It’s no secret thatknowing how to start investing when you’re a total beginner can be intimidating at first.
The learning curve of the stock market, combined with the fact that you’re putting your own money at risk, is often enough to scare many people away from what is actually one of the safest ways to financial freedom.
That’s why investing for beginners can be overwhelming, but it’s important to remember that even the most successful investors had to start investing somewhere, and it’s never too early to start planning for the future and learning how to invest.
The fact that you’re here reading this investing guide is already a huge first step – so congratulations!
In this first chapter, I’ll cover everything you need to know to set financial goals, start investing on your own, and make sure you’re setting yourself up for success.
And here’s something I learned first when I was getting into investing that changed everything for me…
The financial industry purposely uses confusing language and terms meant to scare the average investor away. The big fund managers have been able to dominate the market for a long-time this way, so let’s remember that they are the only ones who benefit from scaring the rest of us away.
It’s time more of us learn to play in their sandbox, so let’s do this.
Step 1: Pay Off Bad Debt and Avoid Money Traps in Your 40s
Take a pause here and realize I just said “bad debt”. Bad debt means unnecessary debt – like the new car you didn’t need or the upgraded phone you couldn’t afford and put on a credit card. I’m not talking about your student loans or home mortgage.
If you have “bad debt” from credit cards, then you want to pay those off before you start investing in the stock market. There is a good reason for this.
Credit cards charge you interest. If you have an 18% interest rate on your credit card balance then you’d be losing more money than you can earn from investments, even at 15% average returns. Pay that down first so all the cash you can funnel into your investments is truly only making you money and growing your bank accounts.
It’s also worth mentioning that you should do your best to avoid common money traps people fall into. A money trap is anything you’re spending your hard-earned money on that you can’t really afford or don’t really need just to “keep up with the Joneses”.
These 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 your personal finance in the best possible situation before you start investing.
Step 2: Create an Emergency Fund
If you’ve figured out how to spend your money wisely, you’ve probably figured out how to save it. An emergency fund is… you guessed it… part of your savings that you have 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) that way you’re covered if something crazy or unexpected happens (like a pandemic)!
Emergencies might look like your car breaking down, getting unexpectedly laid off, or having an unforeseen medical expense. Or it can also come in handy in case of a recession.
Even if you don’t have to tap into your savings account, you’ll have peace of mind knowing there is a cushion available if you need it.
Step 3: Learn the Investing Basics
You wouldn’t jump into a boxing ring without knowing the basics of sparring and self-defense, so you shouldn’t jump into stock market investing without knowing the basics.
Before you begin building wealth, it’s important to understand the true goal of investing as well as the process you’ll need to use to reach that goal.
At the most basic level, investing is all about buying $10 worth of value for $5.
When you’re able to buy a company for less than its true value, your investment return 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:
If you’re brand new to all this, those are some great guides to bookmark for later.
Step 4: Utilize Investing Resources for Beginners
The most important thing you can do to become successful is to get an investing education.
This does NOT have to be a formal program. In addition to the posts I shared above, there are plenty of resources available fill with investment advice on my site and online 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.
Tip: Jumpstart your knowledge with my investing resources center. This is a great page to save in your notes for later — there are year’s worth of tips and guides that will take you through your journey.
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.
In the last chapter of this guide, we’ll go into these in more detail – but a good place to start investing is by reading Rule #1. It gives a great foundation for investing principles used by Warren Buffett and other great investors.
Best Investing Classes for Beginners
Investing courses or online trainings are some of the best ways to learn hands-on investing instructions from experienced investors.
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 with my daughter, Danielle.
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. Some sites that I follow and use regularly include Barrons, Seeking Alpha, and Wall Street Journal.
Best Investment Apps for Getting Started
There are a number of investing apps available with a variety of uses from apps such as Acorns that automatically round up your purchase totals to the nearest dollar and invest the leftover change.
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, feel free to use it.
Step 5: Create an Investment Plan
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 follow the steps below in order to set yourself up on the path to success.
Evaluate your current financial standing to understand your risk tolerance.
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 start investing.
Let’s review the third step below and compare some of the different types of investments you can consider as a beginner investor.
Step 6: Decide What Type of Investment to Make
We’ll get into more detail on investment types in the next chapter – but for now, let’s review some of the high-level information to get you started!
Investing in Stocks For Beginners
When you purchase individual stocks, you become a partial owner of the company’s 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.
Important: This is where ‘value investing’ comes into play. Since you’re investing in companies you already spend money on and believe in, it makes the process WAY more fun and interesting.
On average, the entire stock market grows at a rate of about 7% a year, but it’s 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. It’s also important to remember that the average rate of inflation each year is 3% or more so you may technically just break even.
Investing in Investment Funds for Beginners
An investment fund (like mutual funds, exchange-traded funds, or ETFs, index funds, etc) is a collection of individual 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 manage them for you.
You’ll have a much easier time (and more fun!) learning how to invest money on your own, rather than relying on some mutual fund manager who can’t beat the market.
So, what is the best type of investment for a beginner? Stocks!
Don’t let a financial advisor and so-called “gurus” scare you into giving them your money or talk you into over-diversifying in some fund that will make you the same money it costs you. Breaking even isn’t our goal.
With the right strategy, investing in stocks breaks down to a few simple principles that ANYONE can learn… so you don’t need a financial advisor. And this brings us to step #7.
Step 7: Establish Your Investment Strategy
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, and you don’t need an investment advisor to do it.
When you invest your money in this way, you can still buy growth companies, small-cap companies, and impact 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 experience big returns.
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
You can open an investment account with different online brokers you can 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. After all, they’re made for this.
Step 9: Build a Stock Watchlist
Ready to get real?
You’ve educated yourself and made your investment strategy, so now it’s time to start narrowing down your list of potential investments. If you decided stocks are the right type of investment for you, you’re in the right place.
A stock watchlist is your own personal list of companies that you’ve researched and found to be worthy of your investment. Once you build your watchlist, you watch and wait for those companies 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 are 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 then you’ve found an ideal investment for any investor, beginners included.
Practice Patience and Wait
Remember – once you have found a company that meets your qualifications, it still may not make sense to invest your money right away. Instead, you’ll want to wait until the stock price is 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.
Key Takeaway: 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 before they can make a comeback.
By the same token, greed causes many investors to buy into a company at times when the company is overpriced (usually because it’s in the news and “everyone else is doing it”). 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 in investing in individual stocks is all about choosing the right companies as well as the right time to invest in the stock market, 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 your money it in the company.
Investing Tip: Practice with Paper Trading
Paper trading is an excellent way to build up investing experience without having to put any real money up!
You can think of paper trading as an investing 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 so you can practice investing in the most realistic way possible without risking any real money.
Bonus Step: Continue Learning Strategies for Beginners
Investing is kind of like riding a bike… once you get the hang of it, it’s with you for life…
And it makes you richer over time with the right investment strategy.
I’m a full-time investor and 3x New York Times best-selling author. I want to help the little guys, people like you and me, gain financial freedom by using simple principles that Warren Buffett and Charlie Munger have been using for over 80 years.
I have a passion for investing and I can’t wait to share it with you.