So you want to learn how to start investing…

You’ve decided it is time to start investing but you don’t know where to start…that’s perfectly fine!

Investing is an amazing way to build financial security and create wealth…yet almost half of Americans are not doing it. A 2019 poll conducted by Gallup, found that only 55% of Americans are investing in the stock market. This number is staggeringly low and even lower among Millennials (anyone born from 1981 to 1996), and Gen Z (those born between 1996 and 2010).

Investing in the stock market does carry some risk so it is important to establish emergency savings beforehand, and only invest what you can afford to lose. You should be very careful about risking money that you need. For example, it is probably best that you don’t use your rent money for any risky/speculative investments.

Curious to learn what type of investor you are? Check out our FREE course Investing 101: What Type Of Investor Are You?

Why don’t people invest?

The truth is, you can start investing with $100. A lack of financial knowledge is preventing high school and college students from investing their money in stocks, bonds, and real estate. The true benefits of investing are apparent the earlier you start investing. Having a basic understanding of investing will provide you with a life skill that will allow you to make money, and provide yourself with financial security. So let’s get started!

This is probably the most common, and most misguided response I hear from other young people when it comes to investing. My question for you then is How Much Money Do You Need to Start Investing?? Would you start if you had $1,000? Or maybe $5,000?

There’s a multitude of Apps geared towards young people such as Acorns, Stash, and Robinhood, which help users get started investing at little to no cost with no minimums.

But, before we get any further, let’s discuss some terms you’ll need to know. Unless you have a 401k plan or Roth IRA, you’ll need to set up a brokerage account to start investing. A brokerage account is an investment account that you can open with a bank or brokerage firm that will allow you to buy, and sell investments. Depending on where you go, you may need to open the account with a minimum balance which can range from $1 to $10,000. The brokerage account is the middle point between you, and any investments you’re attempting to buy. At a minimum, you’ll have access to stocks, bonds, and mutual funds, but some platforms will give you the ability to purchase more complex, and riskier investments.

What Can I Invest In?

There are many investment options available for you — I’ll quickly go over some of the most popular and simple financial instruments you need to be aware of.

Stocks

A stock is an investment that represents an ownership share of a company. People buy shares of companies that they expect will experience success in the long term.

For example, take video streaming service Hulu. Chances are you know someone who uses Hulu, shoot, maybe you use Hulu! Let’s say that based on the streaming habits of you and your friends, you believe the value of Hulu as a company is going to increase. So you go to buy some of its stock.

Fun fact: Hulu is owned by Walt Disney Corporation. So, if you want to invest in Hulu, by default you’ll need to buy some Disney stock. As of today, Disney (DIS) trades at about $144 dollars a share so you’ll need that, plus trading fees (if any exist on the platform you’re using) to own one share.

You can separate stocks into several categories: income, value, growth, and blue chip to name a few. Income stocks are great for investors who have retired or for those that are looking for an additional revenue stream. For quality income stocks, you’ll want to look at stable stocks that pay dividends. What is a dividend? Great question - dividends are payments (usually cash) that are made to shareholders of a company. These payments typically occur quarterly, but some companies issue dividends monthly, annually, or semi-annually.

Not all companies pay dividends! Dividends are normally paid out by companies that have been around for some time, like Boeing and Microsoft. When you own shares of a company that pays dividends, you will receive a dividend for every share you own.

For example, Microsoft pays a dividend of $0.51 per share. This dividend is paid out quarterly, so owners of Microsoft shares will be paid four times a year. If you own 100 shares, your total payout comes to $204 before taxes every year. What is nice about dividends, is that they are in addition to any capital gains. So, not only do you make profit on dividends, but you will also make money if the stock price increases from when you initially purchased it.

Want to learn more about how to start investing? Check out our course Investing Made Simple: A Beginner’s Guide to The Stock Market.

Bonds

A bond is a fixed-income instrument issued by the government or corporate entities to the public.

Companies will issue bonds when they need to borrow large amounts of money. In other words, a bond is a type of loan. When a bond is issued, the issuer of the bond will pay you interest on that bond, until it’s maturity date. At the maturity date, you will receive back your initial investment in the bond (and hopefully a little more in an ideal scenario).

Bonds are very conservative, low risk investments that can be used to balance out your investment portfolio. Your decision to invest in bonds will depend on your risk tolerance and the types of investment returns you are seeking.

For more on bonds, check out 4 Basic Things to Know About Bonds

Mutual Funds

You can think of mutual funds like a basket of stocks. Inside them there can be hundreds, even thousands of different companies. While owning one stock allows you to invest in an individual company, a mutual fund gives you partial shares of all the companies within a mutual fund. Think of it this way, if you go and buy a bag of Doritos, you now own a bag of chips. But, if you buy a variety pack, you’ll have Lays, Cheetos, Doritos, and Fritos. Think of mutual funds like a variety pack of chips.

The biggest advantage of mutual funds is that they provide investors with instant diversification. This is particularly advantageous for young investors because since you have less cash on hand to invest, it is difficult to create a diverse portfolio of stocks. If you’re just getting started investing, mutual funds and ETF’s are two very affordable, and safe investment options for new investors.

Index Funds

Index funds allow investors to track the performance of a particular index. There are three major stock indices:

• The Dow Jones Industrial Average tracks the performance of 30 companies. The aim of this index is to capture the performance of the American Economy. Some of the companies represented in The Dow Jones are: Apple (AAPL), Coca-Cola (K), Boeing (BA), and Disney (DIS). It is important to note that this particular index only contains large-cap companies. Think of this index as one that holds companies that have been around a very long time and are extremely stable.

• The S&P 500 captures the performance of 500 large companies and is regarded as the true indicator of overall stock market performance by many experts. Currently, it only includes companies that are listed in the United States, but because many of those companies are multi-national, operating overseas, the index can be impacted by events (positive and negative) that occur in other parts of the world.

  Historically, the index returns an average of about 10% annually, but this is not always the case and global concerns can drive the market down. For instance, over the course of two days, the U.S. stock market lost $1.7 trillion dollars. $1.7 TRILLION!

  Funds that track this index: Schwab S&P 500 Index Fund (SWPPX)

ETF’s

ETF stands for Exchange Traded Fund and is a pooled investment vehicle. Unlike mutual funds, ETF’s are passively managed and as a result, offer a tax advantage to investors. Also, ETF’s are traded throughout the day, similar to a stock.

Because ETF’s are pooled investments, they offer diversification to investors at low cost. The price of an ETF will depend on the real-time price of the securities it holds. When you see the term “pooled investments” think back to our chip analogy.

Personally, I am a huge fan of ETF’s. You can find ETF’s that seek to track the returns of the major indexes, or ones that are specific to certain sectors. There are biotech ETF’s that allow investors to gain exposure to tech companies, broad-market ETF’s that seek to track the market, and leveraged ETF’s that give aggressive investors an opportunity to bet against the stock market, and/or use leverage to multiply the returns they see in the market.

Read: What Types of ETF’s Are Best for You

For instance, TQQQ is a leveraged ETF that offers 3x leverage exposure to 100 of the largest non-financial firms listed on the NASDAQ. Yeah, that sentence didn’t make sense to me the first time I read it either. Basically, TQQQ provides a return that is 3x that of QQQ, which is an ETF.

Example: If QQQ returns 3% on a given day, TQQQ will offer a return of 9%. Similarly, if QQQ is down 3%, then TQQQ will be down 9%. Because of your ability to quickly gain and lose money, leveraged ETF’s are not generally advisable investments to new, or conservative investors.

Interested in leveraged ETF’s? Check out Don’t Buy and Hold Leveraged ETF