Investing for Beginners: A Complete Guide

Do you want to build wealth? It’s simpler than you may think if you invest your money. And the earlier you start investing, the easier it is. 

Consider this example: Let’s say an investor started investing when they were 22 and contributed $100 per month in an investment account. Assuming a 10% average annual return, they’d have over $1 million by the time they turned 67. Even better, they would contribute just $54,000 — the other $950,000 is entirely from the power of compounding at a 10% annual return.

Saving that much money may sound impossible. But there is a way to help ensure you can retire comfortably: Investing your money. Investing can be key to giving your money a chance to grow over time to help you achieve your goals. 

If you aren’t sure where to start, this guide to investing for beginners will teach you the essentials.

Why is investing important? 

When it comes to planning for your retirement or another major financial goal, many experts will tell you that investing is critical. Why is it so important? There are two reasons: 

1. Compounding: Investing makes your money work harder for you, thanks to the power of compounding. An asset’s earnings, such as gains or interest, are reinvested, which can generate additional earnings too. 

2. Market growth: Over time, the price of your investments can increase. If a stock’s price is higher than when you bought it, you can sell and receive a profit. Over the long term, your returns can be significant. 

Consider these examples. 

Mike has $10,000. He wants to play it safe, so he deposits the money into a savings account that earns the national annual percentage yield (APY) of just 0.33%. After 20 years, his account grew to $10,682; he only earned $682 in interest.

Jeff went about things differently. He also had $10,000, but he invested it in the stock market. Although the market fluctuated, over 20 years, the average annual return was 10% — in line with the historical average. 

As a result, his $10,000 investment grew significantly. After 20 years, his account was worth $73,280. Thanks to compounding and market growth, Jeff’s account grew far beyond Mike’s. Although they started with the same amount of money, Jeff had seven times as much as Mike after 20 years because he invested it rather than stash it in a savings account. 

To see how investing can affect your money, use Acorns’ compound interest calculator.

Risk tolerance explained 

Before you can open an investment account or choose investments, spend some time thinking about how much risk you’re willing to take with your money. Any investment has some risk associated with it, and your goals and time horizon will affect your choices. 

Generally, you can take on more risk for long-term goals, such as retirement. When you’re decades away from your goal, you can often afford to invest your money aggressively since you have time to recover from market declines. 

If your timeline is shorter, such as within the next two to five years, you may want to choose short-term investment options that are more conservative to protect your money from market fluctuations. 

Setting investment goals 

When investing for beginners, your goals may vary. Depending on your investment goal, you may benefit from using one of the following investment accounts: 

If you’re saving for college education: A 529 Education Savings Plan

A 529 education savings plan is a tax-advantaged investment account. The money you contribute grows tax-deferred, and you can withdraw money tax-free to pay for qualifying education expenses. 

If you’re saving for a child’s future: A UGMA/UTMA Account

Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts you can open on behalf of a child. While these accounts don’t have tax benefits, there is no penalty if the child uses the money for non-education expenses. 

If you’re saving for retirement: A 401(k) or 403(b)

Retirement planning is a common investing goal. 401(k) and 403(b) accounts are employer-sponsored retirement plans; 401(k) plans are offered by for-profit corporations, while 403(b) plans are typically offered by non-profit organizations. You can make contributions to your retirement plan with pre-tax dollars, and the account can grow tax-deferred. 

If you’re saving for retirement and don’t have access to an employer-sponsored plan or want to save more cash: An IRA

An individual retirement account (IRA) is a useful tool in the following scenarios: 

• Your employer doesn’t offer a 401(k).

• You reached the maximum contribution limit for a 401(k).

• You want another retirement account with more investment options.

• You want to open a Roth IRA so you can make post-tax contributions now and enjoy tax-free withdrawals in retirement. 

Depending on the type of IRA and whether you have access to an employer-sponsored retirement plan, your contributions may be tax-deductible, and your money can grow tax-deferred. 

If you’re saving for other goals: Taxable brokerage account

Taxable brokerage accounts allow you to invest your money without picking a specific investment goal. These accounts don’t have the tax benefits of 529 plans or 401(k)s, but they typically allow you to withdraw money at any time — and for any purpose — without penalty. 

5 investment options to consider 

Now that you know about the different investment accounts that are available for various goals, you can decide how to invest your money. The most common investment types when investing for beginners include the following: 

Stocks

When you invest in stocks, you buy an interest in the company and become a shareholder. Individual stocks tend to be a relatively risky investment choice, as they are not diversified on their own. 

Bonds

Bonds act like IOUs; you loan a company or government agency money for their projects. In exchange, they pay you interest on top of the bond principal. Generally, bonds are less risky than stocks. 

Exchange-traded funds (ETFs)

ETFs are collections of stocks, bonds and other assets. By investing in an ETF, you can invest in hundreds — even thousands — of companies simultaneously. 

Mutual funds

Mutual funds are similar to ETFs in that they allow you to buy baskets of stocks and bonds at one time and diversify your portfolio. But they usually have higher investment minimums, and mutual funds are only traded once per day after the trading day ends, so you have less control over the trading price. 

Index funds

Index funds are a type of mutual fund. Rather than being managed by a professional manager, their goal is to replicate the performance of a leading stock market index, such as the S&P 500 or the Nasdaq Composite. 

How to start investing

To start investing, follow these steps: 

1. Open an account

Before you can begin investing, you must open an account so you can buy, sell and trade stocks and other securities. For example, you can open an investment advisory account through Acorns and begin investing your money to save for your retirement or a child’s education.

2. Decide how much to invest

How much you can invest is dependent on your income, expenses and financial goals. Because investing carries risk, it’s generally recommended you have an emergency fund with three to six months living expenses on hand. From there, many experts recommend the 50/30/20 rule - with 20% of your take home pay allocated towards saving and investing for financial goals. If 20% feels like a lot, do not despair. You can start small with as little as $5. Given time, the little amounts you’re able to squirrel away in an investment account can have the opportunity to grow.

3. Pick a management type

Investment accounts can be actively or passively managed. 

Actively managed

Actively-managed accounts have a professional manager or an individual, such as you, handling them. They can be more expensive and are often focused on beating the performance of the overall market. When investing for beginners, seeking out the help of a professional is recommended. 

Passively managed

By contrast, passive accounts are cheaper. Rather than trying to beat the market, passive accounts mimic the performance of a benchmark index. For example, an account may track the performance of the S&P 500, which measures the stock performance of 500 of the biggest companies in the U.S. Historically, passively-managed funds outperform actively-managed funds. According to S&P Global, 93.40% of actively-managed funds produced lower returns than the S&P 500 index over 15 years (as of Dec 31, 2022). 

Robo-advisor

If you’re looking for some help with your investment decisions, a robo-advisor can be an excellent option to get started investing for beginners. A robo-advisor will ask you questions about your goals and finances and recommend a customized investment portfolio for you. The robo-advisor monitors the market and buys and sells securities, eliminating the need for you to do it yourself. 

4. Place an order

To invest your money, enter your brokerage account’s trading platform and enter the amount of money you want to invest. If you’re investing in individual stocks or bonds, the platform will prompt you to enter the ticker symbol for each investment. If you’re using a robo-advisor, you can simply enter the dollar amount you want to invest, and the robo-advisor will invest it accordingly. 

That’s it! You’re now an investor. 

4 helpful investing tips

After reading this guide on investing for beginners, you can start investing for your future with more confidence. To help your money grow, utilize these tips: 

Take advantage of employer perks

If your employer offers a retirement plan, find out if it will match your contributions. According to Vanguard’s 2022 How America Saves report, nearly half of the employers that operate retirement plans also provide matching contributions. It’s basically free money and part of your compensation package, and if you don’t contribute to your retirement plan, you’ll lose out on that perk. 

Diversify your portfolio 

A common theme among experts that give investment advice is how critical it is to diversify your portfolio. Instead of investing in a handful of stocks or bonds, consider investing in a wide range of funds or ETFs. A diversified portfolio typically reduces the amount of risk you take on since your money is spread across many companies. 

Invest for the long term

As an investor, focusing on long-term goals can help you make progress towards your goals. The market can fluctuate a great deal from day to day, but historically, it has delivered positive returns over time. Looking at the bigger picture will help reduce your anxiety when your portfolio’s value drops overnight. If you’re interested in investing for the short term, portfolios carrying less risk are generally recommended. 

Make regular contributions

Even if you don’t have a lot of money to invest, make investing a habit. Making small, regular contributions — even if it’s just $5 or $10 per month — can add up over time. And if you sign up for Acorns’ Round-UpsⓇ feature, you can invest your spare change and help your money grow even more.