You’ve probably heard about investing, though you may think it’s something reserved for those with lots of extra money. But we’re here to let you know that’s a myth! You can start investing with just a few dollars.
Sound interesting? If you want to grow your wealth, investing can be a smart way to do it.
Example: Let’s say you have $100 to put in, and the investment you choose grows an average of 6% per year. At the end of the first year, you will have $106 in your investment account. But if you invest it even longer, at the end of 20 years, that $100 investment will triple and be worth $318. And if you added $100 to your investment each year for 20 years? Your investment will grow to $2,318.
Of course, investments aren’t guaranteed to grow in value – sometimes, they do the opposite. But the goal is to prioritize diversification (think Roth IRAs, brokerage accounts, mutual funds, and more) and pick investments that will average solid growth over the years, even if there are little bumps along the way.
This beginner’s guide for new investors will explain how to start investing and why the decision to do so could be a worthwhile money move.
A step-by-step strategy to starting investing
The idea of investing can be a lot to take in at one time. Luckily, this step-by-step guide will break down each area to focus on so you can go at your own pace and start making progress.
Define your investment objectives
Contrary to popular belief, the first step to start investing is not to run out and open a brokerage account. First, determine your goals through your investments, such as a long-term savings plan, capital growth, or generating income. Think about why you want to invest and what your financial goals are.
You may even want to talk to a financial advisor to get personalized direction based on your situation. Once you have a clear objective, you can start sorting out which strategies will suit you, depending on your investing goals.
Choose the investment tools
Once you know your objectives, it’s time to explore your investment options and the type of account you want to open. Each investment vehicle has its own purpose and risk. Not all of the different investment types will fit into your overall approach.
For instance, stocks offer a higher interest rate return but are also high-risk investments. Conversely, bonds are investment products that are less risky but tend to offer lower returns. Retirement accounts like a 401(k) offer tax-free benefits and tax advantages since you contribute with pre-tax dollars.
Depending on the type of investment, you may need a brokerage account. A brokerage account is similar to a bank account but is specifically used for investing in securities like stocks, bonds, mutual funds, and ETFs. Various online brokerages offer low fees and easy access to investments.
Determine your ideal investment amount
Next, determine the amount you can comfortably invest. You should only invest the funds you can afford to lose, so don’t invest your entire savings account balance or borrow money to put it in the stock market. Consider creating a budget to identify how much money you can allot for investing each month.
If you’re investing in an individual retirement account like a traditional IRA, there’s an annual maximum contribution limit each year. You can use this limit to determine how much you want to put into the account each month. Or, if you plan to diversify with a retirement account and brokerage account investments, you can budget for a total monthly amount and divvy it up among your different investments.
Figure out your comfort with risk
Risk and reward are inseparable in investing. This doesn’t mean you should take risks you’re uncomfortable with.
If you’re a conservative investor, you might want to avoid high-risk investments that can lead to significant losses. If you’re willing to take on more risk, you may be comfortable with high-volatility investments like company stocks, which can be more unpredictable than low-risk investment options.
Consider taking a risk tolerance assessment to figure out your preferences and determine how much risk you’re willing to take. This can help you build wealth at your own comfort level and timeline.
Decide your investment approach
Do you prefer an active or passive approach? Active investing involves a more hands-on approach, where you make specific investments to outperform an investment benchmark index. This strategy requires a significant amount of time, expertise, and analysis.
On the other hand, passive investing is a strategy that aims to maximize returns by mimicking the performance of a specific index. Passive investors often invest in index funds – a diversified pooled group of underlying investments – and hold them for an extended period. While active investing can potentially lead to higher returns, it comes with higher risk and fees. Consider taking expert advice to navigate your investment strategy effectively.
Build a diversified portfolio
Constructing a diversified portfolio helps you balance your long-term investments and any risks. If one investment isn’t doing well, for example, your entire investment portfolio won’t take a sharp decline if it’s diversified. Determining the best investment for your situation may involve choosing several high-risk and low-risk options. Some of the different types of assets you can invest in include:
Stocks
When you buy a stock, you purchase a small piece of a company. If the company performs well and more people want to invest in them, your stock price increases. The opposite can also happen.
One of the main advantages of investing in stocks is the potential for compounding returns. This means that as you earn dividends on your stocks, you can reinvest them back into buying more shares, thus increasing your overall investment. Over time, this can lead to significant growth in your portfolio.
However, stocks also come with a high level of risk. The stock market can be volatile, and the value of stocks can fluctuate based on various factors such as economic conditions or company news. Carefully research and select stocks that fit your risk tolerance and investment goals.
Bonds
A bond is when an investor lends money to a business or a government. The borrower promises to pay back the loan with interest. Bonds typically offer lower returns than stocks but also have less risk. That’s because bonds have a fixed rate of return and are not as affected by market fluctuations. They can stabilize a portfolio and act as a hedge against stock market volatility.
There are different types of bonds, such as government bonds, floating rate bonds, corporate bonds, and municipal bonds. Each type has its own risk level and return potential. For example, treasury bonds issued by the U.S. government are considered among the safest investment options, while corporate bonds carry more risk but offer higher returns.
Mutual funds/ETFs
If you don’t want to invest in just one stock or bond, you can invest in a mutual fund or an exchange-traded fund (ETF). With these, you buy a basket of stocks and bonds. They are usually considered less risky than buying individual stocks – even if one stock decreases, your entire investment won’t decrease.
Mutual funds and ETFs offer diversification within a specific asset class. Specialized mutual funds and ETFs focus on specific industries or sectors, such as real estate. This allows investors to gain exposure to different types of assets and further diversify their portfolios.
Continue to oversee and adjust your portfolio
Regularly monitor and adjust your portfolio to align with your investment objectives and risk tolerance. Follow updates on the stock market, review your investments regularly, and make adjustments as necessary. Rebalancing your portfolio periodically can help ensure your investments remain diversified.
A financial planner can help with portfolio management and rebalancing your portfolio during your desired investment time horizon. If you use a robo-advisor, it may automatically monitor and rebalance your investment portfolio for you.
We surveyed 1,000 members of Gen Z to find out how Gen Z builds wealth.
Pros and cons of investing small amounts
Starting with small investments and working your way up to larger ones is a solid strategy. But, like anything, this approach has pros and cons.
The pros of investing small amounts of money
- It’s an easy introduction to investing.
- Seeing your money grow can encourage you to invest consistently each month.
The cons of investing small amounts of money
- It may be tough to meet any minimum investment requirements.
- It won’t be enough for retirement.
Ideal investments for beginners
Here are three places where first-time investors can start without being a whiz at picking stocks and bonds.
1. 401(k), IRA, or other retirement accounts
If your employer offers a retirement plan like a 401(k), this is a great place to start investing. Many employers will offer a company match, meaning they’ll partially or fully match your contribution up to a certain amount. (Yep, they’ll give you money just to invest in your retirement!)
Another great benefit of investing in an employer-sponsored retirement account is that your contributions are automatically deducted from your paycheck. You don’t have to think about it; money will go straight to your retirement account.
If you don’t have an employer retirement plan, you can still put money away into your own retirement account, called an Individual Retirement Account (IRA). Though there’s no employer contribution, these accounts give you some tax breaks for putting money away for the long term. With a traditional IRA, you contribute pre-taxed dollars and pay taxes when you withdraw the funds during retirement. A Roth IRA does not allow the opportunity to deduct contributions from your income since you contributed after-tax dollars and get tax-free withdrawals during retirement.
Retirement accounts also make it easy to pick your investments with a target-date mutual fund. With this type of investment, you simply enter the date you want to retire. These funds then pick a mix of stocks and bonds to put your money into based on your goal.
2. Robo-advisor
Robo-advisors are another relatively simple way to get into investing in the stock market. Rather than having a human manage the money that you invest, which can be expensive and require you to invest a large amount of money, a computer does the work for a fraction of the price. As a result, the amount of money you need to start with is lower.
Robo-advisors will give you a simple questionnaire when you sign up to understand your goals to help the computer decide where and how to invest your money. This approach is meant to be hands-off but still check in on your investments. If there’s something you don’t understand, reach out to the robo-advisor for details.
3. Investing apps
Investment apps make it easy to get started regardless of your personal finance situation. You can start with a small amount of money and invest in stocks, bonds, and ETFs.
How to start investing with $100
Think you need thousands of dollars to start investing? Think again. We have three solid options to get you started.
- Robo-advisor: Sign up with a robo-advisor with low or no minimum requirements.
- Open an IRA: You can either open with a brokerage company or with the help of a robo-advisor.
- Investing apps: Retirement accounts are the best place to start investing, but if you’re not ready for that, you can use $100 to get started investing with an app like Acorns or Robinhood.
With investing, you can be in the driver's seat
Plenty of options are available for beginning investors, and starting small helps build up your confidence over the long run. Knowing which steps to take, from determining your risk level and type of investments to opening an account, can also help you feel more in control of your path.
Investing isn’t a short-term get-rich-quick strategy but can be a smart way to combat inflation. When you jump in, make sure you do so for the long haul. Your future self will thank you!