6 Best Investments for Beginners

With the boom in the stock market and seemingly every other asset class, beginners may be eager to dip their toes into the investing waters.

But before making any investment, it is important for new investors to know their risk tolerance. Some investments carry more risk than others and you don’t want to be surprised once you invest. Think about how long you can do without the money you’re investing and whether you’re comfortable not having access to it for a few years or longer.

Here are some top investing ideas for those just starting out.

Best Investments for Beginners

1. High-Yield Savings Accounts

This may be one of the simplest ways to boost your return on your money above what you’d earn in a typical checking account. High-yield savings accounts, often opened through an online bank, pay higher interest on average than standard savings accounts, while still giving customers regular access to their money.

This can be a great place to park the money you’re saving for a purchase in the next few years or to keep it with you in case of an emergency.

2. Certificate of Deposit (CD)

CDs are another way to earn extra interest on your savings, but they’ll tie up your money longer than a high-yield savings account. You can buy a CD for different time periods such as six months, one year or five years, but you generally cannot access the money without penalty before the CD matures.

These are considered extremely safe and if you buy one through a federally insured bank, you are covered up to $250,000 per depositor per ownership category.

3. 401(k) or other workplace retirement plan

This can be one of the simplest ways to start investing and comes with some major incentives that can benefit you now and in the future. Most employers offer to match a portion of what you agree to save for retirement from your regular paycheck. If your employer offers a match and you don’t participate in the plan, you’re turning down free money.

In a traditional 401(k), contributions are made before taxes and grow tax-free until retirement age. Some employers offer Roth 401(k)s, which allow for after-tax contributions. If you choose this option, you will not pay tax on withdrawals during retirement.

These workplace retirement plans are great savings tools because they are automated once you make your initial selection and allow you to invest consistently over time. You can also choose to invest in target-date mutual funds, which manage their portfolios based on a specific retirement date. As you get closer to the target date, the fund allocation will shift away from riskier assets to account for shorter investment horizons.

4. Mutual Fund

Mutual funds give investors the opportunity to invest in a basket of stocks or bonds (or other assets) that they could not easily create on their own.

The most popular mutual funds track indexes such as the S&P 500, which includes approximately 500 of the largest companies in the U.S. Index funds usually come with very low fees for the fund’s investors, and sometimes no fees at all. These low costs help investors keep more of the fund’s returns for themselves and can be a great way to build wealth over time.

5. ETF

Exchange-traded funds, or ETFs, are similar to mutual funds in that they hold a basket of securities, but they trade throughout the day in the same way that a stock would. ETFs don’t come with the same minimum investment requirements as mutual funds, which usually come in at a few thousand dollars. ETFs can be purchased for the cost of one share plus any fees or commissions associated with the purchase, although you can start with even less if your broker allows fractional share investing.

Both ETFs and mutual funds are ideal assets to hold in tax-advantaged accounts like 401(k)s and IRAs.

6. Individual Stock

Buying stock in individual companies is the riskiest investment option discussed here, but it can also be one of the most rewarding. But before you start trading, you should consider whether buying a stock makes sense for you. Ask yourself whether you are investing for the long term, which usually means at least five years, and whether you understand the business you are investing in. Stock prices change every second of the trading day and because of this, people often gravitate towards a short-term trading mindset when they own individual stocks.

But a stock is a fractional ownership stake in an actual business and over time your fortune will grow with the underlying company you invested in. If you don’t think you have the expertise or stomach to duke it out with individual stocks, consider instead adopting the more diversified approach offered by mutual funds or ETFs.

Why should you start investing?

Investing is important if you want to maintain the purchasing power of your savings and reach long-term financial goals such as retirement or building wealth. If you let your savings sit in a traditional bank account earning little or no interest, inflation will eventually reduce the value of your hard-earned money. By investing in assets such as stocks and bonds, you can ensure that your savings keep up with or even outpace inflation.

Short-term investments like high-yield savings accounts or money market mutual funds can help you earn more on your savings while you work toward a larger purchase like a down payment on a car or home. Stocks and ETFs are considered better for long-term goals such as retirement because they carry additional risk, but are more likely to earn better returns over time.

Important considerations for new investors

  • Risk Tolerance:  Before you start investing, you would want to understand your tolerance for risk. Volatile investments like stocks can make some people very uncomfortable on a decline, causing you to sell at the worst possible time. Knowing your risk appetite will help you choose which investments are best suited for you.
  • Financial Goals:  Set both short and long term goals that you want to achieve through savings and investments. Understanding your goals will help you develop a solid plan.
  • Active or Passive:  You also need to decide whether you want to be a passive investor or an active one. A passive investor typically owns assets such as diversified mutual funds or ETFs that charge low fees, while an active investor may choose individual investments or mutual funds that aim to outperform the market. Studies have shown that passive investing outperforms active investing over time.
  • Do It Yourself or Hire Someone:  You can choose to manage your investments on your own through an online broker, or hire a financial advisor (or robo-advisor) to assist you. It’s likely to cost you less if you do it yourself, but a consultant can be helpful for those just starting out.
  • Taxes: If you invest in an individual or joint account, you  will need to pay taxes on the interest, dividends and capital gains earned by you. You can avoid these taxes by investing in tax-advantaged retirement accounts like IRAs.

How much money is needed to start investing?

The good news is that you don’t need a lot of money to start investing. Most online brokers have no account minimums to get started and some offer fractional stock investments for those starting with small dollar amounts. For just a few dollars you can buy ETFs that allow you to build a diversified portfolio of stocks. The micro-investing platform will let you complete purchases made via debit card as a way to get started with investing.

ground level

If you’re just starting out in the world of investing, be sure to consider your risk tolerance and your financial goals before committing money to invest. Some investments, such as high-yield savings accounts, allow quick access to funds when emergencies arise. In the meantime the stock should probably be part of a long term investment plan instead.

Many beginner investors turn to robo-advisors, where an algorithm automatically selects and manages a diversified portfolio of exchange-traded funds (ETFs) for you based on your individual financial needs and risk appetite.

6 Best Investments for Beginners

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