How to Invest: Your Step-by-Step Guide

Between work and managing your bills, you might not have much time to think about investing. That's a common problem. In fact, 58% of Americans between 18 and 29 said they didn’t own stocks — even stocks or funds in a retirement account. 

But not investing your money can be a costly mistake. Even high-yield savings accounts may not keep pace with inflation, so you could end up losing money over time. 

Investing may seem intimidating, but it doesn’t need to be complicated. And you don’t need a ton of money to get started. You can learn how to invest in the stock market in just five steps. 

Step 1: Set an investing goal

First, spend some time thinking about what you want to accomplish through investing. Common investing goals include:

• Retiring comfortably

• Starting a business

• Paying for a child’s college education

• Buying a home

• Pursuing financial freedom

All investing has some level of risk, but how much risk you're willing to take on can affect your decisions. For example, if you're in your 20s and have a long time to invest before you retire, you may be willing to take on more risk in pursuit of higher returns. But if you're getting close to retirement and need to preserve your nest egg, you might want to focus on safer investments. 

The University of Missouri has a risk tolerance calculator you can use to assess your risk tolerance so you can make informed investment decisions. 

Step 2: Decide on an investment strategy

There are many investment strategies, and deciding which is right for you can be overwhelming. When thinking about how to invest your money, keep it simple. Ask yourself the following questions to shape your investing plan: 

How long do I have to accomplish my goals? 

When considering your options, keep short-term vs. long-term goals in mind. Short-term goals are typically goals you want to accomplish within one to five years, such as buying a home or starting a business. Long-term goals take more time to achieve, such as saving for retirement or a child’s education. Short-term goals generally need a more conservative approach to investing, while you can take on more risk for long-term goals. 

How much time can I spend managing investments? 

There are two main approaches to investing: active and passive. 

• Active: Active investing is when someone personally manages your portfolio, picking and choosing which stocks to buy and sell. You can be your own investment manager, or you can pay a professional portfolio manager. 

• Passive: Passive investing is a more hands-off approach to investing. Passive investors are typically long-term investors and may utilize index funds and mutual funds rather than buying individual stocks.

The best option depends on your experience and the time you have to dedicate to managing your investments. For those that are new to investing, passive investing is often less expensive and can be a good option if you don’t have a lot of time to spend on investing.

How much money do I have to invest? 

If you're in the early stages of your career, you likely don't have thousands to put into the stock market at once. That's okay! You can start small and regularly invest through dollar-cost averaging. Dollar-cost averaging is when you make regular investments into a stock or other securities, regardless of the share price. For example, you might invest $25 every month into a particular stock or index fund. 

By investing a set amount of cash at fixed intervals, you can potentially smooth out the effects of market volatility and reduce your risk. To utilize dollar-cost averaging, create a budget and figure out how much money you can set aside for investing. Even if it's a relatively small amount, like $10 per week or $25 per month, you can start building a portfolio that will grow over time.

Not convinced? Consider this example. Let’s say you’re 21, and you start investing $25 per month. Assuming your money earns an average annual return of 8%, your account will be worth $71,682 by the time you’re 60. Even better, you only contributed $11,700 of your own money; the remainder is all interest and market growth. 

Step 3: Learn about the 8 most common investment types

You may know about stocks and bonds, but there are other types of investments to consider. Here are eight common investment options:

Stocks

A stock is a piece of ownership in a company. When you invest in stocks, you become a shareholder. 

Bonds

Bonds are a type of debt investment. When you buy a bond, you're lending money to an entity, such as a government or corporation. In return, the borrower agrees to pay you interest and repay your loan at a later date. 

Exchange-traded funds (ETFs)

ETFs are a way investors can pool their money in a fund to buy stocks, bonds and other securities. ETFs are often passively-managed and have the ability to track the performance of a benchmark stock market index, such as the S&P 500. 

Mutual funds

Similar to ETFs, mutual funds are a way for investors to pool their money and invest in a variety of stocks, bonds or other securities. With mutual funds, you may have the option to choose an actively or passively managed fund.

Index funds

Index funds are a type of ETF or mutual fund that track the performance of a specific stock market index, such as the S&P 500 or Dow Jones Industrial Average (DJIA). Compared to individual stocks, investing in index funds is popular because it allows you to invest in many companies at once. 

Retirement accounts

Retirement accounts aren’t really a type of investing, but because people focus so much on their retirement investments, they deserve a call-out of their own. You may have access to an employer-sponsored retirement plan, such as a 401(k) or 403(b). Or you may have an individual retirement account (IRA) you open on your own. Within the retirement account, you can invest in stocks, bonds, mutual funds, ETFs and index funds. 

Cryptocurrency

Cryptocurrencies like Bitcoin and Ethereum are digital or virtual tokens that use cryptography to secure their transactions and control the creation of new units. 

Real Estate Investment Trusts (REITs)

If you are interested in investing in real estate — but don’t want to be a landlord — another option is to invest in REITs. A REIT is a company that owns and operates income-producing properties, such as commercial facilities or apartments. You can buy shares of a REIT without having to manage the property or handle rent collection. 

Step 4: Choose your way of investing

Now that you know how to invest, you can choose which investing approach works best for you. There are three main paths: 

• Employer-sponsored retirement accounts: If your employer offers a retirement plan like a 401(k), you can contribute money through the plan’s platform and choose investments from the available funds. 

• Open a brokerage account: Not all employers offer retirement plans, so if that’s not an option — or if you want to invest for non-retirement goals — you can open a brokerage account on your own to start an IRA or to invest in a taxable investment account. 

• Utilize a robo-advisor: A robo-advisor is  a type of financial advisor that uses algorithms and software to automate the investing process. With a robo-advisor, you can invest in stocks, bonds, ETFs and mutual funds without having to choose each investment yourself. For example, you can open an investment account with Acorns. Acorns will ask questions about your goals, and will use that information to invest your money in diversified portfolios of ETFs. 

Step 5: Managing your investments

Once you have opened an investment account, the important thing is to stick with it! Market fluctuations are normal. Although market dips can be scary, historical data shows that the market has always recovered.

To manage your investments and weather market changes, follow these tips: 

• Don’t put all your eggs in one basket: Instead of investing in a few individual stocks, focus on building a diversified portfolio of ETFs, index funds and mutual funds. By utilizing funds, you can diversify your investments and spread out your risk. That way, if one investment goes down, you’re not losing all your money.

• Have a long-term outlook: Short-term market fluctuations are normal. If you’re investing for retirement, you shouldn’t need that money for 20, 30 or even 40 years, so don’t get too worried about day-to-day movements.

• Stay the course: When the market dips, it can be tempting to sell all your investments and get out. But remember, if you sell when the market is down, you’ll lock in any losses. Historically, the average annual return was 12.3%, so consider staying the course and riding out the market fluctuations.