Basics of investing
Are you new to investing and wondering where to start? You’re not alone. The world of investing can be an intimidating place. However, learning the basic terms and concepts can be a good place to start.
Overview: Investing is a way to grow money over time by buying financial products such as stocks, bonds and funds. This article explains core ideas including risk, diversification, time horizon, common account types and simple steps to get started. It also covers strategies for staying on track and why long-term investing is often preferred over short-term trading.
What is investing
Investing is using your money to buy financial products like stocks, bonds or mutual funds, with the goal of growing it over time. Unlike saving, investing involves risk because the value can go up or down.
Why people invest
Saving money is important, but investing can help your money grow. One reason to invest is inflation. Over time, prices tend to go up, and the same dollar buys less. Investing gives your money a chance to grow faster than inflation, so you may be able to reach financial goals faster.
Common goals include:
- Retirement
- A first home or other large purchase
- College or training costs
- Building long-term wealth
Risk, return and time
In general, investments with higher growth potential also have higher ups and downs. A big part of investing is matching your choices to your timeline. Your time horizon, or when you plan to use the money, can help determine what investment you choose.
- Short-term (0–3 years). You usually want steadier options and easier access to cash.
- Medium-term (3–10 years). A balanced mix may make sense.
- Long-term (10+ years). You can often handle more market swings because you have time to recover from drops.
Key investing concepts
Here are some investing concepts to help you understand the process of investing.
Asset classes (main types of investments)
Different kinds of investments that behave differently. Many portfolios use a mix.
Stocks: ownership in companies, can grow more but swing more.
Bonds: loans to governments/companies and are usually steadier and may pay interest.
Cash/cash-like: savings, money markets and CDs. They are considered safer and easy to access but have slower growth.
Alternatives: real estate or commodities. These can add variety but may be harder to buy or sell.
Diversification (“don’t put all your eggs in one basket”)
Spreading money across many investments so one bad performer doesn’t hurt your whole plan.
Diversify across companies or industries, countries/regions and asset classes (stocks, bonds and cash).
Investment portfolio
Collection of assets. It is made up of all your investments.
Example: an investment portfolio usually holds a mix of stocks, bonds, cash and funds.
Asset allocation (your mix)
How you divide your money among stocks, bonds and cash based on your goals, risk tolerance and timeline.
Longer time horizon often means more room for stocks.
Shorter time horizon often means more stability (like bonds/cash).
Compounding (growth on top of growth)
Your money earns returns, and then those returns can earn returns too. Time helps compounding work.
Example: $5,000 growing at 7% per year becomes about $9,800 in 10 years (without adding more). Regular contributions can boost results.
Fees matter
Fees lower your return over time, so it’s important to know what you’re paying.
Common fees include fund fees (expense ratios), advisory fees and trading costs. Small differences can add up over years.
Common types of investment accounts
An account is the container that holds your investments. Each account type has different taxes, rules and how easily you can take money out. Here are some common investment accounts:
Retirement accounts (tax advantages may apply)
401(k) / 403(b)
Retirement savings through work
May lower taxes now (Traditional) or allow tax-free qualified withdrawals later (Roth option, if offered)
Usually meant for retirement; early withdrawals may have taxes/penalties (rules apply)
Retirement accounts (tax advantages may apply)
Individual retirement savings
You may get a tax break now; you generally pay taxes when you withdraw in retirement (rules apply)
Early withdrawals may have taxes/penalties (rules apply)
Retirement accounts (tax advantages may apply)
Individual retirement savings
You contribute after-tax money; qualified withdrawals in retirement can be tax-free (rules apply)
Rules apply; early withdrawals on earnings may have taxes/penalties
Education accounts
Saving on education costs for your kids
Tax advantages when used for qualified education expenses (rules vary by state/plan)
Withdrawals for non-qualified uses may face taxes/penalties (rules apply)
Taxable investing
Taxable brokerage account
Investing for any goal (flexible)
No special tax break; you may owe taxes each year on dividends, interest and realized gains
Generally flexible access; you can usually withdraw anytime
*Note – this is general information but check with a financial advisor for any specific questions you may have about accounts information and rules.
How to start investing
- Know your monthly money picture. Track what comes in and what goes out. Even small, regular investing can help over time.
- Build an emergency fund. Many people aim for three to six months of essential expenses in a safe, easy-to-access place. An emergency fund may help you avoid selling investments during a bad market time when an unexpected bill hits.
- Make a plan for debt. High-interest debt (like many credit cards) can grow quickly. Some people focus on paying debt down while still contributing enough to get an employer retirement match.
- Set clear goals. Consider writing down the different purposes of your investments, including what the money is for, how much you may need and when you’ll need it (your time horizon).
- Choose a basic approach. Many beginners use funds that spread risk automatically. Some of these include broad index funds, which follow a market index or target-date funds, which change their mix over time as a target year gets closer.
- Automate contributions. Automatic transfers may make investing easier and help you stay consistent.
Managing risk and staying on track
Here are some things that may help you manage risk when investing.
- Diversifying on purpose. Avoid relying too much on one company, one industry or one type of investment.
- Dollar-cost averaging or steady investing. This means investing a set amount on a regular schedule (like monthly). You buy more shares when prices are lower and fewer when prices are higher. It doesn’t guarantee profits, but it can reduce the pressure of trying to “pick the perfect time.”
- Rebalancing. This is the process of keeping your mix in line. Over time, market changes can shift your mix. For example, if stocks grow faster than bonds, stocks may become a large share of your portfolio. Rebalancing means adjusting back to your target mix. Some people check and address it once or twice a year.
- Check progress the right way. Instead of reacting to daily headlines, focus on saving regularly and adjusting your investments to your time horizon and life changes (like getting married, having kids, getting a promotion at work, etc.)
Frequently asked questions
Q: How much money do I need to start?
A: Often, not much. Some brokerages have low minimums, and some investments allow fractional shares. The habit of investing regularly is usually more important than starting with a large amount.
Q: Should I pay off debt or invest?
A: It depends on the interest rate and your situation. High-interest debt often deserves attention first. If you get an employer retirement match, many people try to contribute enough to receive it while also working on debt.
Q: Should I wait for the “right time” to invest?
A: Trying to predict the market is very hard, even for professionals. A steady plan and regular contributions can help you avoid guessing.
Q: What is a target-date fund?
A: It’s a fund that holds a mix of stocks and bonds and gradually becomes more conservative as the target year approaches. It can be a simple “all-in-one” option, but it’s still important to review fees and confirm the target year fits your timeline.
Q: What are the main risks of investing?
A: Investing involves risk, including the possible loss of principal (your original money). Stock prices can change quickly. Bonds can be affected by interest rates and the borrower’s ability to pay. Diversification can help manage risk, but it cannot remove it.
Q: What’s the difference between trading and long-term investing?
A: Trading means buying and selling more often, sometimes trying to profit from short-term price changes. Day trading is a fast, high-risk type of trading that can take a lot of time and attention. For beginners, it is recommended to consider long-term investing, since it focuses on diversification, regular saving and patience.
Investing doesn’t have to be complicated. Start with your goals and your time horizon. Build an emergency fund, manage high-interest debt and choose a diversified mix that matches your comfort with risk. Automate contributions, review your progress a few times a year and adjust when life changes. If you are ready to get started, consider investing with guidance from a registered agent.
This article was drafted with the help of AI and reviewed by State Farm editors.
The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.
State Farm VP Management Corp. is a registered broker-dealer.
State Farm VP Management Corp. is a separate entity from those affiliated and/or unaffiliated entities which provide advisory services, banking products and insurance products.
Securities are not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.
Neither State Farm® nor its agents provide tax or legal advice.
Diversification does not assure a profit or protect against loss.
The stocks of small companies are more volatile than the stocks of larger, more established companies.
Bonds are subject to interest rate risk and may decline in value due to an increase in interest rates.
Dollar cost averaging. Systematic investing or Automatic Investment Plan do not assure a profit or protect against loss.
Asset allocation does not assure a profit or protect against loss.
Past performance is no guarantee of future results.
You could lose money by investing in the Money Market Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
Before investing in a 529 plan, consider the plans investment objectives, risks, charges, and expenses. Contact the plan issuer for an official statement containing this and other information. Read it carefully.
Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.
AP2026/06/0770
