What Should You Know Before You Start Investing?

Investing can feel complicated when you’re first getting started. Between unfamiliar terminology, market headlines, and seemingly endless choices, it can be hard to know what you need to understand.

You don’t need to become an investing expert before you begin. Building a foundation around a few core concepts can help you ask better questions and make more informed decisions.

Start With the Basics

As boring as it may seem before choosing investments, it’s important to become familiar with a few important investing concepts that are the foundation of investing and financial planning:

• Risk and return: Investments with greater potential returns often come with greater uncertainty and the possibility of loss. It’s important to understand your risk tolerance and how that impacts the investment strategy you choose.
• Types of investments: This is a broad topic with a lot to explore, but a good place to start is to understand the basic differences between common investment types and the role each may play.
• Diversification: Spreading money across different investments can help manage risk, although it cannot eliminate it. This is one of the most important concepts for hedging against risk and ensuring you can navigate different market conditions.
• Time horizon: When you expect to need your money can influence how much investment risk may be appropriate. The time horizon can greatly influence risk and the types of investment vehicles you use to reach your goals, so knowing how long you must grow wealth is vital.
• Compounding: Returns that generate additional returns over time can make time an important part of investing.
• Fees and expenses: While investment fees may seem counterproductive to building wealth, the cost of professional advice can be invaluable to long-term wealth accumulation, so factoring costs into your investment strategy and having an understanding of them is an important part of the knowledge.

Learn Before You Follow

Social media, friends, family, and financial headlines can introduce interesting ideas, but they shouldn’t be your only sources of investing education. When you're learning, look for objective resources that explain both potential benefits and risks.

The U.S. Securities and Exchange Commission’s Investor.gov offers introductory information on investments, fees, diversification, and avoiding fraud. FINRA’s Investor Education resources provide information on investment products, markets, and common terminology. Educational institutions and accredited colleges or universities may also offer introductory courses in personal finance and investing.

Build Knowledge Gradually

You don’t have to learn everything at once. Choose one topic each week, keep a running list of unfamiliar terms, and practice explaining concepts in your own words.

Investing knowledge develops over time. Starting with reliable information and understanding the fundamentals can give you a stronger foundation for the financial decisions ahead.