Choosing stocks, mutual funds and other types of investments can be intimidating for first-time investors. Relying on the advice of friends and family isn't the best way to get started investing in stocks or other investments because everyone's financial situation and investing risk tolerance are different. Relying on investing experts and expert resources, however, can give you some peace of mind when you're making informed investing decisions that can potentially grow your money.
This guide on investing for beginners can help you get started. You're already on the first step: understanding why investing is important. Strategic investments can grow your money over the long term, and the sooner you start, the more time you have to ride out the ebbs and flows of the stock market as well as capitalize on the power of compound interest.
How To: Invest 500 Dollars or Less
Investing 101: How to Start Investing Money in the Stock Market
Deciding how to invest your money will involve making several choices. You'll want to assess your short- and long-term financial goals, determine how much you can afford to invest, take a risk-tolerance quiz, and decide whether you want to consult a human investment advisor or use a robo-advisor. Use this overview of some of the key components to investing to get a handle on the basics.
Set Goals to Achieve Your Long-Term Plans
You know investing is an important part of a long-term financial plan, but the first step in investing for beginners is to establish why investing is important to you. List your long-term goals so you can start figuring out how much they'll cost and how you can use investing as a means of achieving those goals.
Examples of life goals for which people need long-term financial plans include:
Retiring
Paying for a child's college education
Buying a house or other real estate
Building a business
Once you know what you want, you can start to plan. You'll need to find answers to the following questions, among others, to create a road map that will help you reach your ultimate goals:
What is the total amount of money your goal will cost? For example, how much money will you need to last you through 20 to 30 years of retirement? Or, how much do you anticipate needing to pay for your child's education?
How much money can you afford to invest now to get started?
How much money can you add to your investments over time and how often can you contribute to your investments? For example, start thinking about how you might increase the percentage of your income that you contribute to an individual retirement account each year.
You can turn to financial advisors and use online calculators to help you break down your goals. If you need more capital to invest in order to increase your potential annual earnings, set shorter-term savings goals, such as saving a certain amount of money to open a high-yield certificate of deposit or money market account. Your plan will likely involve using several financial tools and account types in order to achieve your ultimate goal.
Review Your Budget
Prioritization is a critical part of any financial plan. You might consider investing a priority now, but if you don't have your financial ducks in a row first, you might be setting yourself up for failure when you start investing in stocks and other investments.
"You cannot invest without getting your finances in order," said Ryder Taff, a chartered financial analyst and portfolio manager at New Perspectives, a fee-only investment advisory firm in Ridgeland, Miss. "Make sure that you have money to invest, and part of your budget can go to saving and investing each month. While retirement savings through an employer account is a high priority, and investing for other goals is very important, you must have your other finances in order before investing."
Weigh the consequences of your financial decisions carefully before you lock money into an investment. If you need liquid assets to pay for your kid's college tuition, you'll need to plan ahead to make sure those funds are available in time. If you are already 50 and don't have any retirement savings, however, you won't want as much money going into your child's college fund as a retirement account.
Here's a look at the average and median retirement account balances from among Vanguard retirement fund participants. Use it to help you gauge whether you should be prioritizing retirement savings over a college fund or other investments.
Average and Median Retirement Account Balances by Age Group, 2015
Age
Average
Median
<25
$4,048
$1,385
25 -- 34
$22,187
$8,363
35 -- 44
$60,528
$23,944
45 -- 54
$116,192
$46,200
55 -- 64
$177,805
$71,579
>65
$200,358
$68,558
Data from Vanguard, 2016.
Learn the Basics of Investing for Beginners and Investing Terms
Whether you plan to one day manage your investments on your own or want to seek out help from an advisor, stock market news can come with a dizzying amount of terms. If you're working with a financial advisor, don't be afraid to ask questions about how the financial markets and your portfolio are working. If you're reading up on stock market news, look up terms you come across, especially those that come up most often.
Related: 12 Investing Hacks for Beginners
Determine Your Level of Risk Tolerance
Beginner investors often struggle with understanding concepts about risk, according to Amy Podzius, director of a field consulting group at national financial services organization TIAA-CREF. The level of risk appropriate for your portfolio generally depends on your preferences and the time frame in which you need to access your funds, she said.
"To get started investing on the right foot, beginner investors should do their research into various investment risk and portfolio diversification strategies to ensure that their actions are aligned with their long-term goals," said Podzius.
Podzius said that 71 percent of American investors believe they can eliminate investment risk by having a diversified portfolio, according to TIAA-CREF's November 2015 study. "In reality, there is no way to eliminate investment risk altogether; diversifying your portfolio is simply a way to manage risk."
One of the best investment tips for beginners you should follow is to take a risk-tolerance quiz. A risk-tolerance quiz can help you determine how much risk you can reasonably take on when you invest. It will ask you questions regarding how you spend and save money, and what you would do with windfall.
If you find that you are highly averse to risk, you might want to take on more conservative investments, such as bonds. If you're open to tackling more risk, you'll want to have more volatile stocks in your portfolio, allowing you to grow your savings faster but at the risk of losing more money.
Don't Get Emotional
For both experienced investors and for beginners, investing in stocks can be thrilling. When the market experiences highs and lows, it's typical for investors to get excited. However, your emotions can have detrimental effects on your long-term savings goals.
The stock market rises and falls every day. And on especially bad days, like Black Monday, the stock market can fall a lot. But selling stocks when your portfolio is at a low -- and when you're scared -- is a bad idea. Even if you're worried you'll lose all of your money, it's typically better to ride out the storm. Oftentimes, your investments will bounce back.
Ways to Invest: How to Get Started
Investing in the stock market is an exciting venture. When you're ready to buy in, you'll first want to decide whether you'll be managing investments with an advisor, a robo-advisor, or if you'll be flying solo.
Choose a Platform
Another decision involved with investing for beginners is deciding what platform to use. Whether you're investing in mutual funds, stocks, bonds or something else, here are the platforms you can choose from.
Traditional Advisors
A financial planner can take the reins when you're investing money. Having someone knowledgeable overseeing your investments can help you keep your sights set on long-term goals. If you plan to hire a financial advisor, make sure he is fee-only. A fee-only advisor doesn't earn commissions based on product sales, meaning he comes with fewer conflicts of interest and can provide more comprehensive advice.
Robo-Advisors
A robo-advisor is an online wealth management service that offers investment advice based on algorithms. A robo-advisor takes human financial planners out of the equation. Although you're liable to spend less on fees with a robo-advisor, don't expect to receive advice on personal wealth management, such as dealing with your taxes.
Managing Stocks on Your Own
You can also elect to manage investments on your own. With the wealth of information online, you have many resources that can help you navigate the intricacies of investing. However, without professional help, you're more liable to make costly mistakes and you'll need to put in dedicated hours into managing your portfolio as you figure out how to start investing.
Choose Investment Account Types
"In the quest for greater or more assured returns, investors look to different ideas and the newest strategies of the moment," said Liz Miller, CFA, certified public accountant and president of Summit Place Financial Advisors, a financial advisory firm in Summit, N.J. "I have always found the best consideration of these strategies is to follow the adage, 'If you can't explain it to your mother, don't buy it.'"
Miller's advice is as relevant for investing in stocks as it is for using different investment vehicles. Here's a look at common financial products and how they work to grow your money.
Annuities
Annuities are offered by insurance companies. With an annuity, you invest a large sum of money or make a series of payments to the company. Afterward, you start receiving back periodic payments, either immediately or at a future date. The money you earn back comes with interest.
Certificates of Deposit
Certificates of deposit, or CDs, allow you to grow your money risk free. With a CD, you deposit your money for a predetermined amount of time. During that time, your money will grow at rates typically higher than most savings accounts. The longer you lock in your money, the higher the rate your money will grow at.
Money Market Accounts
Money market accounts function similar to savings accounts, but might come with limited check-writing ability and a higher minimum balance requirement. These types of accounts are FDIC-insured, allowing you to grow your money with no risk.
401k
A 401k allows you to make contributions from your paycheck before or after taxes. Your contributions are put into investments you choose under the plan. Many employers that offer 401k plans will match your contributions, up to a limit. If your employer offers a match, be sure to contribute enough to your 401k to get the full match.
Traditional IRA
Contributions you make to a Traditional IRA are tax-deductible and only subject to taxes when you make withdrawals. A Traditional IRA is best used by investors who won't need their savings before age 59½.
Roth IRA
A Roth IRA is an individual savings account that is not tax-deductible. Your savings will grow tax free, and you can make qualified withdrawals tax free. Because a Roth IRA is not tax-deductible, you won't need to pay taxes on your earnings when you make a withdrawal.
Choose Investments
When you open an investment account, you have the option to put your money into any number of investment vehicles: investing in mutual funds, ETFs and bonds are all options. A typical investment portfolio includes a mix of volatile and more predictable investment options. This allows your portfolio to weather the lows of the market while capitalizing on its highs.
Bonds
A bond is a type of loan you make to an organization. Over time, you receive interest payments. At the end of your bond's term, you will receive back the money you originally invested. Because bonds are safe investment vehicles, the returns you earn are typically small compared to more volatile investment options, like stocks.
Stocks
When you invest in stocks, you come to own a small portion of a company. The value of your stock rises and falls as the company succeeds or fails. You can also make and lose money based on market trends, among other factors.
Mutual Funds
Mutual funds are comprised of stocks, bonds and other investment vehicles. Mutual funds allow you and other investors to buy into a collection of securities that you might otherwise be unable to obtain. For small investors, mutual funds are an easy way to diversify investments. The typical mutual fund has over 100 securities, according to Fidelity.
Exchanged-Traded Funds
Like a mutual fund, an exchange-traded fund, or ETF, pools money from numerous investors. However, ETF shares can be traded on the stock exchange or sold.
Investing Strategies
How aggressively or conservatively you invest your money is based on your risk tolerance. However, there are some investing basics and key rules to follow when it comes to investing -- for beginners and the more experienced alike:
Talk to Experts
The best first step for any beginner investor is to speak to someone who has spent years studying the market. The right expert is key because you'll be entrusting this person with your hard-earned money as you learn how to start investing. Even if the fees are higher for a more experienced financial advisor, the cost will be well worth it if that advisor has the knowledge to sell before a fund crashes, buy when a stock is on the verge of breaking through or help you build a diversified portfolio.
If you do choose to hire a professional, make sure you fully understand the fee structure associated with the advice and any transactions conducted. You also want to consult someone who can help you clearly understand what is happening with your investments and why. The more you learn about investing, the more you'll be able to refine your personal investment strategy.
DIY Investing
Management fees from financial advisors can eat into your earnings. With online investment tools and resources online, many individual investors choose to manage their own portfolios. If you choose this route, you'll want to research brokerages and their trading and maintenance fees to find one that suits your needs.
As you begin investing, keep your long-term goals in mind. Short-term successes and failures are typical, though you'll want to evaluate your overall portfolio health from time to time. You'll also want to establish a backup plan, in case you're unable to continue managing your portfolio, or if the market takes a turn for the worse.
Finally, surrounding yourself with other individual investors can be a powerful tool. Sometimes you'll want advice from others, whether you're buying into a new stock or looking to sell.
Diversification
One of the most dangerous things an investor can do is put all of his money into one investment, especially if there is considerable risk involved. Sinking every dollar into your favorite tech company, for example, is risky even if you're sure that stock will continue to dominate for many years. Part of mastering Investing 101 is understanding that unexpected occurrences can wipe out years of earnings in a matter of days.
Diversification, when done right, can reduce risk as well as improve gains. Many successful stockholders have made their money with a combination of funds.
"Diversification is important in two ways -- between and within asset classes," said Taff. Asset classes are defined groups of securities and investments that are expected to behave similarly, according to Taff. Examples of asset classes include large U.S. stocks, small U.S. stocks, foreign stocks, corporate bonds and cash.
Taff recommended having different asset classes in your portfolio, adding that your precise mix will depend on your unique situation and goals. "It is the role of an advisor to help optimize that mix for you," he said.
"Within asset classes, you can diversify by investing through funds," said Taff. "Funds hold a lot of different securities or investments in them so that you don't have to pick out individual ones. Index funds are everywhere and are cheap to buy and hold."
Dollar-Cost Averaging
Experts have noted that in a thriving market, investors tend to boldly choose high-risk stocks, whereas, in struggling markets, they flock to low-risk investments. By resisting this urge, investors can actually benefit by buying stocks when prices are low and waiting it out as they rise.
This task isn't always easy, especially because the market can be unpredictable. Even the best experts sometimes get it wrong. There's no way to know for sure when a stock is at its lowest or when it will increase in value.
"When you are just starting out, how much you are regularly investing is often more important than the rate of return you receive," said John Cavanaugh, certified financial planner and chartered retirement planning counselor at Cavanaugh Financial Group, a financial services firm in Plymouth, Minn. "Additionally, if you are a young adult just starting to invest, a market decline can actually be a good thing. If you are investing regularly, your new money will be purchasing more shares," he said.
Making ongoing contributions, no matter how small, is called dollar-cost averaging, said financial advisor Laurie Itkin. You can apply it to individual retirement accounts or brokerage accounts outside of an employer's plan. "This method allows you to buy securities at different price points; you will buy fewer shares when the market is high and more shares when the market is low," she said.
Read: Warren Buffett Reveals His No. 1 Investment Strategy That Anyone Can Follow
Leveraged Investing
Leveraging allows you to use borrowed money from banks and brokerage firms to invest in stocks. The amount you borrow must be paid back with interest. Although leveraging allows you to buy shares that you otherwise might be unable to, if the shares you buy drop in value, you'll be out a whole lot of money. In general, avoid leveraging as it increases your investment risk.
If a new investor puts time and attention into learning how to start investing, he can learn enough about the market to be successful. Choosing the best technology, expert advice and strategy for your financial situation and personal preferences can help you make smart investing decisions.
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Stephanie Barbaran and Ruth Sarreal contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: Investing for Beginners: What First-Time Investors Need to Know