Afraid to Start Investing? Start With $50 at a Discount Broker

The problem

For a lot of people, the hardest part of investing is the fear of getting it wrong.

When I started, the terms alone were enough to make me hesitate: ETFs, mutual funds, expense ratios, ticker symbols, market versus limit orders, NAV, dividends. I didn't know what half of them meant, and I worried I'd make the wrong choice just because I didn't understand the words. So it's easy to put it off: "I'll learn about it next year," "I'll start when I have more saved," "I'll wait until the market calms down."

If that sounds familiar, you're not alone. It took me a while to build some experience and confidence. What got me there was starting small. I started with a growth index fund and a value index fund, about $50 each, and watched how it all worked: the fees, the timing of trades, the mobile app and the terminology. Then I set up a small recurring investment and kept learning as it ran. At that size, a mistake cost me a few dollars.

Getting started matters more than picking the perfect fund, because the biggest thing working for you is time. Money that's invested earns a return, and then that return earns its own return, year after year. The longer it has, the more of the work growth does for you. Waiting a few years to "figure it out" can cost more than any beginner mistake.

You can see this for yourself with the Savings Growth Calculator. Set your age and what you could save, then look at "The cost of waiting": the same savings, started five or ten years later, can end up hundreds of thousands of dollars smaller.

What you need

• An account at a discount broker. A discount broker is an investment company where you buy and sell investments yourself, online or in an app, for low or no fees. Opening an account is free and takes about as long as opening a bank account.
• A bank account to move money from. You link it once, then transfer money in.
• An amount you can invest regularly, even a small one. Starting with a little and adding to it every month matters more than starting big.
• A basic understanding of what you're buying. The next section covers the three things you'll see most.

How it works

You'll see three kinds of investments everywhere.

A stock: a small piece of one company

When you buy a share of stock, you own a tiny piece of that company.

• Diversification: none on its own. Your money rides on how that one company does. If it struggles, your investment can drop a lot, or even go to zero.
• How it trades: on a stock exchange, any time the market is open. The price changes minute by minute, and you buy or sell at the current price.
• Returns: the share price going up (or down), plus dividends if the company pays them. Some stocks do far better than the market and many do worse; it's hard to know ahead of time which will be which.

A mutual fund: a basket of investments, priced once a day

A mutual fund pools money from many people and buys a basket of investments: dozens, hundreds or even thousands of stocks or bonds.

• Diversification: built in. One purchase spreads your money across many companies, so one company having a bad year doesn't sink you.
• How it trades: directly with the fund company, and only once a day. Orders placed during the day all get the same price, set after the market closes. You can usually buy in dollar amounts, like $100, rather than whole shares.
• Costs: every fund charges a yearly fee called the expense ratio, taken out of the fund's value. Some mutual funds have a professional manager picking investments and charge more for it; some also charge sales fees. Check before you buy.
• Returns: whatever the basket earns, minus the fees. Over long periods, most funds with a manager picking investments have earned less than an index fund, largely because of their higher fees.

An index fund: the whole market, at low cost

An index fund buys everything in a market index, a list that represents part of the market. The S&P 500, for example, is about 500 of the largest U.S. companies. Nobody is trying to pick winners; the fund holds the list.

• Diversification: broad. One index fund can own hundreds or thousands of companies, or a whole market of bonds.
• How it trades: index funds come in two forms. As a mutual fund, it trades once a day like any mutual fund. As an ETF (exchange-traded fund), it trades on the exchange all day, like a stock. Both hold the same kind of basket.
• Costs: usually very low, because there's no one picking investments. Many cost a few dollars a year for every $10,000 invested, and some cost nothing at all.
• Returns: about whatever that market returns, minus a tiny fee. You won't beat the market, but you won't fall far behind it either, which over decades is a very good place to be.

Side by side

Where to start: low-cost index funds

For a new investor, low-cost index funds are a great place to start. "Low-cost" means a very small expense ratio, the yearly fee the fund takes out of your balance. On a broad index fund it's often well under 0.1%: less than $10 a year for every $10,000 you have invested. Higher-cost funds can charge 0.5% to 1% or more, and that gap compounds against you year after year.

Index funds also do better than most other funds over the long run. A fund with a manager picking investments has to beat the market by more than its extra fees just to come out even, and over 10 or 20 years most don't. A low-cost index fund keeps the market's return, minus a tiny fee, which ends up ahead of most of them.

One way to begin is with two index funds, which is where I started:

• A growth fund holds companies expected to grow faster than average, often reinvesting their profits instead of paying dividends. Many well-known technology companies fall here. Growth funds can rise faster in good years and fall harder in bad ones.
• A value fund holds established companies whose share prices look low compared with their earnings, often steady businesses that pay dividends. Value funds tend to move more gently.

Together, the two cover a big share of the stock market, and they tend to take turns doing better, which smooths the ride. The example funds in the calculator are index ETFs I own, including a growth fund and a value fund, plus dividend-paying companies, bonds and international companies. They're there to show how a mix works, not as picks for you.

Setting it up

1. Pick a discount broker and open a brokerage account, online or in its app. A brokerage account is the most basic type: an account where you invest money you've already paid taxes on. You can add money and take it out whenever you like, and you pay taxes along the way on dividends and on gains when you sell. You'll need your Social Security number, your address and your bank details. If you're saving for retirement, also ask about a retirement account like an IRA, which can have tax advantages but has rules about when you can take money out. Check whether your job offers a 401(k) with a match, too, which is free money worth getting first.
2. Link your bank account and move in your first amount.
3. Choose one or two low-cost index funds to start, like a growth fund and a value fund. Look at what each one holds, its expense ratio and its history on the broker's fund page. One or two is plenty.
4. Make a few small practice buys, about $50 each. This is how I started. Small amounts let you learn how it works without much at stake: what each fee is, when an order actually goes through, where things are in the app and what the terms mean. That first purchase is the hardest one; after it, the screens start to make sense.
5. Set up a small recurring investment, like $50 a month, while you learn. Most brokers can move money in and invest it automatically every month or every payday, so it happens whether or not you remember and whatever the market is doing.
6. Turn on dividend reinvestment. Many funds pay dividends (from stocks) or interest (from bonds). Reinvesting them automatically buys more of the fund, which is how growth starts earning growth.
7. Watch it for a few months. Track what you put in, what it's worth and the dividends that come in. You'll see it go up and down, and you'll get used to that. That's the confidence you're building.
8. Raise the amount as you get comfortable. $50 a month is a starting point, not the goal.
9. Plug your numbers into the calculator to see where steady saving could take you. It's a good reminder of why you started.

Upkeep

• Check in a few times a year, not every day. Daily ups and downs are noise; looking too often makes it feel scarier than it is.
• Raise what you invest when you can, like after a raise. Even small increases add up over decades.
• Don't sell in a panic. Markets drop sometimes, occasionally by a lot. Historically they've recovered over time, and selling during a drop locks in the loss.
• Look over your mix once a year to make sure it still fits your goals and how close you are to needing the money.

What it doesn't fix

• Investing has real risk. Prices go down as well as up, and past returns don't promise future ones. Money you'll need in the next few years usually belongs in savings, not in stocks.
• An emergency fund comes first. Having a cushion in savings means you won't have to sell investments at a bad time.
• It's not a plan for your whole financial picture. Taxes, debt, account choices and retirement timing are all different for each person.
• I'm not a financial advisor, and this isn't financial or investment advice. Talk with a qualified financial professional about what fits your situation.

If you do one thing this month: open the account and make one $50 buy. My first one was the hardest, and the screens made a lot more sense after it. This describes what I do, not financial advice; the disclaimer has more.

Products named here are ones I bought and use myself. No sponsorships, no affiliate links.
I'm not a licensed electrician or other professional. Follow the product instructions and local codes, and call a qualified pro if you're unsure. Full disclaimer.