Why Invest?

The SEC's Investor.gov emphasizes that investing helps your money grow faster than inflation and savings accounts, building wealth over time through compound returns.

Key Benefits of Investing

• Compound Growth: Earnings generate their own earnings over time
• Beat Inflation: Investments historically outpace inflation, preserving purchasing power
• Achieve Financial Goals: Fund retirement, education, major purchases
• Passive Income: Generate dividends and interest
• Build Wealth: Grow net worth beyond what savings alone can achieve

Types of Investments

Stocks (Equities)

Stocks represent ownership shares in a company. When you buy stock, you own a piece of that business. The SEC's guide to stocks explains how stocks work and their potential risks and rewards.

• Potential Returns: Capital appreciation + dividends
• Risk Level: Higher than bonds; individual stocks can be volatile
• Best For: Long-term growth (5+ years)
• Example: Buying Apple stock makes you a partial owner of Apple Inc.

Bonds (Fixed Income)

Bonds are loans you make to governments or corporations in exchange for regular interest payments. Learn more from the SEC's bond primer.

• Potential Returns: Fixed interest payments (coupon) + principal at maturity
• Risk Level: Generally lower than stocks; varies by issuer credit quality
• Best For: Income generation, portfolio stability, capital preservation
• Types: Treasury bonds (safest), corporate bonds, municipal bonds

Mutual Funds

Mutual funds pool money from many investors to buy a diversified portfolio of stocks, bonds, or other assets. The SEC's mutual fund guide explains how they work.

• Professional Management: Fund managers select investments
• Instant Diversification: Own hundreds of securities with one purchase
• Minimum Investments: Often $500-$3,000 initial investment
• Fees: Expense ratios (annual fees) typically 0.50%-1.50%

Exchange-Traded Funds (ETFs)

Similar to mutual funds but trade like stocks on exchanges. Often lower fees than mutual funds. Many track market indexes.

• Trade Like Stocks: Buy and sell throughout the day at market prices
• Lower Fees: Expense ratios often 0.03%-0.50%
• Tax Efficient: Generally generate fewer capital gains than mutual funds
• No Minimums: Buy as little as one share

Index Funds

Mutual funds or ETFs that track a specific market index (like S&P 500). Passive management means lower fees. Recommended by many financial experts for long-term investors. See our Understanding Index Funds guide.

Risk vs. Return

The SEC's Guide to Savings and Investing emphasizes understanding the relationship between risk and potential returns.

The Risk-Return Tradeoff

Types of Investment Risk

• Market Risk: Overall market declines affect investments
• Inflation Risk: Returns don't keep pace with rising prices
• Interest Rate Risk: Rising rates reduce bond values
• Company Risk: Individual company performance affects stock value
• Liquidity Risk: Difficulty selling investment quickly without loss

Your Risk Tolerance

Consider these factors when determining your risk tolerance:

• Time Horizon: Longer time = can take more risk
• Financial Goals: Retirement vs. down payment affects strategy
• Age: Younger investors typically take more risk
• Emotional Comfort: Can you handle market volatility without panic selling?
• Financial Situation: Emergency fund and stable income allow for more risk

Diversification: Don't Put All Eggs in One Basket

Diversification is spreading investments across different asset types, sectors, and geographic regions to reduce risk. The FINRA's guide to asset allocation explains this critical concept.

Why Diversify?

Ways to Diversify

• Asset Classes: Mix stocks, bonds, and cash equivalents
• Sectors: Own technology, healthcare, finance, consumer goods, etc.
• Geographic Regions: Combine US and international investments
• Company Sizes: Large-cap, mid-cap, and small-cap stocks
• Investment Styles: Growth stocks and value stocks

Easy Diversification

Index funds and target-date retirement funds provide instant diversification across hundreds or thousands of securities, making them ideal for beginners.

How to Start Investing

Step 1: Establish Financial Foundation

Before investing, ensure you have:

• Emergency fund (3-6 months expenses) - see our Emergency Fund Guide
• High-interest debt paid off (credit cards, personal loans)
• Budget and positive cash flow

Step 2: Choose an Investment Account

Common account types:

• 401(k) / 403(b): Employer retirement plans (contribute enough for employer match!)
• IRA (Traditional or Roth): Individual retirement accounts with tax advantages
• Taxable Brokerage: Flexible investment account with no contribution limits or withdrawal restrictions
• 529 Plan: Tax-advantaged education savings

Learn about retirement accounts from the SEC's IRA guide and Department of Labor's retirement plans overview.

Step 3: Select Investments

For beginners, consider:

• Target-Date Funds: All-in-one funds that automatically adjust risk as you near retirement
• Index Funds: Low-cost, diversified funds tracking market indexes
• Balanced Funds: Mix of stocks and bonds in single fund

Step 4: Invest Regularly

Set up automatic contributions (dollar-cost averaging) to invest consistently regardless of market conditions. This reduces the temptation to time the market and builds wealth through discipline.

Protecting Yourself as an Investor

Check Credentials

Before working with a financial advisor, verify their credentials through FINRA's professional designations database and check for disciplinary history at BrokerCheck.

Avoid Common Scams

Report suspected fraud to the SEC's Office of Investor Education and Advocacy.