Getting started investing when you’re a beginner can be plenty intimidating at first.
The learning curve combined with the fact that you are putting your own money at risk is often enough to scare many average people away from one of the safest ways to financial freedom.
However, even the most successful investors had to start somewhere, and it’s never too early to start planning for the future and learning how to invest.
In this beginner’s guide to investing, I’ll cover everything you need to know to start investing on your own and make smart investing decisions.
Step 1: Pay Off Bad Debt and Avoid Money Traps
Don’t even think about making any major investments before you have paid off unnecessary debt. I’m not talking about your home mortgage or student loans.
These things shouldn’t hold you back from starting to invest, but if you have “bad” debt from credit cards that will get you in trouble with interest payments, pay that off before you put money in the stock market.
Speaking of trouble, don’t fall into the common money traps. I see people of all ages trying to keep up with the Joneses: buying the latest phone, shiniest car, biggest house, you name it.
I call these money traps because they are things that will take all your money so you have nothing left to invest. Spending money wisely is one of the most important steps you can take to put yourself in the best possible financial situation before you begin investing.
Step 2: Create an Emergency Fund
If you have figured out how to spend your money wisely, you have probably figured out how to save it. An emergency fund is part of your savings that you set aside in case of an emergency.
It’s a good idea to put 3-6 months of your living expenses into your emergency fund (it can just be in a savings account) should something crazy happen, like I don’t know, a pandemic!
If your car breaks down, you get laid off, or you have unforeseen medical expenses, you will have the funds you need. An emergency fund will also come in handy in case of a recession.
Even if you don’t have to tap it, you will have peace of mind knowing there is a cushion available if you need it.
Step 3: Learn the Investing Basics
You wouldn’t jump in the ring without knowing the basics of boxing, so you shouldn’t jump in the stock market without knowing the basics of investing for beginners.
Before you begin building wealth, it’s important to understand the basic goal of investing as well as the basic process that you will use to reach that goal.
At the most basic level investing is all about buying $10 worth of value for $5.
When you are able to buy a company for less than its true value, the value of your investment will grow over time – this is the ultimate goal of investing.
I go more in-depth on the basic principles of investing in these posts:
- Stock Market Basics and How It Works
- 13 Investing Terms All Beginners Need to Know
- 4 Important Financial Metrics to Help Evaluate a Company
If you’re a beginner investor, these are a great place to start.
Step 4: Utilize Investing Resources for Beginners
I am a firm believer that the most important thing you can do is get an investing education. That’s the secret to successful investing for beginners.
In addition to the posts I shared above, there are plenty of resources available if you want to learn more about the stock market and how to succeed as an investor.
These resources include things such as books, blogs, podcasts, apps, investing software, and more.
In the following sections, we’ll cover some of the best investing resources available right now that you can use to grow your investing knowledge, but to jumpstart your knowelege be sure the check out my investing resources center with all of my best assets.
Best Investing Books for Beginners
There are a lot of wonderful investing books written by highly successful investors that are chock-full of helpful tips, insightful information, and inside knowledge on the world of Wall Street.
Best Investing Classes for Beginners
Enrolling in investing class is one of the best ways to learn hands-on investing instructions from experienced investors.
My Rule #1 Transformational Investing Webinar is a good place to start. Especially so if you’re getting close to retirement and you have a bunch of money tied up in a 401(k) that isn’t growing fast enough.
Best Investing for Beginners Podcast
Listening to an investing podcast is a great way to gain access to timely and relative information on investing and the current state of the market.
Start by checking out the InvestED Podcast that I host along with my daughter, Danielle, then branch out into other podcasts that catch your ear.
Best Online Investment Sites for Beginners
In addition to checking out Rule #1 Investing for new videos, blog updates, and more, there are plenty of other great investing websites that you can use to stay up to date on the market and learn more about how to invest.
Best Investment Apps for Beginners
There are a number of investing apps available with a variety of uses from apps such as Acorns that automatically rounds up your purchases and invests the leftover change to Seeking Alpha that notifies you when there is breaking news about one of the companies in your watchlist.
Some of these apps may prove quite helpful, while others may be little more than a distraction. If you find an app that works for you and helps you become a better investor, though, there’s no reason not to use it.
Step 5: Create an Investment Plan
Once you know you have a solid foundation on how investing works, you can move on to the next steps, but don’t get your wallet ready just yet.
Before you put your money in the market, you need to have a clear plan of what you want to accomplish and how you are going to do it. This is where creating an investment plan comes in.
The best investment plan is one that is customized to your lifestyle, so I’ll walk you through the steps necessary to create an individualized strategy that will set you on the path to success.
- Evaluate your current financial standing to understand how much risk you can take.
- Determine your goals and how long it will take you to realistically achieve them.
- Figure out which types of investments and strategies are the best way to get you to where you want to be.
Having a clear investment plan will give you a ton of clarity as you begin investing.
Let’s go ahead and get a jump on the third step and compare some of the different types of investments you can consider as a beginner.
Step 6: Decide What Type of Investment to Make
Next, you need to decide what type of investments will help you accomplish what you have set out to accomplish. There are several different types of investments that you should be aware of before you start investing your money.
But let’s focus on some of the most common types of investments for beginners. These investments include:
Investing in Stocks For Beginners
When you purchase an individual stock, you become a partial owner of the company whose stock you purchased. That means when the company makes money, so do you, and when the company grows in value, the value of your stocks grows as well.
Investing in stocks is by far the most rewarding investment option since it allows you to profit from owning any publicly traded company that you wish to invest in.
On average, the entire stock market grows at a rate of about 7% a year, but it is possible to achieve much higher returns by investing in hand-selected individual companies.
Investing in Bonds for Beginners
Bonds can be purchased from the US government or from individual companies. Rather than buying ownership in a company, bonds essentially allow you to “loan” money to the government or to a company in exchange for modest returns. On average, bonds offer a return of 2%-3% per year.
Those returns aren’t great, especially if you’re getting close to retirement and don’t have 40 years to grow your money.
Investing in Investment Funds for Beginners
Investment funds are a basket of stocks that are overseen by a fund manager. While these funds are built and managed by so-called “financial experts”, they typically have a hard time beating the market when you factor in the fees that fund managers charge to those who invest in their fund.
You’ll have a much easier time (and more fun!) learning how to invest your own money rather than relying on some mutual fund manager who can’t beat the market.
So, what are the best types of investments for beginners? Stock!
Don’t let financial advisors and so-called “gurus” scare you into giving them your money or talk you into over-diversifying in some fund.
With the right strategy, investing in stocks breaks down to a few simple principles that ANYONE can learn, which brings us to step #6.
Step 7: Establish Your Investing Strategy
As I’ve already mentioned, investing is more than picking a few stocks and hoping for the best. If you’re doing it right, there’s a real strategy involved. Now, you can search the web and find a lot of strategies for investing beginners out there. These investment strategies include:
- Impact Investing: Investing in companies with a measurable environmental or charitable impact
- Growth Investing: Investing in companies that exhibit signs of above-average growth
- Income Investing: Investing in securities that pay dividends
- Small-Cap Investing: Investing in small companies that are new and potentially grow faster
- Value Investing: Investing in great companies when they are on sale for prices lower than they are worth
However, there’s really only one strategy that I live and invest by. The Rule #1 investment strategy follows the principles of value investing.
When you invest in this way you can still buy growth companies, small-cap companies, and impactful companies, but you buy them when they are on sale.
This is the only kind of investing that will give you the highest rates of return with the lowest amount of risk. When you buy wonderful high-value companies for half or even a quarter of their value, you can ensure big returns.
Learn more about the different types of investing strategies and their pros and cons by watching this video:
Step 8: Determine Where To Invest
Once you decide that you are ready to start buying and selling stocks, you need to choose what platform or service you will use to make your investments.
For most investors, an online broker will be the best option because online brokers allow you to place trades for a relatively small fee while still offering all of the resources and information you need to make wise investments.
Best Investment Firms for Beginners
There are a lot of online brokers available to choose from and most are fairly competitive in regards to the fees they charge and the services that they offer.
Here are just a few great online brokers for you to consider include:
While you should check out the fees each one charges and get a feel for each platform before you make your decision, you really can’t go wrong with any of the major online brokers.
Step 9: Build a Stock Watchlist
I think you’re ready for the real deal. You have educated yourself and made your investment plan, so now, it’s time to start investing. If you decided stocks are the right type of investment for you, you’re in the right place.
Here are a few steps for how to start investing in stocks.
Next, you can start picking stocks…carefully. A stock watchlist is your own personal list of companies that you have researched and found to be worthy of your investment. Once you build your watchlist, you watch and wait for the companies on it to go on sale.
So, how do you build a watchlist?
Do Your Research
The best companies to invest in for beginners are companies that have been around for at least ten years, companies that you understand, companies that exhibit past growth and the potential for future growth, companies that are run by trustworthy management, and companies that have been placed on-sale relative to their value.
You can break down these qualifications into what we call the Four Ms of Investing. It will take a bit of research to discover the Four Ms for each company, but the payoff will be worth it.
If you find a company that meets these qualifications, you will have found an ideal investment for any investor, beginners included.
If you find a company that meets all of these qualifications, you will likely have found an ideal investment opportunity.
Practice Patience and Wait
Once you have found a company that meets your qualifications, it still may not be prudent to invest in it right away. Instead, you’ll want to put the company on your watchlist and wait until the stock market places it on sale.
The good news is that the market puts wonderful companies on sale all the time. If you’re patient, the companies on your watchlist will eventually dip to a price that allows you to buy them up for a bargain rate and profit once the price of those companies goes back up to their true value.
Investing Tip: Check Your Emotions
By far, the most important investing tip for beginners to follow is this: keep your emotions in check.
If you invest in wonderful companies at a point when the market has placed them on sale relative to their value, it’s hard not to make money; that is, if you don’t let your emotions get the better of you.
Even great companies can experience dips in price over the short-term, and these dips often cause inexperienced investors to become afraid and sell off their shares.
By the same token, greed causes many investors to buy into a company at times when the company is overpriced. This leads to lower returns or even losses.
If you want to succeed as an investor, you have to avoid letting fear or greed drive your decision-making process.
Remain patient and logical as you invest and you’ll be able to avoid many of the pitfalls that beginner investors often fall prey to.
Step 10: Know When to Buy Your Stocks
Succeeding at investing in stocks is all about choosing the right companies as well as the right time to invest, but the right time won’t last forever. Once a company on your watchlist goes on sale, it’s time to buy.
At this point, all you need to do is place your money in the company and keep it there for the long-term. If you made a wise investment, your money will grow in value for many years after you invest it in the company.
Investing Tip: Practice
Paper trading is an excellent way to build up investing experience without having to put any real money at risk.
You can think of paper trading as an investment simulator in the sense that you can buy and sell stocks, track your profits and losses, and do everything else you would do with real investing all while using imaginary money.
There are a number of online platforms like Think or Swim that allow you to engage in paper trading free of charge, enabling you to practice investing in the most realistic way possible without risking any real money.
Bonus Step: Continue Learning Strategies for Beginners
Now, investing in individual companies does take a little bit of learning, but it’s like riding a bike…Once you get the hang of it, it’s with you for life…
And it makes you rich over time.
Are you unsure where you stand on your investing journey, want more clarity on a topic or two, or wondering how much money you need to retire?
Join me at my Free 1-Hour Investing Webinar where you can learn how to set yourself up for financial freedom using just a few simple investing principles.
If you’d like to see how you stack up against experienced investors, take my Investing IQ Quiz!
Editor’s Note: This post was updated for 2021 with additional investing strategies for beginners and more details on how to create an investment plan.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.