Investing 101 Guide

Investing your money can help you build wealth over time. But there are many different ways you can invest, depending on your preferences, goals, timing, and risk tolerance, so it's important to understand what your options are, how to create your strategy, and how to manage your investment portfolio.

With this guide to investing, you'll learn the basics of how investing works and how to get started.

What is investing?

Investing involves buying assets with the goal of generating a return, or profit. Unlike saving money in a savings account or certificate of deposit, investing comes with the potential for greater rewards — as well as greater risk. 

There are a lot of different ways to invest. For example, you can: 

• Contribute to a 401(k) or individual retirement account (IRA) to create a nest egg for retirement

• Set up a 529 plan or custodial brokerage account for your child for educational and other purposes

• Buy an investment property or simply open an individual investing account like Acorns Invest 

5 types of investments

You can invest in a number of financial instruments, but most investors focus on the following five:

Stocks

Stocks represent a share of ownership in a company. As a company grows, shareholders can benefit from the increase of a stock's price and, in some cases, also receive dividends from the issuing corporation. But companies can lose value, too, making stock prices fluctuate.

Bonds

Bonds are basically loans to corporations, governments, or municipalities, which agree to pay investors back by a certain time, plus interest. Bonds can also be traded after they're issued, with prices fluctuating based on current market interest rates.

Mutual funds

A mutual fund is an investment vehicle that pools money from its shareholders to invest in stocks, bonds, and more. They provide an easy way for investors to diversify their portfolios without a lot of time and effort. Mutual funds are usually run by professional investment managers who buy and sell securities based on the fund's targets. Mutual funds only trade once a day at the close of the market.

Exchange-traded funds

Also called ETFs, this investment option works in a similar way as mutual funds, but instead of trading just once per day, investors can buy and sell ETFs throughout the day while the market is open.

Index funds

Index funds are a specialized type of mutual fund or ETF. They’re designed to track or match a specific market index, such as the S&P 500 or Dow Jones Industrial Average.

Other investment types

There are lots of other types of investments out there, too, including: 

• Real estate investment trusts (REITs)

• Commodities

• Cryptocurrencies

• Fiat currencies

• Futures contracts

• Money market funds

Investors can also consider trading options, which give them the right to buy or sell specific securities — typically stocks — at a set price by a certain date. But this type of active investing can be risky, and can require daily or even more frequent monitoring. 

How can investing grow my money?

A major way investing can help you build wealth is through the power of compounding. Compounding happens when you have an investment that generates a return, which you then reinvest. 

That reinvested return then generates its own earnings, essentially compounding your return on your initial investment. 

For example, let's say you invest $100. In your first year, you earn 5% interest — that’s $5. If you keep your $105 invested, and the next year you earn 5% interest again, you’ll now have a total of $110.25. Over time, these numbers can add up!

Try our compound interest calculator to see for yourself!

Investing strategies

Depending on your financial situation, your experience, and your goals, you can approach investing in a few different ways. However, here are some of the most common investment strategies that can help you figure out your process.

Active vs. passive investing

Active investing takes a hands-on approach with the goal of beating the average return for the stock market or other financial markets. Active investing involves intensive real-time analysis in an attempt to time the market and take advantage of short-term price fluctuations. 

Portfolio managers often engage in active investing, and it's possible for individual investors to do the same. Potential benefits include higher returns and flexibility to invest how you wish. However, there is a greater risk of loss if you're wrong, and an active investing strategy can also result in higher fees and a greater tax burden. 

With a passive investing strategy, you may buy shares in an index mutual fund or ETF and hold the position for the long haul. You'll typically get much lower fees and avoid higher short-term capital gains taxes, but you may miss out on bigger gains if you're focused only on a predetermined set of securities.

Growth vs. value investing

If you're planning to invest in individual stocks or funds, you may be faced with the decision to invest in growth stocks or value stocks.

Growth stocks are companies that have enjoyed above-average returns and are expected to continue to do so in the future, or they may not have a track record of above-average growth but show potential for it. 

In contrast, value stocks are companies that investors believe are undervalued based on their fundamentals. 

Fortunately, you don't have to choose one over the other. In fact, investing in a mix of growth and value stocks and mutual funds or ETFs can help diversify your portfolio.

Dollar-cost averaging

Dollar-cost averaging (DCA) is a good approach for passive investors that involves investing a set amount of money in stocks, bonds or other financial instruments in regular intervals. For example, you may decide to invest $100 in ABC Company's stock each month, regardless of how it's performing.

The goal of dollar-cost averaging isn't to time the market but to potentially reduce your average cost basis as prices fluctuate. 

For example, if you buy 10 shares of ABC Company stock at $20, your average price per share is $20. But if you buy 10 more shares a month later when the price is $18, your average cost per share is now $19. Lowering your cost basis can result in reduced losses if the stock price declines further and increased gains if the stock price increases again. 

Buy the dip

Rather than investing a set amount of money each month, investors with a strategy to buy the dip try to take advantage of price fluctuations to maximize their returns. For example, if ABC company's stock price drops from a peak of $20 to $19, you may buy up some shares with the hope that the price will increase again soon. 

You can do this to increase your existing holding of a stock and reduce your cost basis with no intention to sell immediately, or you can sell your position as soon as the price goes back up to get a quick gain. 

Buying the dip is a strategy you could take if you're an active investor and don't mind regularly checking stock quotes and trying to time the market.

3 ways to start investing

Depending on your time, desire, and expertise, there are a few different ways you can invest your money.

DIY

Whether you use a taxable brokerage account or an individual retirement account, DIY investing involves managing your money without the help of a professional investment manager or advisor. 

This approach requires more time and effort to learn and develop your investment strategy, and you'll also need to stay on top of your portfolio and make adjustments as needed. However, you'll typically save the most money this way in terms of management fees. 

You may enlist the help of an advisor to get an expert opinion, but you'll still make the decisions on your own.

Managed

This option involves outsourcing your portfolio management to an investment manager or financial advisor, who will typically charge a fee based on your assets under management. It can be more expensive, but you won't need to do the legwork on your own, and if you did your research before working with your financial professional you should have a reasonable assurance that your portfolio will be in good hands.

You'll typically consult with your advisor or investment manager to ensure that they use a strategy that matches your goals, time horizon and risk tolerance, but they'll ultimately make the investment decisions on your behalf. 

Robo-advisor

A robo-advisor is a digital investment platform that uses complex computer algorithms to build and manage your portfolio based on your goals, time horizon, and risk tolerance. 

Robo-advisors typically rely on ETFs rather than individual securities, giving you less flexibility. But as with human advisors, you don't need to worry about doing the research and making the decisions yourself. 

Because robo-advisors are largely automated, they typically charge lower fees compared to human advisors and investment managers. 

History of investing

The concept of investing has been around since ancient times, with the Code of Hammurabi, written in the 18th century BCE, detailing a framework for citizens of Mesopotamia to pledge land as collateral in exchange for investment in a project. 

However, the modern approach to investing began in 1602 when the Amsterdam Stock Exchange was established, primarily to trade the Dutch East India Company stock. In 1792, the Buttonwood Tree Agreement was created, allowing 24 of New York's most powerful merchants to trade stocks on the newly minted New York Stock Exchange.

More than 100 years later, in 1896, the first stock index, the Dow Jones Industrial Average (DJIA), was created to track the stock prices of 12 industrial corporations. Now, the DJIA includes 30 of the most prominent corporations listed on U.S. stock exchanges.

But the DJIA doesn't provide a good representation of the stock market as a whole, and so in 1957, the Standard & Poor's 500 (S&P 500) was introduced. Then, in 1971, the Nasdaq was introduced as the world's first electronic trading system. 

Throughout the history of the stock market in the U.S., the government has created regulations to protect investors, which have historically been wealthy individuals and firms. With the rise of online trading platforms in the late 1990s, however, investing has become more accessible to consumers on an individual level. 

Even then, it was expensive, with brokers charging commissions with each trade. In 2019, brokers across the industry dropped trading commissions entirely. Around the same time, fractional shares became increasingly popular, making it easier for investors at all levels of experience and wealth to get into the market.

How much do I need to start investing?

Depending on where you invest, the minimum amount required to open an account can vary. Many platforms, including Acorns Invest, don't require a minimum investment to open an account. 

However, you may need to have a minimum amount to start investing. With Acorns Invest, that minimum is $5, but some brokers may go as low as $1 with fractional shares. 

In contrast, some full-service brokers and advisors may require you to have thousands of dollars or even more to open an account.

What are the risks of investing?

Investing comes with a risk-return tradeoff, which means that investments that come with a higher potential risk can also have higher potential returns. 

Costs associated with investing

Depending on how you invest and your approach, there may be different costs of investing. Here's what to consider:

• Commissions: You typically don't have to pay a commission to trade stocks online, but some brokers may charge a fee if you request a trade over the phone or in person. Additionally, you may need to pay a commission for other types of securities, such as options, mutual funds, and more.
  
  

• Expense ratio: If you invest in mutual funds or ETFs, the expense ratio is an annual fee you'll pay to cover the cost of management, advertising, and other costs associated with running the fund.
  
  

• Management fee: If you're working with an investment advisor or a robo-advisor, you can expect to pay an annual management fee, which is typically a small percentage of your portfolio value.
  
  

• Loads: Some mutual funds may charge an upfront commission, called a front-end load, when you purchase shares. Others may choose to assess a back-end load or surrender charge when you sell. The cost of a back-end load typically decreases the longer you hold your position.
  
  

• Account fee: Some brokers may charge monthly or annual account fees to maintain your account. This fee may be a flat amount rather than a percentage of your portfolio.

Note that these are just a handful of the fees you'll come across as you invest. Take your time when evaluating an investment opportunity to ensure that you understand all of the costs involved.

Determining your return on investment (ROI)

Investors use a metric called return on investment (ROI) to help them evaluate how well a particular investment has performed. To calculate the ROI of an investment, all you need to do is divide the return you got on your investment by the original cost. 

For example, if you bought your 10 shares of Company A at $20 per share and sold them at $25 per share, you'd have a return of $50. If you divide that figure by the $200 you invested to buy the shares, you'll get an ROI of 25%. 

You can then take that ROI and compare it to the return on similar stocks over the same period to figure out how well your investment performed.

6 steps to get started investing

As you manage your personal finances, investing can feel a bit daunting. But fortunately, you don't have to have a lot of money to get started. Here are some steps you can take:

Step 1: Know your appetite for risk

Some investment options are riskier than others. Understanding how much risk you're willing to take with your money can help you determine the right mix of investments.

Step 2: Set your financial goals

Whether you're investing for retirement, your child's education, or something else, it's important to know what you plan to do with your gains and when you'll need them.

Step 3: Define your investment strategy

There's no strategy that works best for everyone, so it's important to research your options and determine the best approach for you.

Step 4: Choose your investing account

Depending on your investment goals and how you want to invest, take some time to shop around and compare multiple brokers and investment accounts to determine the best fit for your needs.

Step 5: Diversify your portfolio

One of the best ways to limit the risks of investing is to diversify your portfolio across different assets and types of securities. If you're not sure how to diversify on your own, consider investing in mutual funds and ETFs to get started.

Step 6: Stick with it

It can take time to generate a good return on your investment, and short-term fluctuations in the financial markets can cause you to wonder if you're doing the right thing. But as you consistently monitor your strategy and remain diversified over time, you may have a better chance of building wealth.

Investing with Acorns

As you research your options, consider Acorns Invest as a way to get started. In addition to your regular contributions, Acorns Rounds-Ups® invests your spare change when you link your debit or credit card by rounding up your purchases to the nearest dollar and investing the difference, building your portfolio value. You can also earn bonus investments when you shop with thousands of retailers.