How to Buy Your First Stock(s) or Fund(s)

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So you're ready to start investing. That's great, because it's never too early. The sooner you start investing, the more you'll be able to take advantage of the power of compound interest. Here's how to get started.

Open an Account

In order to invest, you'll need an investment account at a broker such as TD Ameritrade, Schwab, Vanguard, or Fidelity. Prominently displayed on their sites, you'll find "open an account" buttons.

After clicking, you'll have to decide whether to open a taxable account or a tax-advantaged account, such as an IRA. If your purpose for investing is to build a retirement nest egg, you'll probably want to open an IRA. Keep in mind, however, that IRAs have relatively low annual contribution maximums. If you want to invest more than $5,500 per year, a taxable account would be necessary.

After entering some personal information, you'll need to fund the account, usually with an electronic transfer from your checking account.

Of the brokers just mentioned, only TD Ameritrade has no minimum required amount for opening an account. The others require $1,000 to $2,500, although some allow you to open an account with less if you sign up for automatic monthly contributions. At Schwab, the monthly commitment is $100. Shop around to find a broker that best meets your needs.

Choose Your Investment Vehicle

There are two primary types of stock market investments — stocks and mutual funds.

Buying individual stocks probably sounds like a fun way to get started with investing. There's something inherently appealing about the idea of owning a piece of some of the most famous companies in the world, such as Amazon, Facebook, and Apple.

However, while investing in stocks might be exciting, mutual funds have some advantages over stocks. When you buy the stock of one company, your money isn't diversified at all. The performance of your portfolio is completely dependent on the performance of that one company. If the company has a bad year, your portfolio will have a bad year.

However, if you invest in 10 companies and one has a bad year, some of the other ones will likely have good years, which may more than offset the one company's losses. That's why making sure your portfolio is diversified is so important.

In order to be adequately diversified, you would need to buy stock in many companies. But when you're starting out, you probably don't have all that much money to work with — which is why you may want to consider using a mutual fund.

When you buy shares of a mutual fund, your money is inherently diversified. That's because a mutual fund is a pool of money from many investors that the fund manager invests in many companies (there are also bond funds, real estate funds, etc.). Buying a single share of a mutual fund gives you instant diversification.

Decide What to Invest In

One of the easiest ways to invest for your retirement is to choose a target-date mutual fund. With such funds, you just choose the one with the year of your intended retirement in its name (Fidelity Freedom 2040, for example, or Schwab Target 2035). The fund will be designed in a way that the fund manager believes is appropriate for someone with your investment time horizon.

If you're 30 years old and plan to retire when you're 70, you would choose a 2055 fund (most target-date funds are offered in five-year intervals, so you choose the one that's closest to the year of your intended retirement). Such a fund would likely be mostly invested in stocks and a little bit in bonds. As you get older, it will automatically change that investment mix to become appropriately more conservative.

Many mutual fund companies offer such funds. Here are the target-date offerings from Schwab, Fidelity, and Vanguard. TD Ameritrade doesn't have its own mutual funds, but offers target-date funds from several mutual fund companies.

Look for no-transaction-fee (NTF) funds, which means there will not be a fee associated with buying the fund, and be sure to check the fund's minimum required investment amount.

Invest

Now you're ready for action. After logging onto your account, look for a button that says "trade" or "buy and sell." You buy or sell mutual funds in one place, and stocks in another.

To buy a mutual fund, you'll need to look up and then enter its "ticker" symbol — the four- or five-letter abbreviation for the fund's name. Then enter the amount you'd like to invest and click "buy."

Of course, there's more to know about investing and there are many different ways to invest. But this simple tutorial will get you started.

Welcome to the world of investing.

Have you gotten started investing? What are you waiting for?