I, like many of my friends have been told for the greater majority of my adult life that investing is a very important financial tool that I really should be taking advantage of. I’ve heard 401ks and retirement plans are about the most important things for my future, but up until three months ago, I didn’t know the first thing about how to get started.

As a young(ish) person (26 doesn’t feel that young to be honest), the terms “retirement” and “401k” are about as relatable as a Ke$ha music video–maybe less. Which is a shame because I’ve learned the actual reason youngish professionals should start investing is less about retiring and more about learning to use money as a tool.

DISCLAIMER: I am not a financial advisor. I don’t know your situation. There’s a reason this post is called, “How to Start Investing” and not, “How to Become a Successful and Wealthy Investor”. These are the lessons I’ve learned in the past six months–take them for what they’re worth.

“It could be that young people aren’t investing because we saw the way our parents lost so much in the recession and we want no part of that.”

Despite the fact that every single college counselor and so many Forbes articles explain WHY young people should invest, I’ve been amazed to find that most of the people I’ve asked don’t. Maybe it’s because there’s a misconception about how much money you need to get started or it could be that young people aren’t investing because we saw the way our parents lost so much in the recession and we want no part of that. Or maybe we just don’t want to grow up. No matter the reason, investing is one of the most powerful ways to make your idle money bring home friends (more money) without having to do anything.

So let’s say you invested $100 a month for the next 40 years and your money grew at an average rate of 8% annually. That investment of $48,000 would be worth $335,737.25 (thanks to Dave Ramsey’s Investing Calculator) at the end of the 40 years.

 

Here’s how I started investing:

Step 1: Go Buy the Book, “The Intelligent Investor” by Ben Graham

I’m not going to lie to you, it’s a hard read. But this book was written by Ben Graham in 1949 and is still relevant today. He teaches the sort of buy and hold method that made investors like Warren Buffet so wealthy. I wish we were getting paid to endorse this book, but this is just an honest, unbiased plug for a great book.

If you can get through this entire book in a couple weeks then more power to you, but in my experience, it’s more the type of thing you read through slowly and keep for reference. This book, along with the tool I’m about to mention are what helped make the stock market less intimidating and more understandable.

Step 2: Play around on WallStreetSurvivor.com

Wall Street Survivor is best suited for people who are interested in investing in stocks, but don’t know the first thing about it. Their website has multiple lessons with easy to understand videos (though I never paid for any of the paid courses–the free ones are great) and a trade simulator which is the main reason why I’m recommending it.

Their trade simulator allows users to “buy” and “sell” real stocks at real prices with fake money and watch the way their portfolio moves. I used the trade simulator intermittently for months before ever putting any of my real money into the market. It’s a nice way to get over the initial “oohs” and “aahs” of making lots of money and losing it just as fast.  

Step 3: Learn About Your Situation (do some math)

This is the step when it’s time to do some budgeting. Sit down with an excel spreadsheet and figure out how much money you can afford to put away every month and not touch for a long time. If you put money into savings regularly, you may want to consider taking a part of that fund and investing it. However, in order to be more likely to make money and become an intelligent investor, do not put money in the stock market which you will soon need back.

A note about determining the amount of your investment

There are plenty of schools of thought out there on how much you should keep in cash vs. the stock market vs. your 401k and all the other possible combinations. I’m not here to tell you how that works or what you should do definitively because I just don’t know.

The only comment I’ll make on the matter is that I’ve heard several industry professionals say that the younger the investor, the more stocks they should own because of the length of investment. For instance, if you invest half your savings into stocks tomorrow, but need to take the money out of the market in a year–there’s a good chance you won’t make money. In fact, you could lose it. But that same stock will probably be worth way more than it is today in 40 ish years when you retire. Most quality stocks* will experience a significant amount of growth over a long period of time which is why they’re safer for young people who won’t need the money for a while. 

*’Quality stocks’ here meaning big strong companies (not your uncle’s magic store). 

Step 4: Setup a Trading Account

As far as how to pick a brokerage firm, everything I’ve heard suggests that you pick one of the online firms based on the features you want and how much their fees are. You see, every broker charges a fee to make trades. That’s how they make money.

So if your service charges $10 per trade, then your stock has to raise at least $20 to break even ($10 for buying the stock and $10 eventually for selling it). I compared several services and ended up using TradeKing. That’s not really a suggestion because another service may be better for you.

There are so many services that any list I made would be woefully incomplete. Instead, I’ll point you towards this article which compares the features of several of the top online trading platforms.

When you’re deciding on a trading services, here’s what my key determining factors were. Yours may be different, but this is a place to start:

  • Cost Per Trade (the amount of money it takes to buy or sell an amount of shares)
  • Monthly/Annual Fees (mine charges nothing so long as I make a certain amount of trades per year)
  • Initial Balance (how much money you have to start with–when I started I was looking for $0)

 

Step 5: Make Your First Trade

Eventually, you have to actually put money in the market to become an investor. If you’re like me, you’ll transfer money into your trading account and sit on it for a few weeks before doing anything with it.

It’s a scary thing giving your money away to a company and hope they bring back more of it, but I’ve found it helps to try to avoid looking at your account every day. If you’re set up on a consistent plan with an exact amount to invest every month, then you can sort of detach yourself from the ups and downs of the market (like this past week–Yeesh!). 

Key Takeaway

I’ll be the first to admit that I’m not an expert so I’ll say it again; I’m not an expert. So the best advice I can give is to save this post somewhere and come back to it when you’re ready to get started investing.

Further Reading

Here is a list of resources for further reading, I’ll also add resources that people mention in the comments.


8/31/15 UPDATE

Due to the nature of this post, I thought it’d be beneficial to add a very important piece of information about why I started investing.

I started investing in stocks on my own because I didn’t have a 401k. That has since changed and as others have mentioned in the comments, having a 401k or some sort of retirement investing account is probably the most important form of investing to make.

For more on retirement investment accounts, check out this great Nerd Wallet article.