Investing is a way to set aside money while you are busy with life and have that money work for you so that you can fully reap the rewards of your labor in the future. Legendary investor Warren Buffett defines investing as “the process of laying out money now in the expectation of receiving more money in the future.” The goal of investing is to put your money to work in one or more types of investment vehicles in the hopes of growing your money over time.
Let’s say that you have $1,000 set aside and are ready to enter the world of investing. Or maybe you only have an extra $10 a week and you’d like to get into investing. In this article, we’ll walk you through getting started as an investor and show you how to maximize your returns while minimizing your costs.
- Investing is defined as the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
- Unlike consuming, investing earmarks money for the future, hoping that it will grow over time.
- However, investing also comes with the risk of losses.
- Investing in the stock market is the most common way for beginners to gain investment experience.
Click Play to Learn How to Start Investing in Stocks
What Kind of Investor Are You?
Before you commit your money, you need to answer this question: What kind of investor am I? When opening a brokerage account, an online broker such as Charles Schwab or Fidelity will ask you about your investment goals and what level of risk you’re willing to take.
Some investors want to take an active hand in managing their money’s growth, while others prefer to “set it and forget it.” More traditional online brokers, like the two mentioned above, allow you to invest in stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds.
Brokers are either full-service or discount. Full-service brokers, as the name implies, give the full range of traditional brokerage services, including financial advice for retirement, healthcare, and everything related to money. They usually only deal with higher-net-worth clients and can charge substantial fees, including a percentage of your transactions, a percentage of your assets that they manage, and sometimes, a yearly membership fee. It’s common to see minimum account sizes of $25,000 and up at full-service brokerages. Still, traditional brokers justify their high fees by giving advice detailed to your needs.
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|Compare the Best Online Brokers|
|Company||Category||Investopedia Rating||Account Minimum||Basic Fee|
|Fidelity Investments||Best Overall and Best for Low Costs||4.8||$0||$0 for stock/ETF trades, $0 plus $0.65/contract for options trade|
|TD Ameritrade||Best for Beginners and Best Mobile App||4.5||$0||$0 for stock/ETF trades, $0 plus $0.65/contract for options trade|
|Tastyworks||Best for Options||3.8||$0||$0 stock/ETF trades, $1.00 to open options trades and $0 to close|
|Interactive Brokers||Best for Advanced Traders and Best for International Trading||4.6||$0||$0 for IBKR Lite, Maximum $0.005 per share for Pro platform or 1% of trade value|
|Charles Schwab||Best for ETFs||4.8||$0||$0 for stock/ETF trades, $0 plus $0.65/contract for options trade|
Discount brokers used to be the exception but are now the norm. Discount online brokers give you tools to select and place your own transactions, and many of them also offer a set-it-and-forget-it robo-advisory service. As the space of financial services has progressed in the 21st century, online brokers have added more features, including educational materials on their sites and mobile apps.
In addition, although there are a number of discount brokers with no (or very low) minimum deposit restrictions, you may be faced with other restrictions, and certain fees are charged to accounts that don’t have a minimum deposit. This is something that an investor should take into account if they want to invest in stocks.
After the 2008 financial crisis, a new breed of investment advisor was born: the roboadvisor. Jon Stein and Eli Broverman of Betterment are often credited as the first in the space. Their mission was to use technology to lower costs for investors and streamline investment advice.
|Compare the Best Robo Advisors|
|Company||Account Minimum||Fees||Key Features|
|Wealthfront Best Overall / Best Goal Planning||$500||0.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers. 0.42%–0.46% for 529 plans||Sophisticated financial planning. Customized portfolios. Up to $1M FDIC insurance. Mobile app on par with desktop version.|
|Betterment Best Beginners / Best Cash Management||$0||0.25% (annual) for digital plan, 0.40% (annual) for the premium plan||Customizable portfolios. Create multiple goals. Scenario test goals. Sync outside accounts.|
Best SRI / Best Portfolio Construction
|$100 to $50,000||0.08-1.5% per year, depending on advisor and portfolio chosen||50+ portfolio options. Excellent security. Intuitive screeners. Targeted portfolio screening.|
|M1 Finance Best Low Costs / Best Sophisticated Investors||$100 ($500 minimum for retirement accounts)||0%||Low-cost, customizable portfolios. 80 pre-built portfolios. Borrow and spend options.|
|Merrill Guided Investing
|$1000||0.45% annually, of assets under management, assessed monthly. With advisor - 0.85% Discounts available for Bank of America Preferred Rewards participants||Easy to navigate. Superb goal planning tools and calculators. Preferred Rewards help customers reduce fees. Financial experts create and manage portfolios. Excellent customer service.|
|$500||0.30%||Best for newer investors. No external account syncing. Socially responsible investing options.|
Best Portfolio Management
|$100,000||0.89% to 0.49%||Free net worth tracking and retirement planning. Advisory clients can access a financial advisor. Tax-minimization strategies and tax-loss harvesting. Stocks and private equity available.|
Since Betterment launched, other robo-first companies have been founded, and even established online brokers like Charles Schwab have added robo-like advisory services. According to a report by Charles Schwab, 58% of Americans say they will use some sort of robo advice by 2025. If you want an algorithm to make investment decisions for you, including tax-loss harvesting and rebalancing, then a roboadvisor may be for you. Also, as the success of index investing has shown, you might do better with a roboadvisor if your goal is long-term wealth building.
Investing Through Your Employer
If you’re on a tight budget, try to invest just 1% of your salary into the retirement plan available to you at work. The truth is you probably won’t even miss a contribution that small.
Work-based retirement plans deduct your contributions from your paycheck before taxes are calculated, which will make the contribution even less painful. When you’re comfortable with a 1% contribution, maybe you can increase it as you get annual raises. You’re unlikely to miss the additional contributions. If you have a 401(k) retirement account at work, then you may be investing in your future already with allocations to mutual funds and even your own company’s stock.
Minimums to Open an Account
Many financial institutions have minimum deposit requirements. In other words, they won’t accept your account application unless you deposit a certain amount of money. Some firms won’t even allow you to open an account with a sum as small as $1,000.
It pays to shop around some and check out our broker reviews before deciding where you want to open an account. We list minimum deposits at the top of each review. Some firms do not require minimum deposits. Others may often reduce costs, such as trading fees and account management fees if you have a balance above a certain threshold. Still others may offer a certain number of commission-free trades for opening an account.
Commissions and Fees
As economists like to say, there ain’t no such thing as a free lunch. Though many brokers have been racing recently to lower or eliminate commissions on trades, and ETFs offer index investing to everyone who can trade with a bare-bones brokerage account, all brokers have to make money from their customers one way or another.
In most cases, your broker will charge a commission every time you trade stock, either through buying or selling. Trading fees range from the low end of $2 per trade but can be as high as $10 for some discount brokers. Some brokers charge no trade commissions at all, but they make up for it in other ways. There are no charitable organizations running brokerage services.
Depending on how often you trade, these fees can add up and affect your profitability. Investing in stocks can be very costly if you hop into and out of positions frequently, especially with a small amount of money available to invest.
Remember, a trade is an order to purchase or sell shares in one company. If you want to purchase five different stocks at the same time, this is seen as five separate trades, and you will be charged for each one.
Now, imagine that you decide to buy the stocks of those five companies with your $1,000. To do this, you will incur $50 in trading costs—assuming the fee is $10—which is equivalent to 5% of your $1,000. If you were to fully invest the $1,000, your account would be reduced to $950 after trading costs. This represents a 5% loss before your investments even have a chance to earn.
Should you sell these five stocks, you would once again incur the costs of the trades, which would be another $50. To make the round trip (buying and selling) on these five stocks would cost you $100, or 10% of your initial deposit amount of $1,000. If your investments do not earn enough to cover this, you have lost money just by entering and exiting positions.
Mutual Fund Loads
Besides the trading fee to purchase a mutual fund, there are other costs associated with this type of investment. Mutual funds are professionally managed pools of investor funds that invest in a focused manner, such as large-cap U.S. stocks.
An investor will incur many fees when investing in mutual funds. One of the most important fees to consider is the management expense ratio (MER), which is charged by the management team each year based on the number of assets in the fund. The MER ranges from 0.05% to 0.7% annually and varies depending on the type of fund. But the higher the MER, the more it affects the fund’s overall returns.
You may see a number of sales charges called loads when you buy mutual funds. Some are front-end loads, but you will also see no-load and back-end load funds. Be sure that you understand whether a fund that you are considering carries a sales load prior to buying it. Check out your broker’s list of no-load funds and no-transaction-fee funds if you want to avoid these extra charges.
For the beginning investor, mutual fund fees are actually an advantage compared to commissions on stocks. This is because the fees are the same regardless of the amount that you invest. Therefore, as long as you meet the minimum requirement to open an account, you can invest as little as $50 or $100 per month in a mutual fund. The term for this is called dollar-cost averaging (DCA), and it can be a great way to start investing.
Diversify and Reduce Risks
Diversification is considered to be the only free lunch in investing. In a nutshell, by investing in a range of assets, you reduce the risk of one investment’s performance severely hurting the return of your overall investment. You could think of it as financial jargon for “Don’t put all of your eggs in one basket.”
In terms of diversification, the greatest difficulty in doing this will come from investments in stocks. As mentioned earlier, the costs of investing in a large number of stocks could be detrimental to the portfolio. With a $1,000 deposit, it is nearly impossible to have a well-diversified portfolio, so be aware that you may need to invest in one or two companies (at the most) in the first place. This will increase your risk.
This is where the major benefit of mutual funds or ETFs comes into focus. Both types of securities tend to have a large number of stocks and other investments within their funds, which makes them more diversified than a single stock.
Stock Market Simulators
People new to investing who wish to gain experience trading without risking their money in the process may find that a stock market simulator is a valuable tool. There are a wide variety of trading simulators available, including those with and without fees. Investopedia's simulator is entirely free to use.
Stock market simulators offer users imaginary, virtual money to "invest" in a portfolio of stocks, options, ETFs, or other securities. These simulators typically track price movements of investments and, depending on the simulator, other notable considerations such as trading fees or dividend payouts. Investors make virtual "trades" as if they were investing real money. Through this process, simulator users have the opportunity to learn about the ins and outs of investing—and to experience the consequences of their virtual investment decisions—without running the risk of putting their own money on the line. Some simulators even allow users to compete against other participants, providing an additional incentive to invest thoughtfully.
What is the Difference Between a Full-Service and a Discount Broker?
Full-service brokers provide a broad array of financial services, including offering financial advice for retirement, healthcare, and a host of investment products. They have traditionally catered to high-net-worth individuals and often require significant investments. Discount brokers have much lower thresholds for access, but also tend to offer a more streamlined set of services. Discount brokers allow users to place individual trades and also increasingly offer educational tools and other resources.
What Are the Risks of Investing?
Investing is a commitment of resources now toward a future financial goal. There are many levels of risk, with certain asset classes and investment products inherently much riskier than others. However, essentially all investing comes with at least some degree of risk: it is always possible that the value of your investment will not increase over time. For this reason, a key consideration for investors is how to manage their risk in order to achieve their financial goals, whether they are short- or long-term.
How Do Commissions and Fees Work?
Most brokers charge customers a commission for every trade. These tend to range anywhere up to about $10 per trade. Because of the cost of commissions, investors generally find it prudent to limit the total number of trades that they make to avoid spending extra money on fees. Certain other types of investments, such as exchange-traded funds, carry fees in order to cover the costs of fund management.
The Bottom Line
It is possible to invest if you are just starting out with a small amount of money. It’s more complicated than just selecting the right investment (a feat that is difficult enough in itself), and you have to be aware of the restrictions that you face as a new investor.
You’ll have to do your homework to find the minimum deposit requirements and then compare the commissions to those of other brokers. Chances are that you won’t be able to cost-effectively buy individual stocks and still diversify with a small amount of money. You will also need to choose the broker with which you would like to open an account.
Fortune. “Warren Buffett: Why Stocks Beat Gold and Bonds.”
The Wall Street Journal. “$10 Billion Roboadviser Betterment Flourishes as Chief Learns to Let Go.”
Betterment. "The History of Betterment: Changing an Industry."
Charles Schwab. “The Rise of Robo: Americans’ Perspectives and Predictions on the Use of Digital Advice,” Page 3.
Investing for Beginners: A Guide to Assets
Stock Market | Investopedia
A Look at Primary and Secondary Markets
How to Buy and Sell Stocks for Your Account
Trading Hours of the World’s Major Stock Exchanges
Getting to Know the Stock Exchanges
A Beginner’s Guide to Stock Investing
What Owning a Stock Actually Means
Do You Know the Right Way to Buy Stock? Market vs. Limit Orders
Optimal Position Size Reduces Risk
How Do I Place an Order to Buy or Sell Shares?
When to Sell a Stock
Income, Value, and Growth Stocks
How Do I Keep Commissions and Fees From Eating Trading Profits?
Best Investment Apps
What Type of Brokerage Account Is Right for You?
Best Online Brokers
Best Trading Platforms for Beginners
Best Online Brokers for Low Costs
Investing vs. Trading: What's the Difference?
Stock vs. ETF: Which Should You Buy?
Why Would Someone Choose a Mutual Fund Over a Stock?
What Is the Difference Between an ETF and a Mutual Fund?
Bond Yield Formula and Calculation
4 Basic Things to Know About Bonds
What Is the Quickest, Easiest, and Cheapest Way to Buy a Bond?
How to Invest in Corporate Bonds
Introduction to Treasury Securities
The Basics of Municipal Bonds
What Are the Risks of Investing in a Bond?
Options vs. Futures: What’s the Difference?
Options Trading Strategies: 4 Strategies for Beginners
The Importance Of Diversification
How to Calculate Your Portfolio's Investment Returns
Understanding Corporate Actions
Why Dividends Matter to Investors
What Are Stock Fundamentals?
5 Essentials You Need to Know About Every Stock You Buy
Sector Breakdown Definition and Stock Market Use
How to Analyze a Company's Financial Position
What Is Technical Analysis?