How to Get Started Investing as a Beginner

An old Chinese proverb goes, ‘the best time to plant a tree was 20 years ago. The second best time is today.’ The wisdom behind the quote is that while missing out on a good idea or opportunity may fill us with regret, we don’t need to live with that regret if there’s still a chance to move forward.

Of course, you shouldn’t blindly open a brokerage account today and throw money at stocks. Without planning and risk assessment, your wealth can’t grow to its potential. Read on to learn about how to get started investing as a beginner. And if you have any other questions, contact our team today.

Account Types

You’ll need a brokerage account to begin investing, but choosing the right type for your personal goals is the first order of business. Consider why you’re investing: Speculation? Retirement saving? Maintaining purchasing power? Brokerage accounts can be divided into two categories: taxable and tax-advantaged.

A taxable account is the standard vehicle most brokerage houses will offer. Taxable accounts can either be cash accounts or margin accounts. A cash account does not allow for borrowed money, but a margin account allows investors to buy assets with money loaned to them by the broker. These accounts are funded with post-tax dollars and you’ll owe long or short-term capital gains taxes if you sell any assets for a profit.

Tax-advantaged accounts are usually retirement vehicles like individual retirement accounts (IRAs) or employer-sponsored 401(k) plans. Tax-advantaged accounts provide tax savings in certain situations. For example, IRAs and 401(k) accounts offer income tax write-offs for certain contributions. A Roth IRA provides tax-free investment growth after contributions have been made. Tax-advantaged retirement accounts should be the first item on your investing checklist unless you want to engage in pure speculation. Maxing out these types of accounts should take precedence over taxable accounts.

Asset Allocation

The next important factor to consider is your asset allocation. Asset allocation refers to the composition of your holdings, which should be developed based on your time horizon and personal risk tolerance.

• Stocks – Equity in publicly traded companies comes in the form of shares of stock. A share provides a small sliver of ownership in a company and entitles the holder to a piece of the company’s profits, whether through share price appreciation or distributions like dividends.

• Bonds – Stocks can be considered a company selling off little pieces of itself to raise money. Another method of fundraising is through debt, which comes in the form of bonds. A bond is essentially a loan that an investor provides the company (or government entity) with a promise of a return on their capital. For example, 10-year US Treasuries are issued by the federal government and currently have a rate of 2.9%. Bonds pay interest in the form of a coupon during the life of the loan and the investor receives their capital back after the term ends. Bonds tend to be less risky than stocks, especially government and blue chip corporate bonds.

• Exchange-Traded Funds and Mutual Funds – ETFs and mutual funds are baskets of stocks or bonds that can be purchased as a single security. Did your mother ever tell you not to put all your eggs in one basket? That’s the idea behind these investment products – ownership of a variety of assets within a single stock. ETFs are traded on exchanges like stocks, mutual funds are traded at the end of the day. ETFs tend to be more tax efficient and are better suited for taxable accounts than mutual funds. ETFs and mutual funds can contain specific types of stocks or bonds or can be a combination of the two (ie. Target-Date Funds).

• Derivatives – A derivative is security priced based on another underlying security’s performance. Examples of derivatives are stock options, futures contracts, and currency pairs. For example, a stock option will rise and fall based on the performance of its underlying stock. Derivatives are complex investment tools and shouldn’t be used by beginners.

• Alternative Assets – Not all assets fit neatly into your brokerage account. These assets are known as alternative assets and consist of things like art, wine, gold coins, cryptocurrencies, baseball cards, or stamps. Alternative assets are often illiquid and carry risks far different than typical stocks and bonds.

Careful Considerations

• Stock investing includes risks, like fluctuating prices and loss of principal.
• Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
• ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.
• Investing in mutual funds involves risks, including possible loss of principal. Fund value will fluctuate with market conditions and it may not achieve its investment objective.
• Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Putting It All Together

Starting your investment career can be intimidating, but as long as you understand your goals and preferences, you can begin with minimal capital. Some investment securities are better suited for tax-deferred retirement accounts while others (like municipal bonds) are more efficient in a taxable account. If you’re unsure how to allocate your capital into investments properly, consider your goals and time horizon and consult with an advisor on the best way to get started.

The opinions voiced are for general information only and are not intended to provide specific tax advice or recommendations for any individual.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to 59 ½ or prior to the account being open for five years—whichever is later—may result in a 10% IRS penalty tax. Limitations and restrictions may apply.