The basic places to invest money

When you have money to invest, you are choosing between a few broad categories: keeping it in a bank account earning interest, lending it to a company or government through bonds, owning a piece of a company through stocks, or putting it into a fund that holds a mix of these things. Each one works differently, costs different amounts, and grows at different speeds. Your choice depends on how long you can leave the money alone, how much risk you can handle, and what you are saving for.

Most people start with a savings account or certificate of deposit (CD) at a bank. These are the safest options because the bank insures your money up to $250,000 through the Federal Deposit Insurance Corporation (FDIC). You will not get rich on the interest, but you will not lose what you put in. A savings account lets you withdraw money whenever you need it. A CD locks your money away for a set time—three months, one year, five years—and pays you a higher interest rate in exchange for leaving it alone.

Beyond the bank, you move into investments where your money can go down as well as up. Stocks are pieces of ownership in real companies. Bonds are loans you make to companies or governments that pay you interest. Mutual funds and exchange-traded funds (ETFs) bundle stocks or bonds together so you own a little bit of many companies instead of betting everything on one. These are not insured by the FDIC, but they have historically grown faster than savings accounts over long periods.

Key Takeaways

  • A savings account or CD at a bank is the safest place to start because your money is insured by the FDIC up to $250,000, though the interest rate is low.
  • Stocks, bonds, mutual funds, and ETFs can grow faster over time but can also lose value, and they are not insured by the FDIC.
  • How long you plan to leave your money invested matters more than which specific investment you pick—money you need in the next few years should stay in a bank account.
  • You buy stocks and funds through a brokerage account, which is different from a bank account and has its own login and rules.
  • Starting with a single low-cost index fund in a brokerage account is a common first move because it spreads your risk across hundreds of companies at once.

How a brokerage account works

To buy stocks or funds, you need to open a brokerage account. This is not a bank account—it is a separate account with a company like Fidelity, Charles Schwab, Vanguard, or E-Trade. You link it to your bank account, transfer money into it, and then use that money to buy investments. The brokerage holds the investments for you and sends you statements showing what you own and what it is worth.

Opening a brokerage account takes about 10 minutes online. You will need your Social Security number, a government ID, and proof of address. Most brokerages do not charge you to open an account or to hold money in it. They make money when you buy or sell investments—though many now charge zero commission on stock and ETF trades, meaning you pay nothing per transaction. Some brokerages charge fees if your account falls below a minimum balance, usually $1,000 to $25,000, so check before you open.

Once your account is open and funded, you can buy investments immediately. You search for a stock or fund by its ticker symbol (a short code like AAPL for Apple or VOO for a Vanguard index fund), enter how many shares you want, and confirm the purchase. The money leaves your brokerage account and the investment appears in your holdings. You can sell it the same way whenever you want, though selling triggers a tax bill if the investment gained value.

The difference between stocks and funds

A stock is a single company. When you buy Apple stock, you own a tiny piece of Apple. If Apple does well, the stock price usually goes up and you make money. If Apple struggles, the price goes down and you lose money. Picking individual stocks means researching companies, understanding their business, and betting that you can predict which ones will succeed. Most people who try this lose money to people who do it for a living.

A mutual fund or ETF is a basket of stocks or bonds managed by a professional. Instead of owning one company, you own a piece of 100 or 500 companies at once. If one company fails, it barely dents your investment because the others are still there. This spreading of risk is called diversification. An index fund is a type of fund that simply copies a list of companies—like all 500 companies in the S&P 500 index—rather than trying to pick winners. Index funds charge very low fees because there is no manager trying to beat the market, just a computer tracking the list.

For someone starting out, a single low-cost index fund is usually the better choice than individual stocks. You get instant diversification, you do not have to pick companies, and the fees are often under 0.1 percent per year. Vanguard Total Stock Market Index (VTI), Fidelity Total Market Index (FSKAX), and Schwab U.S. Total Stock Market Index (SWTSX) are examples of funds that hold thousands of U.S. companies and cost very little to own.

How time changes what you should invest in

The most important question is not which investment to pick—it is how long you can leave your money alone. Money you need within the next two years should stay in a savings account or CD. Money you will not touch for five years or more can go into stocks or stock funds. The reason is that stocks bounce around a lot in the short term but tend to go up over long periods. If you need the money in two years and the market drops 20 percent, you are stuck selling at a loss.

A common approach is to split your money by time horizon. Keep three to six months of living expenses in a savings account for emergencies. Put money you need in two to five years in a CD or bond fund. Put money you will not need for ten years or more in a stock fund. This way, you are not gambling with money you depend on soon, but you are also not leaving long-term money in a savings account earning almost nothing.

Your age matters too, though less than people think. A 25-year-old with 40 years until retirement can handle a lot of stock market swings because there is time to recover from a bad year. A 65-year-old living off their investments needs more money in bonds and savings accounts because they cannot wait ten years for the market to bounce back. But even a 65-year-old usually keeps some money in stocks because they might live another 30 years.

Understanding risk and fees

Risk means the chance that your investment will lose value. Savings accounts have almost no risk—the bank insures your money. Bonds have low risk—you are lending to a stable company or government that will probably pay you back. Stocks have high risk—the company might fail, or the whole market might drop. A fund holding 500 stocks has less risk than a single stock because one bad company does not sink you, but it still has more risk than a bond.

Higher risk usually means higher potential returns, but it is not may provide. You might take a big risk and still lose money. The trade-off is that if you have time to wait out the bad years, stocks have historically returned more than bonds or savings accounts over decades. But "historically" is not a promise—past performance does not may provide future results.

Fees eat into your returns. A mutual fund that charges 1 percent per year costs you $100 per year for every $10,000 you invest. Over 30 years, that 1 percent difference between a cheap fund (0.1 percent) and an expensive one (1.1 percent) can cut your final balance in half. Always check the fee before you buy. Look for the expense ratio, which is listed as a percentage. Anything under 0.2 percent is cheap. Anything over 0.5 percent is expensive.

Tax accounts that help you invest

The government offers special accounts that let your investments grow without paying taxes on the gains, as long as you follow the rules. A 401(k) is offered by your employer and lets you put money in before taxes are taken out, which lowers your tax bill that year. A traditional IRA works the same way—you contribute money, deduct it from your taxes, and pay taxes later when you withdraw. A Roth IRA takes money after taxes, but then your investments grow tax-free forever and you do not pay taxes when you withdraw.

These accounts have limits on how much you can contribute each year—for 2024, a Roth IRA caps out at $7,000 per year if you are under 50. They also have rules about when you can withdraw the money without penalties, usually age 59½. But if you are investing for retirement and have decades to wait, these accounts are almost always better than a regular brokerage account because the tax savings compound over time.

You open an IRA through a brokerage like Fidelity or Vanguard, the same way you open a regular brokerage account. You can invest the money in the same stocks and funds. The only difference is the tax treatment and the withdrawal rules.

Common mistakes when starting out

The biggest mistake is trying to time the market—waiting for the price to drop before you buy, or selling when you are scared. Markets go up and down unpredictably. People who try to guess the timing usually buy high and sell low, the opposite of what they intended. A better approach is to invest the same amount every month, regardless of whether the market is up or down. This is called dollar-cost averaging and it removes emotion from the decision.

Another mistake is chasing performance. You see a fund that went up 50 percent last year and buy it, only to watch it drop 30 percent the next year. Past performance does not predict future results. A fund that did great last year might do poorly this year. Stick with a simple, low-cost plan and do not change it based on headlines.

A third mistake is investing money you might need soon. If you have credit card debt or no emergency fund, investing is the wrong move. Pay off high-interest debt first, build up three to six months of living expenses in a savings account, and then invest the rest. Investing is for money you do not need for years.

Frequently Asked Questions

How much money do I need to start investing?

Most brokerages let you start with as little as $1. Some funds have minimum investments of $1,000 or $2,500, but many brokerages now let you buy fractional shares, meaning you can invest $50 and own a piece of a $500 fund. Start with whatever you can afford and add more over time.

Should I invest in individual stocks or funds?

For most people, a low-cost index fund is the better choice. Individual stocks require research and luck, and most people who pick them underperform the market. A fund gives you instant diversification and removes the pressure to pick winners. If you want to learn about stocks, start with 90 percent in a fund and 10 percent in individual stocks you research.

What is the difference between a brokerage account and a bank account?

A bank account holds cash and is insured by the FDIC up to $250,000. A brokerage account holds investments like stocks and funds, which are not insured and can go down in value. You need a brokerage account to buy stocks or funds. Many people have both—a bank account for emergencies and a brokerage account for long-term investing.

Can I lose all my money investing in stocks?

You can lose a lot, but losing everything is rare unless you put all your money in one company that goes bankrupt. A diversified fund holding hundreds of companies is much safer. Even during the 2008 financial crisis, a broad stock fund lost about 50 percent, not 100 percent. If you spread your money across different types of investments and do not panic-sell during downturns, the risk is much lower.

When should I start investing?

As soon as you have money you will not need for at least five years and no high-interest debt. Time in the market matters more than timing the market. Someone who invests $5,000 at age 25 and never adds to it will have more at age 65 than someone who waits until age 35 and invests $10,000. The extra ten years of growth compounds into a huge difference.