Jargon, colorful charts, and acronyms galore can make investing feel intimidating or complicated. But jumping in can be crucial for your long-term financial goals. Investing is a way to make your money work for you—and give it a chance to potentially grow more than it could sitting in a savings account. Here’s what you need to know to get started.
What is investing?
Investing is when you buy something in hopes that it’ll appreciate (a.k.a increase in value) or generate income. People can invest in many ways, from buying gold or real estate to putting money toward building businesses and furthering their education.
In the financial world, investing most often refers to buying an asset, like individual stocks and bonds, mutual funds, or exchange-traded funds (ETFs), that you expect will help you grow your money over time. Most people invest for big long-term financial goals, like paying for college, buying a house, or saving for retirement.
How does investing work?
Investors aim to generate a return on their investments, most commonly through appreciation and income.
- Appreciation is when something grows in value. Think: Buy low and sell high.
- Income is when an investment puts money in your pocket without you having to sell it. This could be through a dividend, an interest payment, or even profits from real estate or a business.
Notably, investing often plays out over the long term, meaning years, if not decades. This makes it different from trading, a similar technique that also involves buying and selling assets but aims to create profit over days, weeks, or months. Trading can be riskier than investing and requires expertise and knowledge. Fidelity does not recommend you trade with substantial percentages of your money allocated for investing.
Two words: compound interest. That’s when your investment returns earn returns of their own, helping make it easier to achieve your financial goals, whether that’s saving for retirement, educational expenses, or something else.
Need an example? Let's compare the returns on a $6,000 investment that earned simple interest vs. compound interest, assuming each earns a hypothetical 7% rate of return.
In year 1, you'd have identical balances: a $420 increase for a total of $6,420. A year later, simple interest would yield $6,840 ($6,000 + $420 + $420), the compound-interest balance is slightly higher at $6,869.40 ($6,420 + 7% returns, or $449.40).
As illustrated in the chart below, over time the difference between simple and compound interest becomes significant. After 10 years, a $6,000 investment earning simple interest would be worth $10,200. The same investment earning compound interest would total about $11,800. And after 30 years, the difference is almost $30,000: about $45,700 for your compound-interest investment vs. just $18,600 for your simple-interest investment.
Keep in mind that there are no guarantees with investing. You may lose money when you invest, including all of your initial investment. You can help manage that risk by using strategies like dollar-cost averaging and diversification, though it is impossible to fully remove risk from the investing equation. Diversification does not ensure a profit or guarantee against loss.
When you think of investing, you probably think of stocks. Stocks represent partial ownership of a company, and they may appreciate in value as companies become more successful or desirable. They also may generate income through dividends, or regular payouts of profits that some companies pay to shareholders.
Remember: Not all companies offer dividends and stock values don't always go up. If share prices fall, you may wind up with stocks worth less than you paid for them.
A bond is essentially a loan from an investor to a borrower. Borrowers may be anyone from federal and local governments to private companies. Investors generally expect to receive full repayment of the loan—plus interest—by the time the loan is due.
Bonds are typically a less risky investment than stocks but often have lower returns. Both factors depend in part on the borrower’s creditworthiness. The most trustworthy, like the US federal government, may offer more modest interest rates because they are unlikely to fail to repay what they borrow. Certain private companies may have to offer higher interest rates to entice investors if they have a higher chance of defaulting on repayment. Some high-yield bonds can even have stock-like risk of loss. There are also bonds with lower interest rates that can offer tax advantages, such as municipal bonds or Treasury bonds. Additionally, bond rates can be impacted by other factors, like current and expected future interest rates, and even inflation.
Investment funds are professionally managed pools of money or assets earmarked for a specific investing goal/objective and risk level, like matching the performance of the S&P 500® index. But past performance is no guarantee of future results.
Because they contain many component investments, funds spread your dollars across many different investments, helping to shield you from taking a big hit if a single investment slumps. The most common types of investment funds are mutual funds and exchange-traded funds (ETFs). Investment funds typically contain stocks, bonds, money markets, or a mix.
How to start investing
Starting investing can be as simple as opening an investment account on your phone and picking a fund that aligns with your goals and risk tolerance. If you don’t already have a brokerage—that’s a company that helps you buy investments—be sure to ask yourself these 5 questions when you’re deciding where to open an account.
Then figure out what kind of investor you want to be.
If you prefer to do it all yourself, you’ll want to look for what are called self-directed brokerage accounts. As the name implies with self-directed investing, this means you’ll be picking funds, stocks, or bonds yourself and adjusting your portfolio as it drifts due to market changes yourself over time.
If you’d rather leave the heavy lifting of research and portfolio management to the pros, you may consider professionally managed accounts, such as a robo advisor. Robo advisors are an affordable digital financial service that uses technology to help automate investing based on information you provide about your financial situation.
If you want that human touch, you can also hire a financial advisor. They may be able to offer more personalized advice tailored to your specific financial situation and be able to answer questions you may have about your investments and investment strategies. This level of personal care does, however, typically come at a higher cost.