Imagine you are 20 years in the future. By then many of your priority long term investment objectives have already been realized. You can remember back before you knew anything about investing. Maybe you know that feeling of not knowing?
It is possible that this is a first step, or you are still early in your journey. Nevertheless, over time knowledge will be accumulated, and learning will take place. This article helps start you on your journey by identifying some of the early decisions you will want to consider about your personal investing activities.
Start investing right now with RoboForex!A beginner investor should be looking for a reliable and trustworthy online broker where they can not only execute transactions in an easy and cost-effective manner but also have access to news and research related to the assets under consideration. Larger investment companies are likely to provide the most assistance and services to new investors, including safety given their size.
In the U.S., the largest investment firms by assets that offer retail brokerage services are Vanguard, Charles Schwab, Fidelity Investments, Bank of America/Merrill Lynch, J.P. Morgan, and Morgan Stanley (E*Trade). Robinhood, which many new retail investors are familiar with is number seven in terms of assets. However, when looking at the number of active accounts, Fidelity, Charles Schwab (also owns TD Ameritrade), Robinhood, Bank of America/Merrill Lynch, and Ally Invest are at the top.
It is common for the best brokerage firms for beginners to offer multiple instruments and assets for investment. Investment products may include:
Stocks
Exchange-traded funds (ETFs)
Mutual funds
Money market funds
Fixed income/bonds
Insurance
Annuities
Also, additional services offered by the larger investment firms include financial planning and retirement services.
Participation in both futures and options markets are best left to experienced investors. Risk is higher, the level of knowledge needed to get started is greater, and the instruments are a bit more complex than stocks, mutual funds, or ETFs, for example.
Stocks - Individual securities that represent a proportional ownership in a publicly traded company. May provide capital gains from price appreciation, and income through dividends.
Mutual Funds – Professionally managed investment vehicles where investment capital is combined from a variety of investors to invest in a portfolio of stocks, bonds, or money market instruments. Benefits include low initial investment and diversification. Transactions only occur once per day at the daily market closing time. According to the Investment Company Institute, there was $27.0 trillion of assets held in U.S. mutual funds at the end of 2021.
Exchange Traded Funds (ETFs) – ETFs are also professionally managed pooled investment vehicles. There are four basic classifications for ETFs: equities, bonds, commodities, and currency ETFs. Most ETFs are passively managed with the most active mimicking popular market indices like the S&P-500 index or the Nasdaq-100 index. Total assets in U.S. ETFs at end of 2021 was $7.2 trillion according to the Investment Company Institute.
There is one very important difference between mutual funds and ETFs that beginner investors should be aware of, and it is regarding risk management. Both pooled structures provide exposure to a group of individual investments, but mutual funds can only be bought or sold at the end of the day. ETF transactions, though, can occur throughout the trading day like a stock.
This way if market volatility spikes during the day investors can get out then rather than wait until the market closes.
Investment markets may be easy to access these days with advances in technology as it is, however, that does not mean that success comes easy. As with any endeavor, achievement arrives to those who work hard, prepare, plan, and execute accordingly.
Beginner investors should allocate time on a regular basis to reading, researching, and learning about investing and related topics. Traders Union can help, but also brokerages will have a wealth of online educational content and investing tools available to clients.
Investment research is prepared by an equity research analyst who primarily analyzes fundamentals of companies and investment opportunities. They do much of the work for you.
Commissions and fees. Choose an investment company that offers zero or relatively low commissions on stock transactions. These days it is not uncommon for brokers to provide buy and sell executions with no commission. Tip: If free trading is not available as a standard offering, ask for it! If there are zero commissions offered to any clients, then you have a chance to also get it and sometimes you just need to ask.
Platform and technology. Pay attention to features and tools that can help you be successful. What is the quality of the trading and analysis platform? Does it fit your needs? Will it allow you to add tools as you become more experienced?
Answers to these questions are a personal choice and will vary among investors. Pat attention to the screening tool for fundamental analysis and for technical analysis. They will help screen and sort through potential opportunities.
Individual Retirement Account (IRA). If you qualify, open an investment account as an IRA for your retirement funds. This way you can take charge of your retirement capital and access a slew of investment opportunities.
Separately Managed Account. Maybe you want to start investing but you don’t want to spend too much time on it at the start. An alternative is to open a separately managed account at an investment firm where they manage the activity in the account to optimize returns relative to risk. This can be a good alternative to pooled investments such as mutual funds. However, there is typically an annual fee of between 1.5% to 2%.
Start with Index ETFs. There are more choices to sort through and research to perform when picking individual stocks versus mutual funds or ETFs. Benefits to ETFs include the ability to trade during market hours and low expense fees. Some investors only use ETFs for their equity exposure. Here is a simple screening tool for ETFs to help sort through listings.
Yes, investment firms are reliable.
Market leading investment firms that are good for beginners have been around for some time, are large corporations with multiple product offering, are regulated entities in the financial sector, and may include insurance on customer assets. In the U.S., for example, the Securities Investor Protection Corporation (SIPC) provides up to $500,000 insurance per brokerage account which includes $250,000 coverage of cash.
How to Start Investing? A Full Beginner's GuideThere are distinct and important differences between engaging the markets as an investor versus as a trader. Both approaches are seeking to profit but investing is a slower process with a longer expected holding period, while traders are more active and look to make small profits frequently.
Which approach is right for you will depend on your individual circumstances and objectives. For beginners investing is usually going to be the better way to start as there is less risk overall, not just to your finances but also in the efficiency of how you use your time.
Traders may have the skills for investing and trading whereas investors are not as likely to have skills for trading.
| Metric | Investor | Active Trader |
|---|---|---|
Goal |
Long-term gains |
Short-term gains |
Holding Period |
Long term |
Intraday up to a few months |
Primary Analysis |
Fundamental |
Fundamental / Technical |
Time Commitment |
Less time |
More time |
Experience Level |
Less knowledgeable |
More knowledgeable |
Approach |
Hold diversified portfolio |
Take short-term profits |
Activity Level |
Less active |
More active |
Risk Tolerance |
Less tolerance |
Greater tolerance |
Risk is primarily defined as the degree of uncertainty as to whether investments will lose money or make money. There are also other risks such as time risk, performance risk, and knowledge risk, to name a few.
Time risk is related to whether you can use your time effectively or have enough time to accomplish objectives. Performance risk is the risk of portfolio underperformance when compared to the market. Investor performance is usually assessed by looking at a benchmark index, such as the S&P 500. Then there is knowledge risk as one can only learn so fast and there is a large existing knowledge base to incorporate.
Traders have a shorter expected holding period of a day to a few months, compared to investors who may hold a few months to years. Traders are looking to profit from short-term up and down swings in the price of a financial asset while investors plan to hold through short-term price swings.
Investing is a slower process than trading. There is more time to research, perform analysis and decide where and how to allocate money. This is especially important for beginners as there needs to be time available for education, not just execution of investing strategies.
Get your personal finances in order so there is money to invest. Necessities should be covered. Investing is risky and you can lose money, so you should have money that you are able to risk.
Identify why you want to invest. What do you want to do with the money you make from investing? Establish long-term investment goals. Are you saving for a child’s college education, or to buy a new car, or retire early?
Investing in your financial education. There is a lot to learn as a beginner so the sooner you start the more you will learn. You could spend a lifetime just reading the free content on the internet, so start there. Once you learn a little you can better assess the next steps in your learning process.
Choosing an investment company. Once you have some money to invest and have learned at least enough to where you feel comfortable starting, you are ready to open an account at an investing company. Decide on a provider that is large and has many services to offer.
Decide how much to invest. At a minimum identify money you have that is beyond what is needed for three months of expenses and emergencies.
Determine an allocation strategy. This answers the question of how much should go into any one investment? Let’s say you have $10,000 to invest in the stock market. All that money will not go into one stock. It should be diversified among a group of stocks. For example, if you have $10,000, you can buy 10 stocks at $1,000 each or 20 at $500 each. Only 10% or 5% of the initial portfolio amount would be in any one stock.
Start investing.
Begin by deciding how much money you have available to invest after other requirements. The pool of money should be what is remaining after reaching the following:
An emergency savings account is funded. Have at least three months of monthly expenses for emergencies.
Income more than covers expenses. There is money left over after expenses each month.
A retirement plan is established
Start as early as possible. This way you will be able to save more, and long-term investments will have more time to reach their potential. Start small. Better to make mistakes with a smaller amount of money.
This article looked at some of the early steps that can be taken by those that are new to investing. The benefits of using one of the best online brokerages for beginners were reviewed. Some ideas about how to get started in investing presented including a brief discussion on differences between stocks, mutual funds, and ETFs. Tips for beginners about commissions, IRAs, and index ETFs was discussed. What are some of the differences between trading and investing and what makes sense for most people? Then we wrapped it up with steps to take to get started for long-term investing success.
Most investment accounts can be opened with no capital but there may be a minimum to transact in the account. You can start with $100 if your broker allows you to, trade odd lots for zero commissions. Typically, stocks have been traded in lots of 100 shares and you will not be able to purchase 100 shares with only $100 in most cases. Stay away from stocks below $5.00 as they carry extra risk. Look at your early actions as a learning process rather than trying to make money.
Technical analysis is the study of price history, with charts as a tool to make investment decisions. The theory is that price movement reflects changes in supply and demand of a financial asset and that patterns that form during that process alone can be used to make investment decisions. This doesn’t mean it needs to be the only method, just that it could be.
One thing to keep in mind is that learning to invest actively is like learning a sport. You take some lessons or classes, read a book, get a little coaching, and then you practice, practice, practice. After that, again, you go back to learning from those with greater experience, and then practice some more. It takes some time to learn how to invest successfully. Keep at it and slowly you will learn.
In most cases no. If you have a strong math background or are particularly attracted to options at the beginner stage, then it may be worth looking into. But, for most investors the high leverage and complexity of options make them dangerous for beginners.
Bruce Powers is an expert trader and technical analyst with over 20 years of experience in Forex, commodities, ETFs, cryptocurrencies and other assets. He is an active trader, technical and fundamental analyst, media commentator, educator and a writer. As an author for Traders Union, he contributes his deep analytical skills, expertise and understanding of the global economy and financial markets to provide market analysis and insights. Powers is also a frequent guest on business TV news shows.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.
