How to start investing

Investing means putting money into something — stocks, bonds, mutual funds, exchange-traded funds (ETFs), or other assets — with the goal of growing that money over time. You start by opening an account with a brokerage firm or bank, depositing money, and then choosing what to buy within that account. The account type you choose affects how much you can contribute each year, when you can withdraw money without penalty, and how your earnings are taxed.

The first decision is whether you want a taxable brokerage account (no contribution limits, pay taxes on gains each year) or a tax-advantaged retirement account (contribution limits, tax benefits now or later). If you're saving for retirement, a tax-advantaged account usually makes more sense because the tax breaks compound over decades. If you're saving for something else — a house down payment, a car, education — a taxable account is your only option.

Key Takeaways

  • You open an account with a brokerage or bank, deposit money, and then choose individual investments or funds to buy within that account.
  • Taxable brokerage accounts have no contribution limits and no withdrawal restrictions, but you pay taxes on gains each year.
  • Tax-advantaged retirement accounts (401(k), IRA, Roth IRA) have annual contribution limits and withdrawal restrictions, but offer tax breaks that grow your money faster over time.
  • Most people start with either a 401(k) through their employer or an IRA opened at a brokerage, depending on what's available to them.
  • You can hold the same investments (stocks, ETFs, mutual funds) in any account type — the account is just the container that determines tax treatment.

Choosing between a taxable account and a retirement account

A taxable brokerage account is the simplest to open. You can contribute as much as you want each year, withdraw money whenever you want without penalty, and buy or sell anything the brokerage offers. The trade-off is that you pay federal income tax on any gains (profits) you make each year, even if you don't sell. This tax drag compounds over decades and reduces how much you keep.

A tax-advantaged retirement account limits how much you can contribute each year (the limit changes annually and depends on your age and income), but the money grows without annual tax. With a traditional 401(k) or traditional IRA, you get a tax deduction when you contribute, and you pay tax only when you withdraw in retirement. With a Roth 401(k) or Roth IRA, you pay tax upfront, but withdrawals in retirement are tax-free. The catch is that you generally cannot withdraw before age 59½ without paying a 10% penalty plus income tax on the earnings.

If your employer offers a 401(k) and matches your contributions (meaning they add money to your account), that match is when ready information programs — it's almost always worth contributing enough to get the full match, even if you also open an IRA.

Opening a 401(k) through your employer

A 401(k) is a retirement account your employer sponsors. You enroll through your company's benefits department or HR portal, usually during open enrollment or when you're first hired. You choose what percentage of your paycheck to contribute (the money comes out before taxes if it's a traditional 401(k)), and your employer deducts it automatically.

Your employer also provides a list of investment options — usually mutual funds or target-date funds — and you choose how to invest the money. You cannot invest in individual stocks in most 401(k)s; you're limited to what the plan offers. The annual contribution limit for 2024 is $23,500 (or $31,000 if you're 50 or older), and this limit is set by the IRS and changes each year.

If you leave your job, you can roll the 401(k) into an IRA at a brokerage, which gives you more investment choices. You can also leave it with your former employer's plan if the balance is large enough, or roll it into your new employer's plan if they accept rollovers.

Opening an IRA at a brokerage

An IRA (Individual Retirement Account) is a retirement account you open yourself at a brokerage like Fidelity, Vanguard, Charles Schwab, or your bank. You can open one whether or not your employer offers a 401(k). The annual contribution limit for 2024 is $7,000 (or $8,000 if you're 50 or older), and this limit is set by the IRS and changes each year.

You choose between a traditional IRA (contributions may be tax-deductible, withdrawals in retirement are taxed as income) and a Roth IRA (contributions are not deductible, but withdrawals in retirement are tax-free). Your income may limit whether you can deduct traditional IRA contributions or contribute to a Roth IRA — the IRS sets income thresholds that change each year. Once you open the account and deposit money, you can buy individual stocks, ETFs, mutual funds, or bonds within it.

Unlike a 401(k), an IRA is portable — you own it and can move it to a different brokerage whenever you want. You can also have both a 401(k) and an IRA, but your total contributions across all accounts cannot exceed the annual limits.

Opening a taxable brokerage account

A taxable brokerage account is opened the same way as an IRA: you choose a brokerage, provide your name and Social Security number, and link a bank account to deposit money. There are no contribution limits, no income limits, and no withdrawal restrictions. You can withdraw money anytime without penalty.

The downside is taxes. When you sell an investment for a profit, you owe capital gains tax on the profit. If you hold the investment for more than one year before selling, you pay long-term capital gains tax, which is usually lower than your regular income tax rate. If you hold it for one year or less, you pay short-term capital gains tax at your regular income tax rate. You also owe tax on dividends and interest each year, even if you don't sell anything.

A taxable account makes sense if you're saving for something other than retirement (a house, education, a car) or if you've already maxed out your retirement account contributions and want to save more.

What to invest in once your account is open

Once you've opened an account and deposited money, you need to choose what to buy. The main options are individual stocks, bonds, mutual funds, and ETFs. Most people starting out choose mutual funds or ETFs because they're diversified (you own pieces of many companies at once) and require less research than picking individual stocks.

A mutual fund is a pool of money from many investors, managed by a professional who buys and sells stocks or bonds. You buy shares of the fund, not individual stocks. Some mutual funds are actively managed (a manager picks the investments, trying to beat the market) and charge higher fees. Others are index funds (they track a market index like the S&P 500 and charge lower fees).

An ETF (exchange-traded fund) works similarly to an index mutual fund — it tracks an index and charges low fees — but trades like a stock during market hours. Many people prefer ETFs because of the lower fees and flexibility.

If you're investing for retirement and don't want to pick individual funds, many 401(k)s and IRAs offer target-date funds. You choose a fund based on the year you plan to retire, and the fund automatically shifts from stocks to bonds as you get closer to that year.

How much to contribute and how often

If your employer offers a 401(k) match, contribute enough to get the full match — this is information programs and should be your first priority. If you can afford more, contribute to an IRA next (up to the annual limit), then back to the 401(k) if you want to save more.

You can contribute a lump sum all at once, or set up automatic monthly contributions from your bank account. Many people find automatic contributions easier because the money moves without them thinking about it. If you're contributing through a 401(k), the deduction happens automatically from your paycheck.

The amount you contribute depends on your budget and goals. Even small regular contributions compound over decades — $200 a month starting at age 25 can grow to over $300,000 by age 65 (assuming 7% annual returns), while the same $200 a month starting at age 35 grows to about $150,000. Starting early matters more than the amount.

Frequently Asked Questions

Do I need a lot of money to start investing?

No. Most brokerages have no minimum deposit to open an account. You can start with $50, $100, or whatever you can afford. Some brokerages offer fractional shares, meaning you can buy a piece of an expensive stock or fund with a small amount of money.

What's the difference between stocks and funds?

A stock is a share of ownership in one company. A fund (mutual fund or ETF) is a collection of many stocks or bonds bundled together. Funds are diversified — if one company does poorly, the others may do well. Stocks are riskier but can offer higher returns if you pick the right ones.

Can I lose all my money investing?

Yes, if you invest in individual stocks that go to zero, you can lose your entire investment in that stock. If you invest in diversified funds, the risk is lower because you own pieces of many companies. Over long periods (10+ years), stock market losses have historically been recovered, but short-term losses are possible.

Should I invest if I have credit card debt?

Credit card interest rates are usually 15% to 25% per year, while stock market returns average around 10% over long periods. Paying off high-interest debt first usually makes more financial sense. The exception is if your employer matches 401(k) contributions — that match is an when ready return that's hard to pass up.

What happens to my investments if the brokerage goes out of business?

Your investments are protected. Brokerages are required to hold customer securities separately from their own assets. If a brokerage fails, your account is transferred to another brokerage and your investments stay intact. Cash in your account is also insured up to $250,000 by the SIPC (Securities Investor Protection Corporation).