How Do I Invest?

Once you've figured out why you should invest, the next step is learning how. We'll break that question into two parts. First, we'll talk about how you can structure your financial life to make it possible to invest. Then, we'll delve into the mechanics of investing, such as opening a brokerage or mutual fund account.

What is investing?
Any time you invest, you're devoting your own time, resources, or effort to achieve a greater goal. You can invest your weekends in a good cause, invest your intelligence in your job, or invest your time in a relationship. Just as you undertake each of these expecting good results, you invest your money in a stock, bond, or mutual fund because you think its value will appreciate over time.

Investing money involves putting that money into some form of "security" -- a fancy word for anything that is "secured" by other assets. Stocks, bonds, mutual funds, and certificates of deposit are all types of securities.

As with anything else, there are many different approaches to investing -- some of which you've probably seen on late-night TV. A well-dressed, wildly positive (though somewhat whiny) young man sits in front of lazily waving palm fronds, shaking his head about how incredibly easy it is to amass vast wealth -- in no time at all! Well, hey! That sounds fine! But if it were so easy, wouldn't everyone who saw the same pitch be rich? And how come you always have to send in money to learn those wealth-building secrets?

We suggest you take the $25 you'd spend on the hardcover EZ Secrets to Untold Billions book and the $500 you would shell out for the EZ Seminar, and invest it yourself -- after you've learned the basics here.

First, douse your debt
After learning why investing is a smart thing to do, you're probably itching to take the next step. You want to drop everything and start investing right now. But hold on! Would you start running a marathon without first stretching? Would you pour syrup on the plate before the pancakes are done? Having dazzled you with the power of compounded returns, we want to make sure that same principle's not working against you. Before you start investing, you've got to get rid of your high-interest debt.

The very same principle of compounding that helps your investments grow can quickly transform a dollar of debt into a few hundred dollars. Does it make sense to try to save money even as your debts are multiplying like bunnies? No way. Although some kinds of debt may be low-interest or tax-advantageous (such as your mortgage), you'll want to free yourself from the high-interest stuff before you begin to invest.

Every dollar you can put toward investing will work for you. And every dollar of yours kept out of the pockets of financial professionals or full-service brokers is also creating value for you. (We'll get back to this point later.)

Pay yourself first
To become a successful investor, make investing a part of your daily life. That's not as great a stretch as it may sound. After all, you make decisions that affect your finances every day, whether you're ordering a $7 glass of wine with dinner or getting a home equity loan to pay down credit card debt.

We're not suggesting that you obsess over every penny you throw into a wishing well. (Please don't embarrass your mother by diving in after it.) If you pay yourself first, you won't have to.

You already pay the companies behind your credit card, gas, water, electric, cable, and phone bills every month, right? Why not add yourself to the list? Heck, put yourself right at the top. Set aside a chunk of money to save or invest when you first get your paycheck, and you can happily forget about it for the rest of the month.

The Motley Fool recommends that you save as much as possible; 10% of your annual income (total, not take-home) is a good goal. Depending on your obligations, you may be able to save more or less. The more you save, the more wealth you create -- but anything is better than nothing. Even a few dollars saved now will be worth more than lots of dollars saved later.

With online banking and brokerage services, it's easier than ever to set up automatic monthly transfers between your checking account and a savings account or investing vehicle of your choice. You'll be surprised how easy it is to live on a little less money each month -- in fact, you probably won't even notice the difference.

Don't hesitate to be flexible about your savings. If you find yourself truly pinched for pennies once all the bills are paid, perhaps you're paying yourself too much. Perhaps you're not yet in a position to start paying yourself at all. That's perfectly OK -- but as soon as you can feasibly start saving, jump right in! The earlier you start, the better.

Active and passive strategies
The two main methods of investing in stocks are called active and passive management, and the difference between them has nothing to do with how much time you spend on the couch (or the exercise bike). Active investors (or their brokers or fund managers) pick their own stocks, bonds, and other investments. Passive investors let their holdings follow an index created by some third party.

When most people talk about stock investing, they mean active investing. It may sound like the superior strategy, but active investing isn't always all it's cracked up to be. Over the long haul, most actively managed stock mutual funds have underperformed the S&P 500 Index, the most popular and prominent benchmark for index funds.

In that light, you can understand why some people want an alternative to "active" management. Many people who just want a return roughly equal to that of a major stock index prefer passive investing. Beyond the S&P 500, you can find passive investments in many indexes, including the Russell 2000 for small-cap stocks, the Wilshire 5000 for the broad market as a whole, and various international indexes as well.

Investing versus speculating
Right about now, you may be thinking about that brother-in-law who "made a killing" in options. Or maybe you're reminiscing about the Nevada vacation when your one lucky quarter magically drew out 700 more with the pull of a slot-machine lever. Why put your money in slow-and-steady investment vehicles that merely promise double-digit returns, when you could have near-instant riches? With compounding, you have to wait patiently for years for your riches to accumulate. What if you want it all now?

Granted, there's nothing exhilarating about predictability. Matching the performance of the S&P 500 won't make you the life of the party. But neither will the far more common tales about how you lost your savings on some speculative gamble -- nor a recounting of your subsequent adventures in bankruptcy court.

You don't need a card dealer, dour strangers, or Wayne Newton background muzak to gamble. Plenty of stock market gamblers do an admirable job of losing their money on seemingly legitimate pursuits. At The Motley Fool, we believe investors "gamble" every time they commit money to something they don't understand.

Suppose you overhear your best friend's dentist's nanny talking about a company called Huge Fruit at a cocktail party. "This thing is gonna go through the roof in the next few months," she says in a stage whisper. If you call your broker the first thing the next morning to place an order for 100 shares, you've just gambled.

Do you know what Huge Fruit does? Are you familiar with its competition (Heavy Melon)? What were its earnings last quarter? There are a lot of questions you should ask about a "hot" company before you throw your hard-earned cash at it. A little knowledge could help keep you from losing a lot of money.

Remember, every dollar that you speculate with and lose is a dollar that's not working to create long-term wealth for you. Speculation promises to give you everything you want right now, but rarely delivers. In contrast, patience all but guarantees those goals down the road.

Planning and setting goals
Investing is like a long car trip: A lot of planning goes into it. Before you start, you've got to ask yourself:

  • Where are you going? (What are your financial goals?)
  • How long is the trip? (What is your investing "time horizon"?)
  • What should you pack? (What type of investments will you make?)
  • How much gas will you need? (How much money will you need to reach your goals? How much can you devote to a regular investing plan?)
  • Will you need to stop along the way? (Do you have short-term financial needs?)
  • How long do you plan on staying? (Will you need to live off the investment in later years?)

Running out of gas, stopping frequently to visit restrooms, and driving without sleep (this is the last of the travel analogy, we promise) can ruin your trip. So can saving too little money, investing erratically, or doing nothing at all.

Don't let yourself get away with fuzzy answers, either. Investing demands hard numbers -- get used to them. You'll need to pin down exactly how much it'll cost to send a child to college, or how much you'll need to live on in retirement. It can be liberating to see exactly what you need to reach your destination, and that precision helps you stay accountable to yourself along the way.

Don't worry -- you don't have to do all the math yourself.  Online interactive calculators can help you figure your future money needs. The more specific you can be, the more likely you are to set and achieve reasonable goals.

How stock trading works
You've whipped your finances into shape. You've set concrete financial goals. Now you're ready to learn how to start making your investments. If you use a mutual fund, the process is pretty easy: Contact the fund company and ask to open an account. But with stocks, things get a little trickier.

Stocks trade on exchanges. In the U.S., the major exchanges are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the Nasdaq Stock Market. While there are differences in the way the various exchanges handle trades, buying and selling shares on any of them involves a similar process.

Exchanges bring together buyers and sellers. The price that buyers are willing to pay for shares is called the "bid," while the price sellers are willing to accept to sell their shares is the "ask" price. The difference between these two prices is called the "spread." Usually, the spread goes into the pockets of the exchange professionals who handle trades.

The amount of spread will vary, depending on the volume of shares traded. For heavily traded stocks, competition will make spreads quite small. Thinly traded stocks may carry a large spread, in order to compensate exchange professionals for the risk they take.

Investors can set their own bid or ask prices, too, by placing orders to sell or buy only at a specific price. (These are called "limit" orders.) Exchange professionals keep a close eye on these "open" orders, executing them when conditions are met, and using them to gauge demand for the stock.

Brokerage accounts are the most common way to buy stocks. You can either use one of the many way-too-expensive full-service (or full-price) brokers, or execute your trades through a discount broker. Learn more about how to pick one in our Broker Center, where you can compare brokers and open an account.

The perils of margin
When you use a brokerage account, you can have a cash account or a margin account. The former lets you trade only with money you actually have. The latter -- and right about now, you should be hearing alarm bells and warning sirens -- lets you purchase stocks with borrowed money. Margin accounts can increase your returns -- but they'll also increase your risk.

Brokers, who have a vested interest in enticing customers to use margin, like to say that such accounts increase your "buying power." But in reality, buying on margin only enhances your "borrowing power." You'll have to pay all that margin money back at some point -- forget that at your peril.

Brokers make a good part of their money by collecting interest on margin loans. And since margin gives investors more (borrowed) money with which to buy stocks, it generates greater commission fees for those same brokers. The broker has total control over the collateral for the loan, including the ability to step in and force you to sell stock if it thinks you're in danger of defaulting on its loan. For brokers, margin is a cash cow; for investors, it's a double-edged sword.

Dividend reinvestment plans (DRPs) and direct investment plans (DIPs)
Not yet ready to open a brokerage account? These plans offer another, steadier way to buy stock. Lovingly known by many investors as Drips, they allow shareholders to purchase stock directly from a company, with only minimal costs or commissions. Not every company offers such plans, but they're great for people who can only invest small amounts of money at regular intervals.

Summing up
All right, Fool -- you've got a rough idea of what you want to do with your finances, how much money you'll need, and how much time you have to reach that goal. And you now know how to start investing your money in the market. For your next step, it's time to start thinking about exactly what you should invest in, and the kind of returns you can reasonably expect.


Read/Post Comments (39) | Recommend This Article (553)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 26, 2008, at 8:25 PM, jesterride wrote:

    this reading is much appeciated, i'm new to the game, so this info. is extremely helpful

    thanks for being,

    andy

  • Report this Comment On November 02, 2008, at 9:16 AM, matrixphyler wrote:

    How does one buy a stock recommended by the Motley Fool Stock Advisor, if you don't have a broker or don't want one? Can I purchase just the stock by myself?

    Mark

  • Report this Comment On November 02, 2008, at 9:25 AM, matrixphyler wrote:

    Guess I should have read the article first...:)

    Mark

  • Report this Comment On November 08, 2008, at 7:18 PM, monk111 wrote:

    When I went to "Broker Center" and "Compare Brokers", I was confused as basically, both showed the same info with no explanations and/or recommendations.

  • Report this Comment On December 05, 2008, at 4:16 PM, TMFVermont wrote:

    hey Monk - the Compare Brokers page part of the broker center, and is the full compare table http://www.fool.com/investing/brokers/compare.aspx?source=id.... It has more information about each of the online brokers listed, than you would find in the smaller compare table found on the main page of the broker center http://www.fool.com/investing/brokers/index.aspx

  • Report this Comment On May 03, 2009, at 10:29 PM, wwmed wrote:

    In our age of transparency, don't you want to enhance your credibility by publishing the names and credentials of your writers, instead of merely listing "Staff?"

    Dr. Butler

  • Report this Comment On October 20, 2009, at 12:14 AM, iceberg11 wrote:

    I just want to say that this article and this whole site in general is an amazing site for beginners and teenagers to the stock market. It is very "simple" reading and isn't very dull and confusing like other sites and articles.

    Thanks motley fool :)

  • Report this Comment On December 04, 2009, at 3:23 PM, hemanan wrote:

    it will an idea but not in detail

  • Report this Comment On February 04, 2010, at 10:55 AM, Elisahome wrote:

    I am new to this, please bare with me. We have a family member acting as our broker (not recommended) We are in our early 50's so looking at retirement objectives.

    Currently all of our investments are pretty well diversified but they are in C shares.

    We have been approached by a financial advisor of our financial institution wanting to exchange our C shares to A shares, for a 4-5% fee. This would amount to roughly $5,000-$6,000.

    Finally my question: Could I go it alone using one of hte online Brokers? And what about the fees exchanging or selling C shares for A?

    Many thanks for your comments.

  • Report this Comment On March 17, 2010, at 12:34 AM, snowflake21 wrote:

    I am still learning, but what is the difference between a class C and a class A or any other class shares? Is the type of class denoted in the prospectus or can you find it when you look up the quote symbol?

    Also, same for the mutual funds--how do you determine if one is a load fund or a no load fund?

  • Report this Comment On May 08, 2010, at 11:51 AM, serdok21 wrote:

    I am totally new to stock maket business and have a no idea. I am first generations from my family members and I very interested. I do have a very little money so I want to invest and try to gain some at laters years.

    If anyone could give me adivce or suggestions that will be very grateful.

  • Report this Comment On December 11, 2010, at 1:46 AM, oneilda wrote:

    Definitely wish I had done this long long ago. Still now is as good a time as any.

  • Report this Comment On December 12, 2010, at 3:10 AM, pesewa wrote:

    Should I pay off all my credit cards first before paying myself or investing?

  • Report this Comment On February 26, 2011, at 9:44 AM, dimiship wrote:

    I'am excited about learning the trading game for my long term goals in life, so think you very much.

  • Report this Comment On March 07, 2011, at 10:49 AM, pyriel2012 wrote:

    Investable 1876,

    I am new to investing and have ING's ShareBuilder as well.

    While it is $4 per trade if you set up the automatic schedule, you can turn it off after you make your first investment so it doesn't re-occur every week/month/etc. Otherwsie, it is $8-$10 a trade (depending on your free or paid subscription).

    I was willing to go with them based on their customer service; even though their price isn't quite the cheapest, but it's close.

    In the end, you get what you pay for.

  • Report this Comment On June 01, 2011, at 1:55 PM, thegreenwitch wrote:

    As for any activity or industry, getting fully informed is a must and it is not advisable to shorten the corners. My advice would be to read, and read and read... Beginning stock market investing is an exciting enterprise and the reward potentially tremendous, if only you take a step-by-step approach, learn about stocks, develop a system and paper trade diligently from the esperts: http://www.beginning-investing.net. Then the rewards are tremendous without the pain.

  • Report this Comment On February 15, 2012, at 11:50 AM, Falcon10011 wrote:

    Where do I find the minimum amout of shares one can buy of a stock? On-line?

  • Report this Comment On February 22, 2012, at 1:48 AM, kengcha wrote:

    Im amazed how much ive learned from reading motley fool.

  • Report this Comment On May 16, 2012, at 4:53 PM, Bprosperous wrote:

    I am new to investing and SA. I read the Core list, if I have limited funds, what is a good amount of shares to purchase from 3 of the Core picks. My interest are DIS, NOV, SBUX, and BRK-B?

  • Report this Comment On June 22, 2012, at 1:01 PM, Ed151 wrote:

    I am also new to the Fools and would like to know about asset allocation. I plan on buying the newest recommendations, but not sure how to split up my investment? Buy 10 stocks with 10% allocated to each stock or some other method?

  • Report this Comment On July 27, 2012, at 1:32 PM, adamrsweet wrote:

    I would like to invest in small local businesses in my area. What are the laws (if any) about that and how do I get started?

  • Report this Comment On August 24, 2012, at 5:54 AM, reallisticdream wrote:

    Hey.

    From the moment I read the Motley Fool Investment Workbook, my perspective on shares is much broader and my saving habits are a work in progress.

    I have two questions though:

    1. Impulsive buying- how to curb this

    2. Is it wise to keep money in stocks but sell shares when high, then use the proceeds to buy others when they (the 'others') are low.

    Thank you Motley Fool!!

  • Report this Comment On August 27, 2012, at 9:37 PM, RandomGuy43 wrote:

    Hey ReallisticDream,

    I am a fellow reader of the site and would like to share my 2 cents.

    1. Impulsive buying- how to curb this

    I have had a few impulse buys in the past and here's what I would recommend to reduce your exposure to them:

    A) Don't visit the stores or websites that tempt you. If you must, then get into a mindset of not purchasing anything before you get in the thick of it.

    B) Whenever possible, purchase your goods in cash (it hurts more handing over dollar bills than swiping a card).

    C) If you don't like the cash idea, then audit your expenses every month in Excel or mint.com... Then be sure to justify every purchase right before you make it by asking yourself: at the end of the month, would I approve of this decision? This would also be a good time to review if you can get by without it, and if not, maybe think it over for a few days and buy it later if you have to (my weakness is Costco's special items, as they are usually sold out in those few days I ponder about them).

    D) If you're feeling brave, then visit non-tempting stores to build a tolerance of not purchasing things. Then work your way up to your favorite stores.

    E) Whatever you do, keep your eye on the prize and always see the bigger picture (retiring without a dependance on social security, ahhhh). Also, be sure to reward yourself for being disciplined when you get through the moments of weakness...

    2. Is it wise to keep money in stocks but sell shares when high, then use the proceeds to buy others when they (the 'others') are low.

    That's kind of like having your cake and eating it too. Yes, it is an excellent idea to sell high and then re-invest your proceeds into under-valued stocks, only to sell them when they raise in price. The trick is to know which ones will go up. If you can master this game, then you will be a billionaire.

    Good luck and G** speed out there.

    Regards,

    Random Guy

  • Report this Comment On February 01, 2013, at 5:39 AM, jheacock21B wrote:

    I currently us optionshouse as my online broker. They have commisions of only 2.95 a trade and a lot of helpful tools. You won't get help from outside sources on how to make your trades, but after consulting with other Fools here, you can hop on and make a cheap purchase of your stock. It is excellent for active traders looking to keep comission costs at a minimum.

  • Report this Comment On February 01, 2013, at 5:43 AM, jheacock21B wrote:

    Also, you can set up a virtual account along with your real account that lets you trade for free to try out new investment strategies.

  • Report this Comment On May 10, 2013, at 8:45 AM, IvanaMoscow wrote:

    Thanks for this article. Very insightful. I hope you can write a how to in investing abroad soon. Thanks!

  • Report this Comment On December 30, 2013, at 2:30 AM, TEXASROSES wrote:

    BEING NEW TO THIS WHOLE EVENT, I AM SO GLAD, YOU ALL ARE HELPFUL WITH YOUR IDEAS, AND COMMENTS. I FEEL LIKE JUMPING UP AND INVESTING RIGHT NOW. BUT NOT SURE I AM READY FOR THAT YET. OR SHOULD I BE? HAHA I JUST JOINIED LESS THEN AN HOUR AGO!

  • Report this Comment On January 10, 2014, at 5:05 PM, DaDiCarr wrote:

    Hi I'm new here and new to stocks and bonds, I don't know a thing about it and I'm here to learn. So far what I have read makes a lot of sense to me, I don't pretend to become a millionaire overnight, but I surely need to make investments that will help my and my children in the future, maybe I'm late, I don't know, but if I don't try, I will regrade it, so here I go.

  • Report this Comment On January 13, 2014, at 9:37 PM, Hollycowe wrote:

    I am 85 yrs old and health is ok for now. I would not be able to invest for more then 5 yrs at the most. I have a few dollars to spend. So what would you all suggest

  • Report this Comment On January 21, 2014, at 2:55 AM, MikeLambert3332 wrote:

    Hello i`m 50 years old & not to late to learn how to invest wisely without making major mistakes. I`m very opened to learning slowly & doing it the right way. I`m very patient & eager to learn. I would be so appreciative if i was shown the correct way of doing this. Please help me achieve my goals.

  • Report this Comment On February 11, 2014, at 10:27 PM, Jacobd1970 wrote:

    I think we need an article showing how compound interest works. Any takers on the staff at Fool.com?

  • Report this Comment On February 14, 2014, at 3:19 AM, Dae wrote:

    Where and or how do we find the "Drips"? Does one have to contact the company/s directly or is there a list of company names offering "Drips"?

    Although I read the article above I still have to ask why one must use a Broker/s and give them monies I don't have available and why can't one invest without them other than only with "Drips".

    I appreciate all input and assistance as I am a Newbie onsite.

  • Report this Comment On March 16, 2014, at 2:24 PM, ds111 wrote:

    New to this service, I am currently using tdameritrade for my trading. Does anyone have any experience with them? Any advice?

  • Report this Comment On April 17, 2014, at 1:51 PM, PismoD wrote:

    Another Newbe. Great questions and comments! Time to get started.

  • Report this Comment On June 19, 2014, at 7:35 AM, Serg12 wrote:

    I didn't heard about it? it's a normal company?

  • Report this Comment On June 24, 2014, at 7:57 PM, HOLLY12818 wrote:

    I am very interested in tech stocks I know which ones I would like to invest in . How do I find out were I can start to find them ??

  • Report this Comment On August 06, 2014, at 9:04 PM, ForLegacy2 wrote:

    I just subscribed today and have read and read and read. I am brand new to this. It is exciting and scary at the same time. The writing is easy to understand. Much more to read and understand before I take the plunge.

    Thank you Motley Fool.

  • Report this Comment On August 08, 2014, at 6:47 PM, TailFire wrote:

    Very nice information. They say nothing is perfect, so would love to read more and more from your website. Plz keep updating.

  • Report this Comment On October 06, 2014, at 2:57 PM, SaintJoseph wrote:

    Hi Fellow Fools,

    For 4 decades, I invest

    in the buy-and-hold method,

    for the long term (next generation),

    in large cap, blue chip,

    North American STOCKS.

    Fired my stock broker 3 decades ago.

    It is just that simple, it is my own

    Foolish Investment Strategy!!

    The rest is history!!!

    QED.

    Doing just fine!

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