive regular interest payments (usually paid every 6 months). At the end of the 10-year term, you will get back your original $10,000 investment.

How do you make money from bonds?

The first way is what we listed in the example above. You get a steady, fixed interest rate for the bond term and get your original amount back when it expires.

The second way to make money from bonds is to sell them for more than you bought them for, kind of like playing the stock market. It’s possible that using the example above, your $10,000 bond is now trading on the market for $11,500. You can sell that bond and pocket the difference.

Where do you buy bonds from?

Unlike stocks that are publicly traded, the process of buying bonds is a bit different. Corporate (large corporations) and Municipal (city-level governments) bonds utilize Over Counter trading. This means that you have to go through a broker to purchase them. As with finding a stockbroker, do your research when finding a broker to buy bonds from.

Anyone can purchase government bonds — also known as Treasury Bonds or T-Bonds –. The U.S. Treasury Department has its own write-up on how to buy treasury bonds. The write-up also includes tips and tricks for buying these bonds from a broker or your local bank.

Investing Beginners Guide Basics: Exchange Traded Funds (ETFs) 

Stocks are not the only types of assets you can trade with a brokerage account or trading app. There are other “things” that can be bought and sold, hopefully for a profit, or bought and held onto for the long haul.

Exchange-Traded Funds are a collection of different securities that can be bought and sold at will, similar to stocks. The different securities that makeup ETFs can include a mixture of stocks, bonds, and/or commodities. Aside from contributions to a retirement account, ETFs are the easiest and safest ways to take advantage of market returns.

The SPDR S&P 500 ETF is an Exchange Traded Fund that tracks the S&P 500 index traded using the ticker symbol SPY. The ETF using the ticker symbol QQQ tracks the NASDAQ top 100 indexes. In very simplified terms, this is essentially the same as investing in all top companies publicly trading on the stock market. 

Why Are Exchange Traded Funds (ETFs) A Good Investment For Beginners?

Because one single fund can be made up of hundreds or thousands of stocks, it’s a great way to diversify your portfolio without buying up tons of different stocks individually.

ETFs are also great because they help you weather the storm. The right funds have historically outpaced other investment classes and have stood the test of time. Making regular contributions to funds is one of the best strategies and habits for beginners to learn.

From 1985-2015, the $413 million Donald Trump inherited from his father grew 300% from his real estate investments and other business ventures to give him an estimated net worth of $4 billion. However, if he had put that inheritance into an index fund over the same time period, it would have been worth over $13 billion, a 1336% return on investment.

Investing Beginners Guide Basics: Cash Instruments & Cryptocurrency

It’s possible to invest money into itself or other forms of money. You don’t trade it in exchange for owning a piece of a company. In fact, you don’t really use it to buy anything except maybe a different form of money or currency.

Cash Instrument Investments

The bank uses money held at their institution to give out loans to people and businesses. They profit from these loans by charging interest on the loan payments. The bank will then give you a tiny portion of this interest as a ‘Thank You’ for keeping your money with them. What type(s) of accounts pay the best interest?

• High-Yield Savings Accounts
• Interest-Bearing Checking Accounts
• Certificates of Deposit (CDs)
• Money Market Accounts

All of these are available online or from your local bank. There is virtually no risk with these accounts, but the interest you earn will be much lower. Certificates of Deposit pay the highest rates, but you will not be able to touch the money without paying fees until the CD matures. (6 months – 5 years)

Cryptocurrency (Bitcoin, Etherium, etc..)

No matter which one you’re talking about, all cryptocurrencies are purely digital. There is no actual, physical bitcoin. We know when you have other “digital” money in your PayPal account that, even though it’s not physical, you can transfer the money to your bank account and withdraw it at the ATM. That’s because your local currency backs the digital PayPal money.

Cryptocurrencies are decentralized, unregulated digital monetary instruments. You can use them to buy goods and services or sell digital coins through a broker to turn them into your local currency.

Why does Bitcoin price fluctuate?

Bitcoin, along with many other digital currencies, has a “fixed” amount of coins. No more bitcoins will ever be created. Thus, similar to stocks, the more demand there is for Bitcoin, the higher the price will go. Some years back, when Bitcoin first came out, it was worth $0.008 each. In 2017 Bitcoin reached its peak at nearly $20,000 each.

How do I invest in cryptocurrency? Some trading apps, such as Robinhood, let you invest in cryptocurrency the same way you would with stocks. You can also purchase them from an exchange, such as Coinbase, popular amongst cryptocurrency traders.

Should I invest in cryptocurrency?

The market can be very volatile and change drastically on a whim. Because nothing is backing the cryptocurrency — stock in a company, the US dollar, a vault full of gold somewhere — many different “coins” have flown in, racked up tons of money from people investing, and then crashed into nothing.

The cryptocurrency market is wildly unpredictable, which can cause you to lose a lot of money very quickly. This unpredictable market has also turned people into millionaires. You should only invest in cryptocurrency with money you can afford and expect to lose.

Many beginner-level investors show interest in cryptocurrency. And, with this being a beginner’s guide to investing, we felt we need to connect on the subject. With that being said, go with any other option in this guide before dipping your toes into the cryptocurrency pool.

Investing Beginners Guide Basics: Compound Interest vs. Simple Interest

For those looking to fulfill their long-term goals with investing, you need to learn about the difference between Compound Interest and Simple Interest. Whenever you have an investment that earns interest and that interest is reinvested back with your original amount, that is a compound interest investment.

An easy example of compound interest would be a savings account. The bank pays you interest, and that interest gets added back into your balance. Now your old balance + the new interest deposit is earning interest.

If you had an investment that paid interest out and only re-invested the original principal you put up, that’s a simple interest investment. A good example of simple interest investments would be the three types of bonds we described a few paragraphs up.

Why is longevity important for compound interest?

The longer the money sits, the more interest it earns. Over time this can work out to be a huge increase in your favor. Using the investor.gov Compound Interest Calculator, we can work up a quick example:

At age 21, you set aside $2,000 into an IRA that will earn 10% interest over its lifetime. On the first day of every month, you put another $200 bucks into it. In ten years, your nest egg will be $43,337. In another ten years, you’re looking at $150,915. Ten years after that, by age 51, you will be sitting on close to half a million dollars. And by the time you hit 61 years old and are ready to retire, you will have amassed $1,152,740.

From just stashing away $200 bucks each month into a conservative investment, all of this compounded your interest, which caused your investment to snowball into a substantial nest egg for you. If you’re trying to realize long-term goals: retirement, newborn’s college tuition in 18 years, etc., then you need to make sure you’re taking advantage of compound interest, or you will be missing out on free money.

Investing Beginners Guide: Key Takeaways

Every person out there is unique because they have different goals with different timeframes and live in a variety of financial situations. It would be hard for us to create a beginner’s guide that would work perfectly for everything.

We hope to at least get you pointed in the right direction. You now have a starting point for many different investment paths and enough to get you started down that road.

The main thing we want you to remember is that you should always do your own research. Whether you’re researching a company whose stock you’re about to buy, researching a stockbroker you want to hire, or even doing research to see which bank offers the best interest rate on their savings accounts, research is the single most important piece of this puzzle.

Finally, we want to leave you with one last tip: Do not let your emotions get in the way when investing. Whether that emotion is fear, and you sell off all of your investments before they earn a profit or greed, and you buy up a bunch of stocks that have now lost their value all because you saw someone else get lucky and make money with it, emotions can and will ruin your portfolio.

Do your research, take advantage of compound interest, and make smart decisions with your brain, not your heart. We hope you found this investing beginner guide helpful!