How To Invest Money For Beginners | The Ultimate Guide

Last Updated February 18, 2024 by Davina Kelly

Are you starting your investing journey and trying to learn how to invest your money for beginners? In this post, I will be sharing some tips to help guide you.

When you are beginning your investing journey I know it can be overwhelming. Trying to figure out how to invest and what to invest in can be a lot. 

All of the jargon, different perspectives, and news can be confusing. If you are anything like me you are probably doing as much research as possible to decipher it all. 

As an investor, I am going to share some tips to help you get started. When I began my journey these were some of the things I wish I had a better understanding of.

You are going to learn how to invest money for beginners. I will keep things simple and easy to understand.

After learning these tips you will have a good understanding of how to invest your money and all the things to consider before getting started.

This post is all about how to invest money for beginners.

What Are The Benefits Of Investing Your Money?

Investing your money has many benefits. It is a way to grow your money, build wealth, gain financial independence, plan for retirement, and beat inflation.

Here are some of the ways you can benefit. 

• Long-term gains: The longer you leave your money invested in the stock market, the more your investment will grow. You will benefit from capital gains, which will grow your money and lead you to build wealth.
• Make money: Some stocks offer dividend payments, where you will receive a percentage of the company’s profits. You could also make money through compound interest. This is where you earn interest on the initial money you invested (your principal) and interest from previous periods. Basically, you are earning interest on your interest.
• Beat inflation: Leaving your money in a bank will decrease its value, as inflation continues to rise giving you less buying power. If your money is in the stock market it is growing so it will increase in value.
• Plan for retirement: Saving money alone isn’t the smart way to plan for retirement. This is because the value of your money will decrease over time. Choosing low-risk investments such as index funds is a smart choice as you will benefit from growth over a long period. 

Things You Should Know Before You Start:

What Is The Stock Market?

To keep it simple, the stock market is a place where shares of publicly held companies are bought and sold. Think of it like a supermarket, but instead of buying groceries, you can buy shares. 

These companies are listed on an exchange. You may have heard of the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE). These are the largest stock exchanges in the US and UK. These exchanges are regulated, in the US it is by the Securities Exchange Commission (SEC), and in the UK it is regulated by the Financial Conduct Authority (FCA).

What Is a Stock?

A stock is a type of security that gives the stockholder (you) a share in a company. This is also sometimes referred to as equities. 

Stocks are what companies offer to individuals who see value in them.

When you hear the term IPO it stands for Initial Public Offering. This means a privately held company is going public and you can buy shares of their company.

Companies do this to raise capital by selling stock in their company to the public. This money can be used to help the business grow, pay off debt, or fund other business operations.

What Is a Share?

A share is a unit of stock. When you purchase stock in a company, you own shares of the company. 

For example, if a company has 1,000 shares of stock and you purchase 100 of them, you would own 10% of the company’s shares. Or you would be a 10% share owner.

Owning shares of a company is powerful because ownership is key to building wealth. Once you become a shareowner you have the right to vote at shareholder meetings.

You will receive dividends if and when they are distributed, and you have the right to sell your shares to someone else in the stock market.

The terms stocks and shares are often used interchangeably. To further clarify, a stock is an asset you invest in with a company. A share is the unit of measurement for that asset.  

Why Does a Company’s Share Price Rise and Fall?

This can be difficult to define as it could be due to many different things. But essentially it comes down to supply and demand. This means that your capital is at risk as the value could rise or fall. 

The stock price is initially set by the company, but it can rise and fall due to many factors. Factors such as poor financial results, economic health, and sentient. 

For example, if a company is performing well and the prospects look good more people will buy shares of the company. As a result, the stock price can increase.

During the recent crisis, stock prices were at all-time lows, this was because people panicked as they were unsure about what was going to happen so they sold their shares.

As a result, the stock market took a plunge.

News can also be a factor in share price fluctuations. Think about Tesla, when the CEO makes headline news the stock price fluctuates. 

Now I know this can sound scary, but the important thing to note is that the only price that matters is when you sell.

Of course, you don’t want to see your investments falling and losing value, but if you invest in a smart way and remain patient you will be fine. 

If there is one piece of advice I can give you, it would be don’t panic! If you are investing for the long haul the fluctuations won’t matter.

Do not take action based on what other people are doing and saying. Stay focused and committed to your plan. 

What Is a Dividend?

A dividend is a portion of the profits a company pays to its shareholders. It is essentially a way for the company to say thank you for investing in them. 

Dividends can be paid out to the shareholders, or they can be paid in the form of reinvestment into the stock. 

This essentially means instead of receiving payment, additional stock will be purchased with the dividends. So you will have additional stock that you didn’t pay for out of pocket. 

Not all companies pay dividends. The choice to pay dividends, the amount, and the frequency are determined by the board of directors. 

What Is Dollar Cost Averaging?

Dollar-cost averaging is an investment strategy where you invest the same amount of money in a chosen stock or fund over a period of time regardless of the price.

For example, if the S&P 500 is your chosen fund and you decide to invest $250 a month you would invest this amount every month regardless of the price.

The benefit of doing this is over time you will buy at the average price. You can also buy more shares when the stock price is low, and buy fewer shares when the stock price is high. 

Your focus is on purchasing the shares consistently, so you don’t have to worry about the high and low prices as you will benefit from them regardless. 

This is a great strategy for beginner investors as this way you will reduce the impact of price volatility.

How To Invest Money For Beginners:

Know Your Goals

As with most things in life you need to have a goal. When you are investing this is very important as it will determine your strategy and this will help you make decisions. 

You need to think about why you are investing and what you want to achieve. 

For example, if you want to build wealth for the future you may implement the buy and hold strategy.

This is simply when you buy shares and hold them long-term. With this strategy, you will benefit from capital gains over a long period. 

But if your goal is to make money in the stock market, you may want to focus on choosing funds that pay dividends. 

You could also use the dollar cost averaging strategy where you invest a certain amount of money consistently.

All of these are great strategies for beginners, but you need to decide on your goal first, and then choose the strategy that best aligns with it. 

Once you have decided on your goal and strategy, stick with it and be patient.

Know Your Risk Tolerance

Before you start investing it is important to know your risk tolerance. Knowing this will help you when deciding what you want to invest in.

Do you have a high-risk tolerance? As a beginner individual stocks are a bit risky as you may not be knowledgeable about the company.

You may like a company and own all of its products, but this doesn’t necessarily mean it is a good investment.

Sometimes high risk does come with rewards, but it could also mean a loss.

If you are risk averse index funds are a better option as they are low-risk and have low fees.

They are also diversified as the fund tracks many companies in an industry, so all of your eggs aren’t in one basket.

Determine How Much You Can Invest

You don’t need to have a ton of money to get started. But to be honest, the more money you invest the more you will benefit.

For example, earning 10% interest on $1,000 invested every month for a year will be more than what you will get if you invested $100 every month for a year.

You should have a look at your budget and see how much you can afford to invest. You could choose to invest a certain amount of money each month.

Or you could choose to invest a percentage of your income. For example, 20%. But if you can only afford $100 a month, that is fine too.

The most important thing is starting to invest an amount you can afford. I would recommend investing your money consistently to get the most out of your investment.

Decide What You Will Invest In

When you are learning how to invest your money as a beginner, I would recommend investing in index funds, ETFs, and high-yield savings accounts.

Here are some details of each investment below.

ETF’S:

An ETF (Exchange traded fund) is a basket of securities that is traded on an exchange. In other words, it is a group of businesses that operate the same or sell similar products. 

For example, If you know that you want to buy Tech stock, but you are not sure which company to choose, you can buy a Tech ETF. The ETF will include all of the top performing Tech companies.

This is a great option for beginners as all of the hard work of choosing is done for you and you are diversified which will minimise risk.

ETFs also have lower fees as they track an index so don’t need to be managed.

Index Funds:

An index fund is a type of exchange-traded fund (ETF) with a portfolio that is constructed to match or track a specific financial market index. 

You can buy index funds for many financial markets. The S&P 500 (The Standard and Poor’s 500) is a very popular index fund, this fund tracks the largest 500 companies in the US.

The FTSE 100, is another popular index fund, this fund tracks the top 100 companies in the UK.

The index will follow its benchmark regardless of the state of the market. It is tracked by a computer so if a company within the index is no longer performing well, it will be replaced by another company. 

Index funds are also a great option for beginners as they also have lower fees because they are not actively managed and they are diversified which lowers risk.

The fund follows a benchmark index so it doesn’t need the help of an analyst to choose the stocks. This is a great passive investment strategy. 

To clarify the difference between these investment options, think about it like this. If you go to Westfields but are unsure what to buy so you decide to buy all of Westfields, this is an Index fund.

The whole mall represents a market index. 

Or if you go to Westfields and you know that you want to buy makeup but are unsure which brand to choose so you decide to buy all of the makeup from every brand, this is an ETF.

The makeup brands represent the basket of securities that operate the same. 

You may hear the terms index funds and ETFs used together and it may get confusing. This is because you can buy Index ETF funds.

An index ETF fund can be bought or sold in the stock market the same way individual stocks can. Whereas some index funds can only be purchased once a day.

High-Yield Savings Account

You should always try to have a pot for savings. This can be used for your emergency fund, to pay for a holiday, or a large purchase such as a car.

If we left this money in a current account, it would lose value as inflation continues to rise.

For example, if you spent $100 on groceries for the week in the past, when inflation rises the same $100 grocery shop may only last you for 5 days as the price of groceries has increased.

But if you leave your savings in a high-yield savings account you will earn interest on your savings and it will increase in value.

When you are learning how to invest your money for beginners, starting your investment journey with these options is a great way to learn about how the stock market works.

I know it can seem intimidating at first, and there can be a lot of noise. But it is best to ignore the noise and learn from your own experiences.

Choose an Investment Platform

You need to choose an investment platform, through the platform you can purchase stocks in the stock market.

When choosing a platform you need to look out for usability, and fees, and ensure it is regulated.

I use Vanguard for my Index funds, they have low fees, the platform is easy to use and I can call customer service if I have any questions.

As a beginner I’m sure you will have many questions and having someone to ask will give you peace of mind. 

Look Out For Fees

There are fees for using the platform, purchasing stocks or funds, and transaction fees. You want to choose a platform that has low fees, as the fees will be deducted from any money that you make and you don’t want fees eating into your profits. We want to keep as much of our profits as we can 😉 

Consider Taxes

One thing that is often missed when speaking about investing is taxes. When you sell your shares you will need to pay capital gains tax on the profits you have made.

For example, if you invested $500 in stocks and when you sold them they were worth $1,000, you would have to pay capital gains tax on $500 as this is your profit.

The amount of tax you must pay will depend on how long you have owned the shares. The longer you own them the less tax you will have to pay. 

Which Account Should I Use?

I would recommend investing in a tax-efficient way. Some accounts will allow you to invest a certain amount of money each year tax-free.

Once you pass the threshold you will be charged for anything over that amount. 

In the UK we have ISAs (Individual Savings accounts) which have an allowance of £20,000 each tax year. This means that we can invest £20,000 into the stock market tax-free.

If you are from the UK read here for more information on how these accounts work. If you are not from the UK search online to see if there are similar options available to you in your country.

Research, Research, Research!

One thing that is important when investing is doing your research. From deciding on your strategy, deciding what to invest in, and choosing your platform. You should always be researching so you fully understand what you are getting into before committing. The more you do it the easier it will be for you to understand.

Mindset

When you begin your investing journey your mindset is very important. The way you view money is key to the relationship you have with money.

One important thing I had to learn about money is that the best way to create wealth is through ownership. When you own assets like stocks or property you build wealth through capital appreciation. 

We want to transition from just saving our money to growing our money. As I have said before, we should always have a pot of money for saving. But saving won’t build wealth, investing will. 

Think long term, the longer the better. You want the benefits of growth and compound interest. Be patient, stay consistent, stay focused on your goals and you will do well. 

Resources

When I was first getting started these are some of the resources I used:

Website: Investopedia – This is a really good site, they go in-depth to explain a lot of information in a simple way. 

YouTube: Jennifer Kempson does an amazing job at simplifying everything. Watching her videos helped cement everything I had learned. She has a whole playlist dedicated to investing for beginners.

I have shared some tips to help you get started and learn how to invest your money. I hope that you now feel prepared to start your investing journey.

Was this helpful? Do you now feel ready to start investing? Please comment and let me know.

This post was all about how to invest money for beginners.