Investing in financial markets is one of the most efficient ways of getting ahead. But more than half of Americans avoid investing completely. There are two reasons for this:

  • Investing is scary and it takes a lot of effort to understand even the basics.
  • Investing is inherently risky, and Americans don’t want to lose their money.

In this article I’m going to focus on #1; I will take you on a step-by-step guide to investing that will explain everything you need to know. Along the way, I will also touch on #2, as I explain ways to go about diversifying your portfolio to minimize risk. By the end, the goal is for you to have all the information you need to invest, whether it be buying your first stock or tweaking your already-robust portfolio.

Table of Contents

There are a lot of articles online about how to invest, but at Autopilot Finances we’re all about giving personalized information relevant to you. To that end, use our Table of Contents to see how close you are to becoming a healthy investor, and read the sections that most accurately reflect where you are in the investing process.

I am not sure I am ready to invest

I am ready to invest but I want someone else to handle it for me

I am ready to invest and I want to do it myself but I don’t know what kind of investments are right for me

I am ready to invest, I want to do it myself, I know what kind of investments are right for me, but I don’t know how to go about actually making the investments

I am ready to invest, I want to do it myself, I know what kind of investments are right for me, and I know how to go about actually making the investments, but I want some expert tips on maximizing profit

Without further ado, let’s get started.

I am not sure I am ready to invest

Investing is not for everyone. You should only consider investing if you’ve met certain basic requirements.

  • You have no high-interest debt that you can’t pay off easily each month.
  • You have at least three months’ expenses tucked away in an emergency fund.

Let me address both of those a little more specifically. First, let’s talk about high-interest debt. If you have a loan or credit card debt, and you’re paying it off at an interest rate above 5% (which it most likely will be) you should use all your available money to pay that off as quickly as possible. That’s because it’s very likely that even with a good investment you’ll still make less than you’re paying in interest on your debt.

Second, it’s so important to have an emergency fund. Life will inevitably throw a curveball your way, so you have to plan for that by keeping more money in the bank than you think is necessary to cover regular monthly expenses. If something does come up, you’ll be able to dip into your emergency fund instead of having to draw from your investments.

If you’ve met both those criteria, then read on and learn how to start investing.

I am ready to invest but I want someone else to handle it for me

Robo-Advisors

Even though there is such an overwhelming amount of information to know about investing, the truth is that these days you actually don’t really need to know any of it. That’s because of something called robo-advisors – online, automated portfolio management services. These companies use computer algorithms to select a mix of investments. You just input your risk tolerance, and they’ll do the rest.

Because they’re automated, these companies are low-cost, and provide their services at a much lower fee than human financial advisors.

There is a large and growing number of lucrative robo advising companies on the market today. Some of the biggest ones include Vanguard, Wealthfront, and Charles Schwab. Here’s our complete list of the best robo advisors on the market today.

I keep track of the performance of each of the largest robo advisors, and at the moment I think the one providing the most value to investors is Betterment.

Betterment’s management fees are among the lowest available (0.25% of your account balance per year) and their returns have been absolutely tremendous over the years. They’ll make you a personalized portfolio of stocks, bonds, and ETFs – if you don’t really understand what these are, that’s kind of the point. You don’t really need to with a robo advisor like Betterment.

I highly recommend investing with Betterment. If you end up taking this advice, you can exit out of this article now. You don’t need to really understand the intricacies of stocks and bonds, ETFs, mutual funds, etc. Betterment will do it for you.

If you do want to do it yourself, or if you’re just interested in learning more about the world of investing, read on.

Full Service Brokers

If you fear the AI and want a human touch, consider hiring a full service broker. These are seasoned investing professional that will research the markets, find hidden gems, and provide you with one-on-one advice.

Although it is reassuring to be able to discuss your investing portfolio with an actual person, you do need to consider the drawbacks of going this route. Most importantly, full service brokers will charge hefty fees – typically between 0.75% and 1.5% of your entire portfolio – every year. If your account contains stocks, the fee might even go as high as 3%.

I am ready to invest and I want to do it myself but I don’t know what kind of investments are right for me

The financial world can seem overwhelming. I know, I’ve been there. A lot of people want to invest, but get frustrated by the sheer magnitude of information out there. Put in terms of economics, there are high barriers to entry for investing. I’m going to change that.

In this section, I’m going to present you with the most common forms of investment, including an analysis of the pros and cons of stocks, bonds, mutual funds and ETFs. But more importantly, we’re going to tell you for whom these investments are well suited to and why. By the end of this section, you should know the form of the investments you want to make; next section we’ll get into how to actually make those investments. Let’s dive in.

 What they areWho they're for
StocksShares of a companyBeginner/intermediate investors
BondsA loan to a government or companyBeginner/intermediate investors
Mutual Funds and ETFsA collection of stocks and bonds that someone else has pickedBeginner investors
OptionsThe right, but not the obligation, to purchase or sell a product.Experience investors

Stocks

Stocks are actually little pieces, or shares, of a company. So if you buy a stock, you’re technically becoming a part owner of the company. Depending on the type of stock you own, you might even have voting rights on important strategic decision of the company.

Picture Apple. That’s a big company – it’s worth almost a trillion dollars. It has more money than many countries.

But who benefits when Apple makes money?

The answer is that the owners of Apple – or the people who bought Apple’s stock – benefits.

Picture a pie – or an Apple pie, if you will. Each stock of Apple is one very (very) thin slice of the pie.

When Apple is profitable, imagine that your pie gets tastier. And the tastier the pie is, the more people want a slice. And of course, the more people want a slice, the more each slice is worth.

But I don’t want to just explain what a stock is; I want you to understand whether or not you should invest in them. Buying and selling individual stocks can be very risky. Because just as Apple could be profitable, it could also be unprofitable, making your slice/stock decrease in value.

That’s why when people buy stocks, they often buy them from more than one company, and in more than one industry. This is what’s called building a diversified portfolio. If your Apple stocks lose value one month, your Nike or Coca Cola stocks might gain.

But even with a diversified portfolio, buying and selling individual stocks is an inherently risky proposition.

Bonds

People often diversify their portfolios not just by buying multiple stocks across industries, but by also buying bonds.

Technically speaking, when you’re buying a bond you’re actually loaning money out to an entity. That is, you’re giving them money, and they’re making a promise to pay you back that money over time, with a little extra on top (your interest rate).

The most common types of bonds are governmental or corporate; the safest bonds are issued by the government of the good old US of A. These bonds are often referred to as “risk-free assets”; people trust the US government almost absolutely to pay them back their money at the agreed upon interest rate.

Because there’s very little risk to bonds, there’s also very little reward. Bonds often pay very low interest rates. So if you’re risk averse, you should consider adding some to your portfolio.

Mutual Funds and Exchange Traded Funds (ETFs)

Mutual Funds are a collection of stocks and bonds that someone else has picked. A specific mutual fund might own stocks in Apple or Tesla as well as US government bonds. When you’re buying into a mutual fund, you’re buying a share of all the investments in that mutual fund.

Being actively managed (usually), mutual funds have operating expenses; in other words, you’ll get charged a fee to access the fund.

An Exchange Traded Fund (ETF) is basically the same thing as a mutual fund, although there are a few significant differences. Firstly, ETFs are usually passive; there is rarely a human decided which stocks and bonds to buy or sell, meaning there’s less overhead costs, which in turn means that more of the profits are passed to the investor (you). There are also some minor differences in the way mutual funds and ETFs are treated, and in the time of day they’re traded – neither of which are important right now.

The main difference between ETFs and mutual funds is that ETFs usually track indexes. Let me explain. You’ve probably heard of the S&P 500 or the Dow Jones Industrial Average. These are really anything tangible. They’re simply a collection of stocks that people have grouped together and keep track of.

For example, the S&P 500 Index is composed of the 500 (as the name indicates) most widely traded stocks in the US. As you can imagine, this list is constantly changing, as some companies rise into the top-500 while other fall out.

Let’s say you wanted to buy stocks in every company in the S&P 500 index. You could buy individual stocks, one by one. Or you could buy an ETF that track that index.

There are ETFs for basically anything you can think of. You can get an ETF that tracks the largest companies in the US or one that tracks foreign markets. If you’re environmentalist you can get an ETF that tracks renewables, or if you’re an oil man (or woman) you can get an ETF that tracks the oil majors. Commodities, derivatives, or bonds, there’s an ETF there for you.

Options

Okay, you said you were ready to invest by yourself. And granted, you don’t need to know anything about Options if you want to invest. But I’d be remiss not to discuss them in an article like this, so brace yourself. This is going to get complicated.

Options are the right, but not the obligation, to purchase or sell a product.

Here’s an example of how it works.

Joe believes the value of chocolate is going to rise in the near future, but he doesn’t want to invest all his money in buying actual chocolate. Instead, he finds Lauren and offers her money (the “option premium”) for the right to her chocolate (a “call option”) for a pre-determined price (the “strike price”) at any time within the coming few months (the expiration date).

If Joe is right and the price of chocolate rises, he buys Lauren’s stock for the agreed price (less than the actual value of chocolate) – He’s made money!

If Joe is wrong and the price of chocolate falls, he doesn’t exercise his Option. That means he’s lost only the option premium. He never actually owned any chocolate, so he’s relatively unscathed by the decline in value of chocolate.

From Lauren’s perspective, she’s been paid the “option premium” for the obligation to sell her chocolate (a “put option”) the strike price by the expiration date.

If the price of chocolate rises, Joe will exercise his option and purchase her chocolate from her, and will pay her less than the chocolate is now worth.

If the price of chocolate falls, Joe will not exercise his option and she will be stuck with low-value chocolate.

As you can see, this seems like a great deal for Joe, and a bad deal for Lauren. That’s why Lauren demands a high strike price – she’s taking all the risk, and she’ll demand that Joe compensate her accordingly.

I am ready to invest, I want to do it myself, I know what kind of investments are right for me, but I don’t know how to go about actually making the investments

Now we’re getting into the technical aspects of how to actually go about making investments. Who to call, where to look online, etc. If you’re at this stage, you basically have a few avenues to pursue.

  • Invest through your local bank or credit union – Most banks and credit unions have an investment brokerage arm, and will allow you to buy and sell a few stocks per month with little or no charge. It will likely be enough to get you started, but as you move along you’ll want to be able to trade more often. That’s when you might consider switching to an online discount broker.
  • Discount Broker – A trading platform that will carry out buy and sell orders for you. You tell them what you want to buy or sell, and then they go ahead and do it. Discount brokers will not provide you advice on what to do, but they will help you do it.

Here are the best and largest discount brokerages:

 Account Minimum
FeesOur Rating
Ally InvestNone$4.959/10
Charles SchwabNone$4.958/10
FidelityNone$4.958/10
E-TradeNone$6.957/10
TD AmeritradeNone$6.956/10
Vanguard$10,000$76/10

I am ready to invest, I want to do it myself, I know what kind of investments are right for me, and I know how to go about actually making the investments, but I want some expert tips on maximizing profit

If you’re here looking for individual stock tips, you’ve come to the wrong place. I’m not going to recommend buying Tesla or selling Apple. I won’t tell you to buy a call option on penny stock or to get into futures in the wheat market. I won’t tell you to sell bitcoin or buy Ripple.

What I will say is that the most important thing you can do as a responsible investor is to diversify your portfolio. That doesn’t just mean buying a mix of stock and bonds, but also to buy across industries and even countries.

The idea is to avoid putting all your eggs in one basket. If the carton falls and breaks, you’ll want to have a few more eggs stashed in other places to keep you going.

If you’re looking for specific stock recommendations, I’d recommend you check out Seeking Alpha and The Motley Fool – both of which will provide you with tips and tricks in the investing world.

Conclusion

Investing isn’t easy, and there’s a lot to know before diving in. But there’s no reason to be scared. If you’ve read through the whole guide, you should be ready to get started. And if you’re too scared to do it alone, don’t let that stop you from getting your feet wet. Get yourself a robo advisor and watch your money grow.

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