How to Start Investing – Top 12 Important Things to Understand First

Understand investing for beginners and get started. It’s not too late or too early. Start as soon as possible.

Your Ultimate Guide to Beginning Investing.

You already know that to create wealth long-term and be financially independent, investing is the best option available to the ordinary person. Trying to figure out how to start investing when you’re new can seem super complicated and this puts lots of beginners off.

So here’s the type of person I would expect to read this article. You have a bit of money saved, you want to know how to start investing because you know that the amount is not enough even for down payment on a house.

You may also have heard a few investment advice about how much wealthier you’d be if you had invested in companies such as Apple, Microsoft, Amazon and the rest some 10+ years ago.

You may also have questions such as what is a stock? How do you buy a stock? What is the best stocks for beginners and how do you start investing with your little money? And some other questions right?

You may also have heard of 401(k)s, IRAs, Roth IRA’s and similar ones depending on where you live in the developed world. Coupled with all that is the most important question or concern you may have and that is that investing is risky and you could lose all your money in stock market in the blink of your eye. And so you don’t want that to happen.

This article is going to answer all those questions on how to start investing as a beginner and stocks and shares. I trust you would find it useful. Let me know in the comments section.

How to Start Investing as a Beginner – 10 Things You Need to Understand First.

1. Understand Money Loses It’s Value With Time

Understanding what happens to your money over time by default is important. Economics tells us that your money loses its value over time. Thanks to something called inflation. Inflation is generally around about the 2%-2.5% mark.

That means that every year stuff costs about 2% more than it did the year before. For example, in 1970, in America a cup of coffee cost of 25 cents. But in 2019, that same cup of coffee costs a $1 59. That is inflation in action. And so let’s say you’ve got a thousand dollars in your hand right now.

And for the next 10 years, you kept the money in a piggy bank somewhere and never looked at it again. In 10 year’s time, your $1,000 isn’t going to be worth $1,000 anymore because everything would have increased by about 2% every year.

So the value of your money will have fallen. So over time you would have lost money and this is not good.

What about if you put the money in a savings account? Even if you put your money in a savings account, like these days, a savings account will give you like 0.2% interest which means your money goes up by 0.2% every year. But because inflation is up by 2% you’re still losing money over time.

So how do we stop money from losing value over time? Check our next tip on how to start investing…

2. How Stop Money From Losing Value With Time

Remember we’re still talking about how to start investing for beginners. So the question is how to stop money from losing value over time? The answer is that if we had a hypothetical savings account, one that was let’s say an interest rate of 2.5% that would match roughly the rate of inflation.

So inflation means everything goes up by 2.5% in terms of price. But our money in our savings account also goes up by 2.5% each year. Therefore we’re technically not losing money over time. We actually want to make money, not lose it. That’s what investing is all about, right? We invest because we want to make money.

So how do we actually make money? Check our next point…


3. How Do We Make Money Investing?

Now, let’s go back to our hypothetical savings account. If hypothetically, we could have a savings account that was giving us a 10% interest rate this will never happen because that’s just way too high.

But hypothetically if it did, that means that every year we’d be making 10% of the value of the money in our savings account. So for example, if I were to put a $100 in a savings account right now, the next year it would be worth $110. And then the year after it will be $121 because it’s 10% of the $110, and then it would be 130 something.

And this would very quickly compound. So that in 10 years time, my $100 will have become $259. And if we adjust for inflation that our money is still worth $206 pounds in 10 years time, this is pretty good. We have more than doubled our money, by just putting it in this hypothetical 10% interest savings account. And it really doesn’t seem like it would do that because 10% feels like a small amount of money.

But if you extrapolate 10% over 10 years you actually double your money, which is pretty awesome. Sadly these hypothetical 10% saving accounts don’t really exist, because it’s just way too high and real life is not that nice. These days, most savings accounts in the US and I imagine around the rest of the world as well, offer less than a 1% savings rate, which means you’re actually still losing money over time.

But we do have other options to try and get us to this magical 10% savings account. And that is where investments come in.


4. What is an Investment?

My rather very simple answer is that an investment is something that puts money in your pocket. For example, let’s say you buy a house for a $100,000 and you want to rent it out to people.

There are two ways that’s an investment and there are two ways you’re making money from it. Firstly, let’s say you’re charging some rent to the people living in your house. Let’s say you’re charging them $830 a month. That becomes $10,000 a year.

And so every year you’re making $10,000 in rental income, which is 10% of what you originally paid for the house. That means that in 10 years time you’ll have paid off the a $100,000 that you’ve put in because you’re making 10K a year.

And beyond that every year you’re just making $10,000 in pure profit. So that’s pretty good.

But secondly, it’s an investment because the value of the house itself would probably rise over time. In general, there is a trend in most developed countries that house prices tend to rise over the long-term. And so your house will probably be worth more than a $100,000 in 10 years time.

It’s believed that house prices double every 10 years in the developed world.

So maybe your house is worth close to $200,000. And so you’ve made money off of the rental income but you’ve also made money off of the capital gains which is what we call it when an asset increases in value over time.

But the problem is that buying a house is a little bit annoying. You need to have quite a large amount of money for a deposit. You need to get a mortgage. You need to actually have the house. You have to sort out the rental management, rent it out to people and so forth.

If only there was a way of investing without:

  1. having a large amount of money to start with, and
  2. without having to put that much effort into managing the assets as well.

And that brings us on to investing in shares. And this is where a lot of people have lots of their investment portfolios.


5. What Are Shares and How Do They Work?

So buying shares probably as close as we’re ever gonna get to this magical savings account that just returns some amount of money each year. And the idea is that when you buy a share, you are buying a part ownership of the company that you’ve got the share in.

For example, let’s say the Apple have a particularly profitable year because lots of people have well iPads and other Apple products. Apple decides that they are choosing to pay out a dividend to their shareholders.

So let’s say they decide to issue a dividend of $1,000,000 and this is split evenly to it’s shareholders, based on how many shares they own. So you make money through shares.

The second way of making money from shares is sort of like with houses in that you get the capital gains over time. So for example, let’s say you bought 10 shares in Apple in 2010, at the time those shares were selling for $9 each.

So spent $90 on buying 10 shares in Apple. As of October, 2020, Apple shares sell for $115. So your 10 shares are now worth $1,150 just by the fact that you only paid $90 for them 10 years ago. Okay, so we’ve talked about what a share is and how you make money from them.

So I would assume that at this point, you’re got questions such as how much money you need to get started? And how risky is buying shares in a company? Let’s move on our next point on how to start investing.


6. How Do You Buy A Share?

So in continuing with our example of Apple shares, how do you buy shares in Apple? You simply can’t just go to and you’re good to go. It doesn’t work quite like that.

You need to buy shares through a broker. In days past you pick up the phone and call a stockbroker. You say things like “Hey, John, I want to place an order for some shares in Apple.” And then John would do what he does on his computer or paper and buy you Apple shares. You would own shares in Apple.

Thankfully these days we don’t really have to talk to John because there’s loads and loads of online brokers instead. And so to buy shares, you make an account on an online broker and then you can buy shares in a company through that.

Different countries have their own brokers that operate in that country. So it’s different for Canada, UK, US, Germany and so on. So with most bank accounts you can also open an investment account with them and then invest online.

If you don’t like using your bank’s brokerage firm, you can also open and account with an online broker. One of the most popular online brokers is Vanguard. They have versions for countries such as the US, UK, Canada and others.


7. Which Shares Do You Buy?

So how do you decide which shares to actually buy? And the easy answer to that is that you actually don’t want to figure out which shares to buy. You do not want to buy individual shares.

Generally if you’re trying to figure how to start investing, it’s not a good idea to invest in individual stocks. Essentially the issue with investing in individual stocks is it’s kind of too risky for beginners.

For example if you invested in a company like Apple, chances are it’s going to be around 10 years from now. But the same is not true for all companies.

Historically there’ve been quite a few companies that were doing amazing and then went bust. So you’re automatically exposing yourself to more risk if you’re investing in individual stock. And so the advice that most experienced traders would give beginners is that you should not invest in individual stocks.

You should invest in index funds. And this is what Graham Stephan, one of my favorite YouTubers also says as well. He says, “The index funds are the best, safest, and easiest long-term investment strategy for most people.”


8. What’s An Index Fund?

There are two parts of an index fund: the fund and index.

So the basic understanding of an index fund is that investors will pool their money and there’s a manager for that fund. The fund manager decides which companies the fund is going to invest in. You, the investor doesn’t have to worry about picking the stocks yourself because you trust the fund manager. He is a seasoned professional.

Now, the index refers to a stock market index. And so a stock market index would for example, be the FTSE 100, which is the a hundred biggest companies in the UK or the S&P 500, which is the 500 biggest companies in the U.S. or the NASDAQ or the DOW.

Components of S&P 500
Screenshot of top 10 components of the S&P 500

And these are all different indices of the stock market. The S&P 500 gives you a general idea of how the U.S. economy is doing as a whole.

So putting the two together an index fund is a fund that automatically invests in all of the companies in the index. So if you invested in an index fund you will have some of your money in Apple, Microsoft, Amazon, Facebook and so on and so forth.

Why are index funds good for beginners?

Well, it’s good for a lot of reasons.

Firstly index funds are really, really easy to invest in. A big problem with people who are trying to learn how to start investing is picking profitable stocks.

How do you know which company to invest in? How do I read a company’s balance sheet? If you invest in an index fund, you actually don’t have to worry about any of that.

Secondly, index funds give you a decent amount of diversification. There are all sorts of companies in the S&P 500. So you’re not entirely reliant on the tech sector or the oil sector or the clothing sector or anything to make the bulk of your money.

You are very nicely diversified across all these U.S. companies.

Thirdly, index funds have very low fees. This is because it’s not a real person who is deciding what to invest in, doing all this research and trying to make loads of money. It’s essentially a computer algorithm that automatically allocates your money based on the components of the index fund.

And finally, if you look historically, very few funds have managed to actually consistently beat the market i.e. outperform the index. And in fact, someone like Warren Buffet famously says that if you gave him a hundred thousand pounds and asked him to invest it right now he would just invest in an index fund, like the S&P 500.


9. The Risks Involved in Stock Market Investing

Isn’t investing in the stock market risky?

You have probably heard stories of people, even close friends and family members who have lost a lot of money in the stock market. You’re told to instead invest in real estate because real estate is safe.

You’re not alone in that. Lots of people have these ideas about investing in the stock market.

And naturally there is the anxiety of what if I lose all my money. Well the real understanding you need to have here is that when you’re investing in stocks and shares, and even when you’re investing in real estate, these are long-term investments.

Ideally, you shouldn’t be putting any money into stocks and shares that you need to access within the next five years.

And actually a lot of people would extend that to 10 years. And it’s exactly like that with house prices, it’s like if you buy a house as an investment, and then house prices go down it would be completely stupid of you to sell your house unless you are absolutely desperate for the money, because something major has happened.

And instead, if you just held onto the house then you would have made more money in the long run because in the long-term house prices always go up and in the long-term basically the stock market always goes up.

Let’s say back in 2010 you invested in MySpace and MySpace crushed. You would have lost all your money. But if you invested in the top 500 companies back then, there’s no way you would lose all your money even if one of the those companies crushed.

So bottom line, there’s a risk in investing stocks and shares. However, as a beginner figuring out how to start investing, reduce your risk by investing in an index fund rather any one particular company’s stock or shares.


10. When Should You Get Started Investing in the Stock Market?

How old should you have to be to start investing in the stock market? Is it ever too soon to start? Is it ever too late to start? And here the answer is pretty simple. Basically, you should start investing as soon as possible.

It doesn’t matter how old you are. It doesn’t matter how young you are. The earlier you start investing the better.

However, before you run off, take these financial advice. Do some financial clean up before you start investing.

Firstly, you want to make sure that all of your high interest credit card debts card debt is paid off, because when it comes to compounding even though gains compound, losses compound as well. And so if you’ve got like a 6% credit card debt that’s eating into your bottom line every single month you want to pay that off as soon as possible.

Point number two is that you want to make some sort of emergency fund. And people usually say that your emergency fund should have in cash basically three to six months of living expenses so that if you lose your job or if you’re hit with some kind of incredible medical emergency then you’ve got money to do that. And you don’t have to take money out of your investments.

Number three is that you don’t want to put any money into stocks that you think you might need to use in the next three to five years. So let’s say you’re 24 and you’ve just landed your first job. And you’re thinking of getting a mortgage and buying a house and you need money for the deposit.

Do not put that money into the S&P 500 or into any kind of stocks and shares because no one can time the market. And no one knows whether we might you know, there might be a market crash tomorrow. All we know is that in the long-term, the stock market goes up, but if you need to buy a house next year, there is absolutely no guarantee that that money will still be worth exactly the same or worth more this time next year.

So it provided those two conditions are met. Like firstly, you have no high interest credit card debt. And secondly, you’ve already got your emergency fund. And thirdly, you’re not planning to have a major expense in the next few years.

At that point, absolutely everyone should be investing something into the stock market. In my opinion, whether you’re 12 or 20 or 21 or 22 or 50, it doesn’t matter. And as they say on the market floor there is almost no way your future self will regret making the decision to invest.

And as you know at this point, this is because of compounding. The more time you leave your money in the stock market, the more it compounds. And there is a huge difference. There’s like lots of interesting numbers about this on the internet that people have calculated that if you start investing at the age of 20, versus if you start investing at the age of 25 or 30, it makes such a huge difference to your bottom line.


11. How Much Money Should Start With?

The next question with people want to know how to start investing is usually the amount of money they should start with. And the answer here is again, quite easy, basically start with whatever you can.

There are websites and app that you can use to invest in stock market indices. Look for them. I will another article reviewing some of the best apps you can use.

You can start with as little as $10. You might need to start with a $100 or a $1000. Depending on which country you live in, do your research. But basically you want to start investing as soon as possible.

Firstly, it’s useful to invest small amounts of money because compounding is always good. But secondly and more importantly, the sooner you start investing the sooner it becomes a habit. And it’s a good money habit.

Do an online search on how to open an account in your country with an online stockbroker and get started as soon as possible.


12. How to Actually Start Investing in Index Funds

Finally our last point in figuring out how to start investing is how do you actually start? You have a $100, how do you invest that in an index fund?

My simple answer is to find an online broker in your country. Because of financial regulations, you need to get registered with an online stockbroker in your country of residence.

In the U.S. most people that I know use the Vanguard as well. There are also services in the U.S. such as Betterment, Fidelity Investments.

Search online for best online broker in Germany or Canada, something like that. Read online reviews about them and then go through the process of getting an account approved and you can start putting money in there.


These are the 12 points you need to understand if you want to find out how to start investing. If there’s one thing I can say, it’s that you it’s never too late or too early.

You don’t need too much money before you start investing But the more you delay, the more time goes against you. Get started today.

Do you have any advice for those who are trying to find out how to start investing that I didn’t cover in this article? Feel free to share in the comments section below and please share the article because so many people don’t have the right information when it comes to investing and letting money work for them.

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