The oldest rule for thinking about how to start investing money is also the simplest: “Buy low, sell high.” While it seems blindingly obvious and begs the question of why anyone would want to do anything else when investing, you might be surprised how hard it is to put into practice.
Investing is a discipline which plays not only on astute analysis and remarkable luck but also on people’s behavioral responses. Holding onto your stocks during periods of intense market volatility takes a lot of courage and isn’t what the human brain is wired to withstand.
But how do you approach investing if you don’t have a background in it? Without much prior experience, it’s tough to say. There’s an ocean of information out there and sorting through it requires deliberate, thoughtful reflection when piecing together what you’ve read.
When it comes to growing your wealth and working toward financial independence, investing is an important tool. Through investing, you can buy assets which, hopefully, grow in value, whether it is a home, a tax-advantaged investment (e.g., retirement account, health savings account), stocks, bonds or alternative investments.
All of these, when balanced appropriately and included in an investment portfolio, represent the best investments for young adults.
Let’s walk through some simple steps on how to begin investing money.
First, Invest in Yourself
Recently, I attended a wedding with my wife and her family where my brother-in-law approached me with a conversation about investing.
He wanted to know how he could replicate the performance seen by the world’s greatest investors and learn how to start investing with little money. Specifically, he yearned to turn a small sum of money into an account balance with two commas in quick fashion.
Boy, if only I knew the sure-fire way to make that path my own reality, we wouldn’t have driven to the wedding in a rented subcompact.
I cautioned him that those investors are truly gifted and the exception to the norm. While it is important for him to know how to start investing young, I told him the common trait these legendary financiers share: following a systematic and disciplined approach to investing.
Further, they learned how to invest in yourself and gained a true appreciation for studying markets and the players working in them. These high income skills have yielded them significant returns over time.
I followed this with saying regardless of investing style, time frame, or philosophy, these great investors all have discipline, transact based on logical, informed thinking and do not let emotions drive their decision-making.
These are the most important elements required for investing success.
The investing styles are merely a means to an end and are developed later. Any investor starting out should focus on these core principles and learn to stick to them during times of good and bad.
How to Begin Investing Money: Develop Your Investing Approach
As I explained this to my brother-in-law, I could see his disappointment in my not knowing any shortcuts to overnight investing success. However, we launched into a discussion around how he could develop his own disciplined investing approach by first becoming a student of markets.
Knowing that this discussion could become overly cumbersome in just one conversation, I decided to share only introductory steps, which I outline below.
Investing isn’t easy but, at the same time, it shouldn’t be seen as a frightening endeavor. If done wisely and consistently, investing can separate you from retiring comfortably at a reasonable age and working into your golden years out of necessity.
We all want a comfortable retirement, so why shouldn’t we make smart decisions to get there?
With that thinking, I will do the same here. Short of a formal education in finance, my five high-level steps for gaining familiarity with investing in the market are as follows:
1. Read a Lot About the Market
Sounds logical, right? You may be surprised by how many people I’ve heard say they got into a stock simply because so-and-so recommended it.
This person winds up not doing a lick of due diligence before investing and often doesn’t what was happening in the market, nor anything about the company.
To counteract this, I suggest first beginning by reading reputable stock market investment websites that discuss markets (e.g., MarketWatch, Financial Times, Wall Street Journal, among many others).
As you read more, I really suggest approaching every article with a heavy dose of skepticism.
This will make you more likely to piece together content from multiple sources and form your own thinking about markets and the companies in them.
As an exercise, take a moment to read this 2018 U.S.-China trade war article about the earnings estimates for public companies. After you’ve read it, what were the main, salient points that stood out to you? I found the following to be most important:
- Many investors seem to think lackluster stock market movement during this quarter’s earnings announcements indicates peaking corporate profits. When companies announce record earnings and markets barely move, it must mean expectations were high and future earnings don’t look to get any better.
- Analysts, or those people who follow stocks and publish opinions on them, seem to disagree and are increasing their profit projections at the largest rate in 6 years. This is where the skepticism should come into play. This conflict means someone is wrong, but who? Perhaps both are right and yet both are wrong. The truth likely lies somewhere in between.
- A growing economy and corporate tax reform have benefited companies but trade war activity makes for an uncertain outlook. To illustrate uncertainty, reporting companies have seen the most volatile trading in two years immediately after announcing earnings results. However, it appears this trading reaction could be the result of poor understanding of the effects of the recent tax reform legislation and clouds the visibility for accurately forecasting future earnings. So the volatility merely highlights poor forecasting abilities, not necessarily anything indicative of market direction.
- A lot of positive developments exist to push markets higher but looming risks serve to temper optimism usually present with such strong earnings growth. Bottom line: there doesn’t appear to be a strong case for a plummeting market but neither for a sustained rally.
As you read more pieces like this, reflect after each one and begin to piece together content from what you’ve read. Building this understanding won’t happen overnight. Consider consulting these stock news apps to guide your thinking further.
2. Start Looking into Individual Companies
Naturally, you will come across individual companies. You should identify companies consistently performing well or making strides to improve.
I recommend starting by researching five companies you admire (preferably in different industries) and cultivating ideas about the strategies of each firm, their competitive advantages, and the core value they provide.
If you don’t believe any of these items to be durable over time, I would suggest moving on. You should recognize:
- what sets these companies apart from their peers,
- the prospects for the markets in which they operate (e.g., growing market vs. declining market), and
- how the market values them
The last item remains particularly important as the asset doesn’t so much matter but the price paid for it does. You can buy the most dogged companies for a fantastic price and earn a positive return while you can buy the most overpriced fantastic companies and lose money.
The point is you should pay considerable attention to the price companies trade for as this will be the greatest predictor of you potential returns: pay too much and risk losing money or paying too little and extracting some value the market didn’t assign the stock.
As far as the underlying businesses themselves, you should cast aside companies if you uncover something you don’t like. Don’t let sunk costs guide your thinking.
Ultimately, a stock represents a piece of a company, so sustainable profitability is an important factor.
Companies who continually produce losses, by definition, cannot survive without endless investor appetite for losses (a rare occurrence as long-term investors are in the business of buying profitable companies).
You really want to assess how profitable these companies can be, because before you decide how much to pay for a stock, you need to understand how much money that company makes.
If the company makes a lot of money consistently, you will likely have to pay more to acquire the stock.
The best stock picking services consider all of these variables when making their selections to subscribers.
3. Consider Investing in Index Funds
Investing is hard. It’s more art than exact science. By writing this investing step-by-step guide, my goal is not to simplify it. In fact, what I want to convey as clearly as possible is just how difficult it is to invest in individual stocks.
Investing is so much more than following some rules of thumb. Getting an edge is difficult so you shouldn’t develop irrational self-confidence and think you have an investing edge when you really don’t.
Usually, being humble and saying to yourself that you don’t really know can be great to steady your decision-making.
If you don’t have confidence in selecting individual companies to outperform the market, another strategy is to invest in index funds like ETFs, mutual funds or some combination of the best target date funds. My preferred investing strategy involves investing in low-cost index fund ETFs through brokerages which don’t charge trading commissions like Webull, Firstrade, or M1 Finance.
You can also choose to invest in index funds on Robinhood or many of the best Robinhood alternatives, all of which come with their strengths and weaknesses.
How to Start Investing Money
Many options exist for starting to invest money, even with small amounts, thanks to many new brokerages on the market. Several offer fractional investing opportunities, meaning instead of forking over $1,250+ for a single share of Google (GOOG), you can purchase a smaller fraction in line with the amount of money you have to invest and your desired investment.
Additionally, the best brokers and robo-advisors also avoid charging trading commissions for your investments, meaning you can contribute in increments as small as you can afford. This is of particular importance to Millennials who may not have significant sums of money to invest all at once, but rather have small amounts of cash which come available after accounting for all of the expenses in the monthly budget.
1. M1 Finance (DIY Investors)
- Available: Sign up here
- Price: Free to open account; no commissions on stock/ETF trades
For those looking to fund an investment account with on-going contributions and letting the robo-advisor handle all of the decisions, you should look at M1 Finance.
This service provides the option to invest in “pies,” or mini portfolios which have underlying stock and ETF selections.
The service allows you to create your own “pies” or rely on over 80 expertly-created portfolios to align your investment with your stated financial objectives.
Additionally, M1 Finance provides automatic rebalancing between funds to mitigate your asset allocation straying too far from the optimum selection.
The service does this as you contribute money, make withdrawals and over time if you do nothing. Thus makes M1 Finance one of the best investing apps for beginners, in my opinion.
Kids can even use this money app to start investing early with the help of their parents managing their investments through a custodial account. Index funds are the best investments for a teenager to learn how to start investing.
My wife and I use a robo-advisor to handle all of our individual retirement account (IRA) investments because it takes the guesswork out of deciding which stocks or index fund ETFs to buy.
This automated diversification and fee minimization aligns with our investing philosophy and allows us to focus on attention elsewhere while our money works for us in the background.
2. Public.com: Best Free Stock App for Theme-Based Investing
- Available via desktop, Apple iOS and Android App on Google Play
- Best For: New investors with limited capital
- Sign up here
Public.com is another commission-free investing app that targets Millennials and Gen-Zers who have attuned their senses to social media. These age groups want to align their investing with their social preferences as well as keep good company to socialize and learn from others.
The stock investing app boasts an increasingly-common feature geared toward younger investors who may not have enough money to buy some higher cost shares at one time: fractional investing.
This product feature plays on the company’s mission of making the stock market an inclusive, educational investment opportunity which can be fun. They accomplish the latter point by allowing people to invest alongside friends and other well-regarded investors.
Much like social media platforms who provide the standard blue check mark logo to verify public figures, Public.com provides visibility into trade activity and other insights these verified investors wish to provide to the Public.com community.
What Makes Public.com Different?
Public.com does not monetize its trading activity through receiving payment for order flow (PFOF) unlike other free stock trading apps found on this list.
In light of the GameStop market mania in early 2021, Public.com announced a change in its revenue model, breaking with how many free stock apps generate income.
They no longer generate revenue from PFOF and has introduced a tipping feature in the app, acting as a de facto (optional) commission.
The company believes they have a responsibility to lead the industry in a different direction and no longer receive compensation for routing orders to market makers for trade execution.
With the Robinhood blow up, we saw how this created a conflict of interest between brokerage and customer.
By doing this, Public.com will better align their financial incentives with the best interests of their customers.
For those interested in starting to trade on Public.com, the online brokerage platform offers a free $10 signup bonus if you make an initial deposit. Further, you can share your special link with others and gift them free stocks (fractional shares) as well.
If this sounds like an interesting investing app, open an account and make an initial deposit to see if the app meets your social and investing needs.
3. Acorns
- Available via Apple iOS and Google Android
- Best For: Investors in college looking for a complete personal finance solution
- Sign up here
Acorns is an investing app for minors and young adults who wish to start with a small amount of money which will grow into a large portfolio over time. Hence the name, Acorns, and the company’s goal of maturing from an acorn into a mighty oak tree.
The service doesn’t charge money to make trades on your behalf, but it does charge an account fee depending on the services you select for your account. Currently, the service has multiple offerings including Acorns Lite for $1/mo, Acorns Personal for $3/mo, and Acorns Family for $5/mo.
These subscriptions provide various products which fit well for goals of young adults and even allow the service to act as one of the best money apps for kids with its all-in-one platform (Acorns Family).
Their plans come as follows:
- Acorns Lite ($1/mo): Comes with the Acorns Invest plan, which invests spare change through the popular “Round-Ups” feature, earns bonus investments and provides access to financial literacy articles
- Acorns Personal ($3/mo): Everything on Acorns Lite (Investing), plus it also includes Acorns Later for tax-advantaged investment options like individual retirement accounts (IRAs) and Acorns Spend. This service acts as your bank account, offering free withdrawals at over 55,000 ATMs nationwide and no account fees and the ability to earn up to 10% bonus investments
- Acorns Family ($5/mo): Everything in Acorns Personal (Acorns Invest, Later and Spend), plus Acorns Early. This allows you to take advantage of the best way to invest $1,000 for your child‘s future and can teach you how to invest as a teenager or minor through opening a custodial account.
4. Take Action
Once you’ve gotten a decent handle on the overall market’s activity and analyzed a set of attractively-valued companies you think stand out from the rest, it’s your time to pull the trigger.
Alternatively, as I mentioned in step 3, consider investing in low-cost index fund ETFs through a robo-advisor like M1 Finance, a self-directed broker like Public or a micro investing app like Acorns.
5. Continue Following the Companies and Markets
By doing your due diligence, you will be able to follow these companies and see if they continue to perform as you expect. If a company makes a decision you don’t agree with or think will adversely impact its value going forward, it might be a good idea to cut your losses short and move on.
Investing well can produce very rewarding experiences you share with those you love. For me, it allowed me to buy my first home and now to grow the assets necessary to purchase my next one together with my wife to start our family.
In general, developing your own disciplined investing approach based on rational, informed decision-making can lead to financial peace of mind.
Learning how to invest wisely at a young age will have you maximize your youth by allowing compounding to work to your benefit and see how to build wealth. Do yourself a favor and invest in yourself by following these 5 steps on how to start investing money.
Finishing the conversation with my brother-in-law, as I laid out this process to meet his interest in becoming a student of markets, I stressed how these are the first steps to developing a disciplined investing approach.
Taking the mindset that informed investing can lead to real gains, I saw he wanted to jump in and work toward developing his own investing approach. He may not become the next Warren Buffett but following through will allow him to have his (wedding) cake, and eat it too.
