To start investing, you need to make a few practical decisions — what type of account to open and how to invest your money — while considering more theoretical questions about why you’re investing in the first place. After all, you can’t work your entire life, and investing can offer higher returns than many other ways of saving.
If you’re just getting started with investing, read on; our step-by-step guide will help you on your way.
1. Understand your financial goals
Why do you want to start investing? The answer to this simple question will help guide how much money you invest and how you invest it. Experts generally recommend investing for longer-term goals, at least five years out. A shorter time frame exposes you to a higher risk of not making any money when you sell your investment. Knowing why you’re investing can also help you answer other questions — such as how much risk you’re comfortable with and what assets to include in your portfolio to achieve your goals.
2. Determine how much money to invest
You can start with only a few dollars in many accounts. Starting small will give you some experience and protect you from significant losses if you make a mistake. You can increase your investments over time. One easy way to get started is to carve out part of your paycheck and put it into an employer-sponsored retirement account such as a 401(k). Most employer-sponsored programs offer several mutual funds for you to choose from. You can research the company’s offerings on a financial information site before choosing.
3. Research your investment options
Research is an essential part of the investment process. You should make every effort to understand your investments before you put your money to work. For instance, if you plan to invest in mutual funds, take the time to understand how these funds work, learn what assets are in any funds you invest in, and be sure you know how to track the funds’ performance. Other common securities you can consider include stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
4. Open an investment account
There are three main types of retirement investment accounts, and their appeal will likely depend on your situation. These accounts are:
401(k): Best for workplace retirement contributions
A 401(k) plan is an employer-sponsored plan in which you can set aside a certain percentage of your paycheck toward retirement. After signing up and agreeing to the contribution — or specifying your contribution level — that amount is automatically deducted from your paycheck each pay period. Contributions can be made before taxes, in the case of a traditional 401(k), or with after-tax dollars, in the case of a Roth 401(k). Your employer may kick in some additional contributions — typically a dollar-for-dollar match or a 50% match up to a certain percentage of your pay — as part of your benefits package.
You’ll be offered several types of investments to choose from, and the specific funds will vary depending on the financial services company that oversees your company’s 401(k) program. An for both employers and employees is set by the IRS each year and is currently $23,000 for 2024.
IRA: Best for saving for retirement on your own
An IRA, or individual retirement account, can help you save more than 401(k) contribution limits and offer you a chance to save pre-tax dollars if your employer doesn’t offer a retirement savings program. There are two types of IRAs — traditional and Roth — and the difference boils down to when you’re taxed (more on that below). You could face a tax penalty with either type of account if you withdraw before the age of 59½, though there may be some exceptions. Here’s how the two types of accounts compare:
Roth IRA vs. traditional IRA
A Roth IRA allows you to contribute money you’ve already paid taxes on, and any investment gains in your account are tax-free. With a traditional IRA, your contributions are made before you pay taxes on them and investment gains are not taxed until you make withdrawals.
Taxable brokerage account: Best for investing on your own
Taxable brokerage accounts use after-tax dollars that you put aside to invest. They offer you full autonomy to decide what kind of assets to buy, when to buy them, and when to sell. You’ll pay taxes on any investment gains you make. The amount of tax you owe will depend on factors such as your income, filing status, and how long you’ve owned the securities before selling.
5. Decide on long- or short-term investment strategies
Your investing strategy may be influenced by your time horizon (how long until you need the money) and your risk tolerance. If you want to reach a financial goal in five years, you may want to put your money in a low-risk account where you can earn a decent return — like a or a .
For goals between five and 20 years, you may want to add in some low-risk securities, such as index funds that track a group of stocks. If you’re saving for retirement or another goal that’s at least 20 years away, you may want to add more risk to your investment strategy by mixing asset types between low- and high-risk investments.
6. Choose from different types of investments
To choose an investment strategy, you may want to decide between the following types of investments, which offer different risk profiles, customization options and initial investment amounts.
A stock represents a part or fractional ownership of the company issuing the share. Investing in stocks can come with high risks and potentially high returns. Experts generally recommend owning a minimum of 25 to 30 individual stocks to be diversified. The idea is to spread your risk and smooth out the ups and downs in your portfolio.
Bonds are issued by governments, agencies, and corporations to raise money. You, the investor, are purchasing a type of debt security that pays interest. Bonds aren’t publicly traded like stocks. You can purchase them through a brokerage or directly from the government, in the case of Treasury or savings bonds. U.S. government bonds, in particular, are considered among the safest investments. Minimum investment amounts can vary widely.
A mutual fund is a pool of money gathered from multiple investors that a brokerage or other financial services company manages. They invest in money markets, stocks, bonds, or a combination of different assets. Each type of fund has its own risks and management fees. Many mutual funds require a minimum investment of at least several hundred dollars.
Exchange-traded funds (ETFs)
ETFs are similar to mutual funds. They are pools of money invested in market assets and managed by financial companies. The biggest difference between ETFs and mutual funds is that investors can buy and sell shares in ETFs during the market day as prices change, while mutual funds can only be sold or bought once a day. Minimum amounts will depend on the fund.
Commodities futures contracts
Commodities futures contracts are an agreement to purchase or sell a certain amount of a commodity at a predetermined price at a future date. Commodities you can trade include metals, grains, and currencies. These are risky investments that must be closely monitored and many investment advisers suggest novice investors steer clear of them. There is no required minimum amount to trade commodities; it depends on whether you invest in them directly or through products like mutual funds and ETFs.
There are many avenues to invest in real estate, including lending money to real estate developers, investing via crowdfunding platforms, or purchasing investment properties. The appeal of real estate is the potential for diversification and, in some cases, passive income.
7. Maintain your investment portfolio
An investment portfolio is the collection of all the securities and investment products you own. For example, your investment portfolio could have a mix of ETFs, mutual funds, individual stocks, and real estate holdings. After you start investing, you’ll need to think holistically about your portfolio and manage it over time.
Focus on diversification
Your portfolio should be diversified, which means you should not hold only one kind of stock fund, say tech stocks, or one geographical area, for instance, the U.S. It should also be allocated across different kinds of assets such as stocks, bonds, real estate, and cash.
A diversified portfolio allocated to a variety of assets helps you lower your risk. If you own only tech stocks, for example, and an event causes tech stocks to fall, your losses could be high. If, however, you have a variety of stock holdings spread around other sectors, as well as bonds and some cash, your losses would be lower.