Investing basics: The complete guide for beginners

Are you reluctant to put your money into investment assets? You may think you don't have enough extra to invest or fear you'll lose all your money if you do. But investing doesn't have to involve a lot of cash or big risks.

What actually may be stopping you is that investing concepts and jargon can be confusing and intimidating—until you get familiar with them.

Take a few minutes to go through these investing basics so you're empowered and better equipped to make decisions about investing in a way that's right for you.

The more you know, the easier it can be to make sense of investing jargon.

Stocks, also called equities, are tradable securities that represent a share of ownership in a company and are bought and sold in the stock market. The stock market is, largely, a virtual location where publicly held companies buy, sell and issue shares of their company. Publicly traded companies use the market to raise money to grow and expand their operations by issuing stocks.

However small your slice of the pie, you technically become one of the company's owners when you purchase stock. The stock price reflects the value of the company and is determined by what investors are willing to pay to own a piece of it.

When you buy stocks, you're usually hoping for one of these outcomes:

• You receive a portion of the company's profits in the form of a dividend (though not all companies pay dividends).
• Your shares appreciate—meaning that you can sell them for a higher price than you paid for them.

However, stocks do come with risks. Even though various stock market indices—the S&P 500, Dow Jones Industrial Average and NASDAQ Composite—have historic average annualized returns between 8.7% and 13.8% over the last 10 years, prices have fallen year over year plenty of times. There are no guarantees a company will pay dividends or that shares will grow in value. Some businesses fail no matter what's happening with the greater economy if they developed a product or service that didn't catch on or invested corporate money in unprofitable markets.

With this in mind, stocks tend to be a better fit if you have a long-term investment horizon. When you're building assets for a retirement that's decades away, a temporary dip in your portfolio's value might not throw you off track. You have time for the market to pick up again and potentially regain lost ground.

Learn more about how the stock market works

Bonds, also known as fixed-income securities, are loans from an investor to a borrower—typically a company or government—to fund their growth. When you buy a bond, the borrowing entity will pay you back plus interest.

Bonds are generally considered to be conservative. The interest rate on bonds is usually relatively low but fixed, and interest payments to bondholders are usually made once or twice a year for the life of the bond, making the earnings predictable. Their default risks also tend to be low—government bonds in particular have full faith and credit backing—making them more reliable than other investments.

However, bonds aren't without risk. In rising–interest rate environments, the price of bonds tends to fall. Plus, the interest you earn might not maintain its value during times of high inflation.

A mutual fund is a combination of stocks, bonds and other assets that is managed by professional money managers. These experts research companies, know how the markets typically operate and are responsible for making well-informed decisions. You can think of a mutual fund as having a basket of investments that's taken care of by someone obligated to act in the best financial interest of all the fund's participants.

The prices of mutual funds fluctuate each day based on market conditions and demand. Most mutual funds have some investment risk and volatility. If you're willing to accept ups and downs in your mutual fund's day-to-day price, you may experience long-term gains.

Like mutual funds, ETFs allow investors to purchase an interest in a diversified portfolio of securities. These might include stocks, bonds or other assets. But unlike a mutual fund that is not exchange-traded and only trades once at the end of the day, ETFs are more like conventional stocks in which investors buy and sell shares at fluctuating market prices on exchanges throughout the trading day.

Most ETFs track the performance of a market index. For example, if you want to gain broad exposure to large-cap U.S. equities, you can buy an ETF that invests in most or all of the securities in the S&P 500 Index.

Learn more about diversifying your portfolio with ETFs

Real estate investing can mean buying and managing a rental property, flipping houses for a profit or putting money into a real estate investment trust. Real estate is a physical asset that can appreciate in value over time, providing investors with a solid return on their investment.

Real estate investing can require a lot of time and effort to find the right property and handle it effectively. Real estate investments also are subject to market fluctuations. There's always a risk that the value of your investment could go down.

Despite these risks, real estate remains one of the most popular types of investments. It can be a good option for people who are looking for a long-term investment and have the time to put into it.

An asset class is a group of investments with similar characteristics. Equities (stocks), fixed-income (bonds) and cash (or its equivalent) are three asset classes every investor should be familiar with when developing their investment strategy. Another you may hear about is alternative assets, which may be tangible assets like real estate or commodities such as gold and oil.

You may be most familiar with the cash asset class. You use it to buy goods and pay for services, and it's what you own in traditional bank and savings accounts. Cash offers a lower return on investment in exchange for its safety and guarantees.

Asset allocation is a strategy to help you minimize your overall investment risk by spreading your money across various asset classes, such as stocks, bonds or cash. By holding investments in different classes, the gains in some of your holdings might offset losses in others. As a result, you may have a less volatile investing experience overall.

Diversification is an approach that helps spread your risk even further by allocating your investments within the same asset class. The idea is that if one of your investments is doing poorly, perhaps others that you own will make up for any losses.

An example of diversification would be investing in a variety of stocks from several different small companies instead of allocating your entire stock investment to one small company.

Asset allocation and diversification are both investment strategies, but the key difference is that asset allocation is the percentage of stocks, bonds and cash you invest in while diversification is about spreading your investments among the asset classes within your investment portfolio.

While asset allocation and diversification can help reduce market risk, they do not eliminate it. Diversification does not assure a profit or protect against loss in a declining market. That's why many investors choose to work with a financial advisor they trust who can guide them to make better decisions with considerations based on their investment goals, time horizon and risk tolerance.

6 common investing mistakes & how to avoid them

Investing has become easier than ever, with many options available at the click of a button. But that doesn't mean investing effectively is a no-brainer. It's important to learn about potential investment mistakes and the tried-and-true strategies you can use instead to get ahead in your investing journey and reach your financial goals.

See our guide

Dollar-cost averaging involves investing equal amounts of money in one thing at regular intervals, whether the market is up or down. It can help you start small and build consistently over time as it's an approach that can help reduce the impact of everyday volatility on your investments.

When you put in the same amount every time, you buy more shares when prices are lower and fewer shares when prices are higher. This tends to result in a lower average cost per share. With steady commitment over the long haul, you're counting on these cost differences and earnings fluctuations ultimately averaging out and, hopefully, ending up ahead.

Dollar-cost averaging doesn't guarantee you'll make a profit, but it can remove some of the guesswork and stress of making investing decisions.

Risk tolerance measures an investor's ability to accept that investment values will fluctuate for a variety of reasons. Investors are generally aggressive, moderate or conservative. Generally, the younger you are, the more aggressive you can be with your investment decisions because your investments will have longer to recover from market fluctuations.

But that's only if you can handle the risk. And age isn't necessarily a factor in your ability to stomach market volatility. If you know you might worry during normal volatility, factor that in when choosing investments.

Since risk is part of investing, it's important to understand your tolerance for it. The good news is that investments offer a spectrum of risk levels, which allows you to make choices that best match your comfort zone.

Liquidity in the context of investing refers to how easily and quickly you can turn an investment into cash without a significant price impact. Liquidity ensures you can access your money when you need it, whether for emergencies, unexpected opportunities or simply rebalancing your portfolio. For example, high liquidity allows you to take advantage of changing market conditions by buying or selling investments more easily.

Here's how liquidity applies to different investments:

• Cash: The most liquid asset, readily convertible into goods and services.
• Stocks: Generally considered liquid, especially for common stocks traded on major exchanges. The higher the trading volume, the easier it is to buy or sell shares quickly.
• Bonds: Can be liquid but may depend on the specific bond and market conditions. Government bonds are typically more liquid than corporate bonds.
• Mutual funds and ETFs: Relatively liquid, but share prices can fluctuate, and some funds have redemption fees that can affect your return if you sell shortly after buying.
• Real estate: Not very liquid at all. Selling property takes time and involves transaction costs.

What's your investing style?

Answer a few questions to reveal how you tolerate risk. Based on your responses, we’ll provide insights about your investing style—and suggest investment ideas that may be a good match.

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It may help you feel less intimidated about investing if you know that other people have the same questions as you. Here are some of the top questions people ask when they're considering investments:

Generally, you can start investing with as little as $50 per month. Dollar-cost averaging may make it possible to invest sooner because you'll be investing with smaller amounts instead of having to save up a larger amount to invest at one time. It also can help reduce the risk that you're investing at the market's peak.

Bimonthly investing can be a smart strategy for beginners, particularly if it aligns with when you receive your paycheck. It fosters a consistent savings habit, makes budgeting easier and allows you to benefit from dollar-cost averaging.

Some investors want to spend hours poring over data in search of hidden treasures. Others climb aboard the bandwagon of the latest investment fad. Those investors pay fees, and so will you.

Simply put, investing costs money. There are fees tied to transactions you make, advice you might pay for, and the products you buy. For example:

• Fund companies charge an expense ratio to shareholders every year to cover administrative and operating expenses on their mutual funds.
• Cost basis, which is the original value or purchase price of an investment, is something you need to think about if you're selling your investment because you may be taxed on any gains.

Generally, the longer you hold your investments, the more time they have the potential to grow, which can help offset the fees you will pay. Your financial advisor can help you understand the fees associated with investing and develop strategies to reduce them when possible.

Investing your money is not a set-it-and-forget-it strategy. There are risks, the markets do fluctuate, and your goals may change. For these reasons and more, it's wise to review your investments at least once a year to understand how they're performing. When needed, your financial advisor can help you with rebalancing your portfolio, which is one way to take the emotions out of investing decisions and restore the mix of investments to your original target allocations.

Successful investing takes time. You begin, track your results and gradually increase your commitment as you learn more. It's important to get started and be consistent while realizing there will be ups and downs in the market along the way.

For example, if you want guarantees, you may sacrifice potential earnings. You could choose to defer taxes, or you might be focused on beating inflation. No matter which investments you pick, there will be tradeoffs.

When it comes to investing, you don't want to be emotional. If you get anxious or unsure when looking at your returns during market fluctuations, you might panic and sell off investments just before they start to bounce back.

That's why it's important to think about time in the market, not timing the market. If your investment strategy is based on long-term goals, you will be less tempted to react to short-term fluctuations. Markets may dip, but they historically tend to rebound.

Here's a breakdown of potential account types for beginner investors:

• 401(k), 403(b) or 457(b)(. If offered by your employer, these retirement accounts are excellent options. Contributions often are deducted before taxes, lowering your taxable income. Many employers offer matching contributions, essentially free money to boost your savings. However, these accounts have contribution limits and restrictions on when you can access the funds.

• Traditional IRA or Roth IRA. IRAs allow you to contribute your own money (up to IRS limits) and potentially enjoy tax benefits on your earnings. Traditional IRAs offer tax-deferred growth, meaning you don't pay taxes on contributions or earnings until withdrawal in retirement. Roth IRAs offer tax-free growth and withdrawals in retirement if you follow contribution rules.
  

• Brokerage accounts. These accounts allow you to invest in a wide range of assets like stocks, bonds, mutual funds and ETFs. You have more control over your investment choices than with retirement accounts, but contributions are typically made with after-tax dollars, so there are no tax advantages on earnings.

• High-yield savings accounts. These offer a slightly higher interest rate than traditional savings accounts but are not suitable for long-term investing due to lower returns than stocks and bonds. They can be a good fit for emergency funds or short-term savings goals.

• Certificates of deposit (CDs). With these, you can lock in your money for a fixed term in exchange for being paid a guaranteed interest rate. They offer more stability than a savings account but limit your access to the funds during the CD term.

Remember, the best account type depends on your investment goals, time horizon, and risk tolerance. Consider consulting with a financial advisor for personalized guidance.

The reasonable amount for beginners to invest depends on several factors, but here are some general guidelines:

• Start small. It's wise to prioritize building a consistent savings habit over a large initial investment. This allows you to get comfortable with the process and learn about investing before committing bigger sums.

• Consider your budget. Ideally, your investment contributions shouldn't disrupt your financial stability. Factor in your essential expenses, debt obligations and emergency fund before allocating funds for investing.

• Bimonthly contributions. A common strategy is to invest a set amount bi-weekly or monthly, aligning with your paychecks. This automates the process and can make it easier to stick to a budget.

Here are some potential starting points based on your income:

• Low income. If you have limited disposable income, even biweekly contributions of $25-$50 can be a great start. Many investment platforms now offer fractional shares, allowing you to invest smaller amounts in various stocks and funds.

• Mid-range income. With a more comfortable income level, consider investing 5%-10% of your paycheck. This is a good balance between contributing consistently and ensuring you meet your other financial needs.

• High income. If you have a higher income, you might allocate a larger portion (up to 15% or more) toward investing but prioritize building a solid emergency fund and managing any high-interest debt first.

These are just starting points. The most important thing is to develop a sustainable investment strategy that fits your particular financial situation and long-term goals.

As a new investor, navigating the world of stocks, bonds and mutual funds can feel overwhelming. Before diving in, take a step back to define your goals. Having a thought-out roadmap will guide your investment choices and can keep you motivated over the long term.

Here's are three key areas to consider for your investment goals:

Before you start investing, consider how and when you intend to use the money. Let's say you're saving and investing for your child's college education. How you invest your money can depend on whether your child is a toddler or a teen. Your plans for the money should determine how you invest it. This will help you narrow down investment choices.

Setting a goal can give shape to your plans and make it easier to hold yourself accountable.

Time horizon refers to the amount of time you have before you need your invested money. This directly impacts the level of risk you can take. The longer your time horizon, the more time your investments have to potentially grow and recover from market downturns.

Younger investors often have a longer runway for their money to grow. They may be able to invest in riskier assets that offer potentially higher returns, knowing that if it doesn't work out, they still have time to recover. But if, for example, you're investing for your retirement, your time horizon is continuously getting shorter. As you age, and your time horizon shrinks, you may need to shift your focus toward more stable investments that preserve your capital as you move from long-term investing to short-term investing.

Some investors prioritize stability and are comfortable with lower returns while others don't mind some volatility (ups and downs in investment values) in exchange for the chance of higher growth.

Be honest in assessing your risk tolerance. If you lose sleep over daily market fluctuations, a conservative approach might be best. However, if you have a long-time horizon and can stomach some short-term dips, you might consider incorporating riskier assets for potentially greater returns.

Your risk tolerance likely won't stay the same during your lifetime. As your financial situation evolves, schedule time regularly with your financial advisor to revisit your goals and adjust your investment strategy as needed.