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Investing: A Complete Tutorial for Beginner Investors

Written by experts Pat Collins and John Halloran.

Table of Contents

  1. Introduction to Investing
  2. Definition of Investing
  3. What is Compounding?
  4. Know What You’re Aiming For
  5. How Investing Has Been Changed By Technology
  6. Investing Types and Styles
  7. Investment Portfolios and Diversification
  8. Summary

No. 1: Introduction to Investing

Investing is not only for the wealthy, it’s a tool anyone can use to build wealth. It’s certainly not a ‘get rich quick’ scheme, but anyone can start an investing program using a range of vehicles that make it easy to start with a small amount, then periodically add to a portfolio. Perhaps the main difference between investing and gambling is that investing takes time!

In this tutorial for beginner investors we aim to help you understand what investing is, what investing means, and we’ll explain how compounding works. We’ll go over some of the basics of the markets and the investing world, and hopefully provide an insight into different techniques and how they’re used. This should help you consider which methods and investing strategies might be the best fit for you.

No. 2: Definition of Investing

According to Investopedia, investing is ‘the act of allocating resources, usually money, with the expectation of generating an income or profit.  Warren Buffet, the American business magnate and investor, stated that ‘investing is the process of laying out money now to receive more money in the future’.

What is the goal of investing?  The goal is to ensure your money is put to work in an investment vehicle that will, over time, grow your money.

What is investing really about? Investing is actually about ensuring you’re working smarter, not harder. Whether you work for your own business or for a company, most people work pretty hard. They work long hours, with lots of stress and lots of personal sacrifices along the way. One way to make the most of your heard-earned money is to take some of it and invest for your future needs.

When you invest, it means you’re making priorities for your money. It’s so easy to spend money and the instant gratification received can become very addictive, regardless of whether you’re enjoying a fancy dinner, taking an exotic vacation, or simply buying that new outfit; however, while all of these splurges are great and certainly make your life more enjoyable, investing is a different approach to handling your finances. It means forgoing current desires to invest in your financial future.

Investing is a sensible way of setting money aside while you carry on with your busy life. That invested money will continue working for you, enabling you to reap the rewards of your hard work in the future. Basically, investing is one way of creating a happier ending.

Yes, investing can be a complicated subject and there’s certainly a lot to learn; however, it can also be an extremely rewarding subject. If you want to continue on this learning path you might want to consider Investopedia’s Investing for Beginners Course. Your instructor for the course is a Chartered Financial Analyst, and you’ll receive an in-depth introduction to this fascinating topic. You’ll be taught the basics of investing, managing a portfolio, techniques for risk reduction, and so much more. There are in excess of 75 lessons containing exercises, on-demand video, and interactive content.

A Wide Range of Investing Vehicles

There are a number of ways in which you can begin investing, including putting money into bonds, stocks, real estate, mutual funds, ETFs (Exchange-Traded Funds), and other types of investment vehicles; you can even start your own business.

Each investment vehicle has it’s negatives and it’s positives; all of which will be discussed in a later section. It’s imperative that you have a complete understanding of how different types of investment vehicles work; this information is critical to your investing success. As an example: Do you know what a mutual fund invests in? What are the expenses and fees? Who manages the fund? Will you be hit with penalties or costs if you need to access your money? You must know the answers to these questions prior to investing your money. 

You must also understand that, while there are no guarantees you’ll make money, your own knowledge and work can dramatically increase the odds of becoming a successful investor. Research (and more research!), analysis, and simply reading investment articles and journals can all be of immense help.

Now that we have your interest in investing and you understand why investing your money is important to the success of your financial future, let’s now take a closer look at compound interest, referred to by some investors as ‘the miracle of mathematics’.

No. 3: What is Compounding?

Compounding is an asset’s ability to generate earnings; these earnings are either reinvested or stay invested, thus generating their own earnings. Compounding can also be described as an asset’s invested earnings generating more return. Two things are required for compounding to work, and these are a) time, and b) the reinvestment of earnings. The beauty of compound interest is that it helps grow your initial investment exponentially. Compounding is the best possible tool for young investors and it’s definitely the main argument for beginning as early as possible.

Let’s take a look at some examples of how compound interest works –

First Example: Apple Stock

According to Morningstar’s Advisor Workstation tool, an investment of $10,000 in AAPL (Apple stock) on December 31st, 1980, would have resulted in growth to $2,709,248 at market’s close on 28th February 2017. Including the reinvestment of all stock dividends, this equates to an annual return of 16.75%.

In 2012 Apple commenced paying dividends, but even without the reinvestment of dividends the closing balance of this investment would have been $2,247,949. This is 83% of the amount that would have been earned by reinvesting.

Apple is certainly a very successful company and their stock is always a winner; however, compound interest works just as effectively with index funds because they’re managed in such a way as to reflect the results of a major market index, like the S&P 500.

Second Example: Vanguard 500 Index 

The popular (VFINX) Vanguard 500 Index fund, held for 20 years as of 28th February 2017, is our second example of the benefits of compounding.

If an investment of $10,000 was made into the fund on 28th February 1997, at the end of a 20-year period it would have grown in value to $42,650. The assumption is that all interest or capital and fund distributions for dividends are invested back into the fund.

This original $10,000 investment without reinvestment would only have increased to $29,548, which is 69% of the total that would have been achieved with reinvestment.

In both of our examples, if the investment was held in a taxable account, current year taxes would have been due and payable on any stock dividends or fund distributions; however, most investors understand that these earnings can continue growing, tax deferred, in an employer-sponsored 401K or other retirement account.

Why You Should Start Early

An alternative way of looking at how powerful compounding can be is to determine how much less investment would be required if you started earlier to achieve the same result.

Let’s say you’re 25-years old and your goal is to accumulate $1 million by the time you turn 60 years of age. Assuming a regular return of 5%, your investment would need to be $880.21 each and every month. 

Now let’s say you’re 30-years of age and you have the same goal. Using the same assumptions, you would need to invest $1,679.23 each and every month. 

Okay, let’s do the same for a 45-year-old: they would need to invest $3,741.27 to achieve the same result. Looking at these figures you can see that the 45-year-old must invest almost 4 times the amount the 25-year-old invests. 

So you can see that: a) starting early is key to saving for your retirement, and b) how setting money aside early in your career can be extremely financially rewarding.

No. 4: Know What You’re Aiming For

No approach or investing strategy suits every investor. Everyone has different goals, different reasons for investing, different time horizons, and different levels of comfort when it comes to investing. It’s really important that you define your own reasons for investing,  your comfort zone, and be very clear what your reasons and goals are.


Define your goals for the money you intend investing. Would the safety of principal with a specific level of return be sufficient for you? Perhaps you have a longer-term goal and your reason for investing is to acquire finance for your child’s college education? Perhaps your goal is to set yourself up for a comfortable retirement? Maybe your plan is to set up different investments for different goals?

All of the above are possible; however, before investing any money you must know why you want to invest and what your goals are. What end result are you looking for? Part of your goal-setting process should be to clearly define your objectives, your time horizon, and your risk tolerance.

Risk Tolerance

What does risk mean? When discussing investing, risk means the chance of losing money. To put it simply, the risk you’re taking is that the amount of money you invest will reduce in value, possibly even to zero.

There is risk of some sort involved in any type of investing. Stocks you’ve invested in can, and maybe will, do down in value over various time periods. The S&P 500 dropped 37% in 2008, and while this was one of the worst declines in the history of the stock market, it’s not uncommon for the market to experience less severe market conditions.

So the question you must ask yourself is this: How much can you tolerate your investments dropping in value? Your risk tolerance may be part of your time horizon, typically a function of age, which is when do you need the money? If you’re in your 20s or 30s and you’re investing for your retirement, you probably shouldn’t worry too much about the volatility (fluctuations in value) of your investments. On the other hand, you should have a lower risk tolerance if you’re in your 60s simply because you don’t have time to fully recoup a big loss in your investment.

Align your investments with your own time horizon, which is when you will need the money. This especially applies if your investments are aimed at a specific goal. Let’s say you’re young parents and you’ve decided to invest for your child’s college education. This is considered a long-time horizon, which will allow you to handle some risk during the early years of the investment. Once your child reaches high school, you may want to consider adjusting the investment mix to ensure your investment doesn’t experience any major losses just prior to the start of college.

Trading Frequency

Have you considered how long you intend staying with one particular investment? Warren Buffet doesn’t worry about market fluctuations and hardly ever sells a stock he owns. In other words, his is a ‘buy-and-hold’ strategy. And then there are traders who buy and sell stock every day, which is great for professional investors but definitely not recommended for the average investor.

Don’t take this to mean we’re suggesting you hold your investment forever, because things do change and every investor should periodically review their individual holdings to ensure they still conform to their initial goals and they’re appropriate for your current situation.

Comfort and Knowledge 

Your investment decisions should be determined by your willingness to spend time researching your options, and your comfort level. Some investment vehicles demand in-depth knowledge and constant monitoring, and others require much less attention – they’re more set-and forget investments.

Some investors select a range of low-cost index funds, covering different sections of the markets like foreign stocks, domestic stocks, and bonds. Other choose professionally managed vehicles like target date mutual funds; with this type of investment the manager allocates portfolio over time. As the target date of this type of fund gets closer, its exposure to equities is reduced. 

Savvy investors with knowledge and lots of investing experience often invest in actively managed mutual funds, real estate, individual stocks, and other types of investments.

Know What You Don’t Know!

It’s imperative that investors are fully aware of what they do know, and what they don’t know. Never allow yourself to be coerced into investing in something you’re uncomfortable with or that you simply don’t understand.

No. 5: How Investing Has Been Changed By Technology

We all know that technology has had an enormous effect on pretty-much every aspect of our lives, and this definitely includes investing. The truth is that, over the past several decades, investing has been democratized by technology, and there’s been a significant downward pressure on fees.

Buying and Selling Securities

It wasn’t that long ago that an investor wanting to make a trade would call their stockbroker and place their order. The buying and selling of stocks attracted a commission rate that was relatively standard, but high, due to lack of alternatives and lack of information. Investors were left in the dark and really weren’t aware how their investments were going until they received an account statement in the mail.

Investors today can use the internet to search for a brokerage firm with low transaction fees, and they themselves can buy and sell securities with just the click of a mouse.

A price war in the cost of ETFs and trading stocks started with Fidelity when they reduced their transaction fees to $4.95 per trade. This was quickly matched by Schwab, followed straight after by TD Ameritrade. Some custodians, including brokerage firms, are offering apps to investors to allow them to use their phones to track their investments. The investor can establish alerts on various holdings, so they’re always aware of how their investment is travelling.

And thanks to technology, both investment advisors and individual investors are now armed with tools that allow them to analysis their investments and deliver cutting edge research to assist in managing their portfolios.

 Robo Advisors

Perhaps the biggest innovation over the last ten years has been the arrival of robo advisors. Companies like WealthFront, Betterment, and others, have used this technology that uses algorithms to build and manage client portfolios. The majority of robo advisors invest in low-cost ETFs, so because the human element is taken out of the investing equation the cost of investing can be dramatically reduced.

Robo advisors are also able to offer other services. Both WealthFront and Betterment provide tax loss harvesting services for taxable accounts, while Betterment has a 401K product and also a variation that partners with financial advisors.  

Not wanting to be left out, some of the bigger players in the investing game, like Fidelity, Vanguard, and Schwab, have created their own robo services, sometimes enhanced with a human advisor. We believe that, in the years to come this technology will continue revolutionizing the investing scene.

No. 6: Investing Types and Styles

There are a range of investments and styles of investing to select from, like ETFs, Mutual funds, closed-end mutual funds, individual stocks and bonds, real estate, owning all or part of a business, and other alternative investments. 


When an investor buys shares in stock they have the opportunity to enjoy the Company’s success through dividends declared by the company and increases in the stock’s price. While shareholders don’t own the assets, they do have a claim on the assets of the company should liquidation occur.

Investors who hold common stock have the right to vote at shareholders’ meetings; they also have the right to receive any declared dividends. 

Investors who hold preferred stock do not have voting rights; however, when it comes to the payment of dividends, they do have preference over common shareholders. They also have preference over holders of common stock when it comes to claiming company assets.


What is a bond? It’s a debt instrument, whereby an investor lends money to an issuer (an agency or company) in exchange for regular interest payments. When the bond matures these investors also receive a return of the bond’s face amount. 

Who issues bonds? Bonds can be issued by the Federal Government, a Corporation, as well as some States, Government agencies, and municipalities.

Let’s look at a typical corporate bond. The face value of this bond might be $1,000, with interest paid semi-annually. The interest on this type of bond is fully taxable; however, interest received from municipal bonds is not only exempt from Federal taxes, it may also be exempt from State taxes if the investor lives in the issuing State. Interest on Treasuries are only taxed at Federal level.

Investors can purchase bonds on the secondary market or as new offerings – similar to stocks. Depending on certain factors, the value of a bond can rise and fall, the main factor being the direction of interest rates. As interest rates go up, bond prices go down, and vice versa.

Mutual Funds

What is a mutual fund? A mutual fund is managed by an investment banker. It’s a pooled investment vehicle whereby investors have their money invested in different vehicles, like stocks and bonds, as per the fund’s prospectus.

At the end of trading day mutual funds are valued, plus any buy or sell transactions are executed at the close of the market.

Bond and stock market indexes, like the Barclay Aggregate Bond Index and the S&P 500, can be passively tracked by mutual funds. Some mutual funds are controlled by a manager who actively chooses the investments, like bonds, stocks, or other investments to be held by the fund.

An actively managed mutual fund is typically more expensive to own. The underlying expenses of the fund are responsible for reducing the net investment returns to the shareholders of the mutual fund.

Mutual funds often make distributions by way of interest, dividends, and capital gains. If held in a non-retirement account, these distributions will be taxable. And, as with individual bonds or stocks, selling a mutual fund can deliver a gain or loss on the investment.

With a mutual fund, small investors can instantly purchase diversified exposure to a range of investment holdings as per the investment objective of the fund. This means that a foreign stock mutual could hold 100 or even more different foreign stocks in a specific portfolio. It could be that an initial investment of $1,000 (or even less) might give an investor the right to hold all the fund’s underlying holdings. Both large and small investors state that mutual funds are the perfect way to achieve a level of immediate diversification.

ETFs (Exchange-Traded Funds)

What are ETFs? ETFs are very similar to mutual funds; the difference being that, like shares of stock, they’re traded during the trading day on the stock exchange. While the markets are open ETFs are constantly being valued, which is different to mutual funds which are valued at the end of the trading day.

A number of ETFs track passive market indexes such as the Russell 200 Index of small cap stocks, the Barclay’s Aggregate Bond Index, the S&P 500, and many others.

Actively managed ETFs have come into their own in recent years, and so have ‘smart beta ETFs’ which generate indexes based on low volatility, quality, momentum, and other ‘factors’.

Alternative Investments

There are alternative ways to invest besides stocks, bonds, ETFs and mutual bonds, so let’s briefly go through some of these.

An investor can make a real estate investment by directly purchasing a residential or commercial property. Investors’ money is pooled into REITs (Real Estate Investment Trusts) and property is purchased. REITs are traded the same as stocks. ETFs and mutual funds both invest in REITs.

Private Equity and Hedge funds also fall into the ‘alternative investments’ category, the difference being that these are only open to investors who are accredited investors and satisfy the requirements of income and net worth. Hedge funds can invest pretty-much anywhere, and in turbulent markets may hold up better than other more conventional investment vehicles.

With Private Equity, a company can raise capital without having to go public. 

Private real estate funds offer investors shares in a pool of properties. 

With alternatives there will often be restrictions with regard to how often investors can access their own money. Over recent years we’ve seen alternative strategies being introduced in ETF and mutual fund formats, allowing greater liquidity and reduced minimum investments for investors. These investing vehicles are referred to as ‘liquid alternatives’.

No. 9: Investment Portfolios and Diversification

What is an investment portfolio? Basically, it’s a ‘collection of investments’. In a perfect world these investments would be selected to assist the investor easily achieve their goals. The investment portfolio should also deliver a degree of diversification to ensure the investor is not putting all their eggs into one basket.

A good investment portfolio will contain a mix of asset classes like cash, stocks, and bonds. Further, your portfolio be divided into sub-asset classes such as international stocks, small cap stocks, mid-cap stocks, and large cap stocks. When it comes to bonds, your portfolio may include some foreign bonds, tax-exempt municipal bonds,  short-term bonds, and some intermediate-term bonds.

Both the asset class and the sub-asset class can be sub-divided further. The investment vehicles used may include individual stocks and bonds, ETFs, mutual funds, and others. 

As an investor you may view your entire investment holdings over a range of accounts as an overall, single portfolio; alternatively, you may prefer to section off specific portions of your investment holdings as individual portfolios. It may be that your college savings account is one portfolio, while you might manage your retirement fund as another.

An ideal portfolio will consist of a range of investments, none of which necessarily need to be related to each other.

Take the following example using three mutual Vanguard funds:

Ticker VTSMX – Total Vanguard Stock. Similarly to the United States stock market, Total Vanguard Stock is a weighted market cap fund.

Ticker VGTSX – Total International Vanguard Stock. A market cap encompassing both emerging and developed non-United States market stocks.

Ticker VBMFX – Total Vanguard Bond. Closely following the United States bonds market, Total Vanguard Bond is a weighted market cap fund.

The correlation of these three Vanguard funds for the five-year period ended 28 February 2017 is as follows: 

 Total Vanguard Stock (VTSMX)Total International Vanguard Stock (VGTSX)Total Vanguard Bond (VBMFX)
Total Vanguard Stock 0.79-0.12
Total International Vanguard Stock 0.79 0.08
Total Vanguard Bond -0.120.08 

Data courtesy Morningstar

If there’s a correlation between two investment vehicles of 1.00 it means their performance is accurately tied to each other. Alternatively, there’s no connection between the investment vehicles being compared if there’s a correlation of zero. The Vanguard Total International Stock Market fund and Vanguard Total Stock Market fund have a correlation of 0.97, which means they are highly, but not exactly, correlated.

On the other hand, the Vanguard Total International Stock Market fund and Vanguard Total Bond Market fund have a correlation of 0.08, meaning there’s little relationship in the way these two funds perform.

There’s actually an inverse relationship between the Vanguard Stock Market Fund and the Vanguard Total Bond Market fund because they have a correlation of -0.12.

Below we’re showing three portfolios and the risk and return using combinations of these three funds. The results shown are from the hypothetical portfolio tool courtesy Morningstar Advisor Workstation.  

This simulation relies on the following assumptions:

  • The purchase of investments on 29 April 1996 with results calculated on 28 February 2017.
  • That the funds were held in an account with a tax-deferred status such as an IRA so that no taxes are payable on the portfolio.
  • On a twice-annual basis, a rebalancing of the portfolio occurred.
  • A $50,000 initial investment.

A 40/60 Conservative portfolio includes:

  • 30% Total Vanguard Stock
  • 10% Total International Vanguard Stock
  • 60% Total Vanguard Bond

A 60/40 Moderate portfolio includes:

  • 45% Total Vanguard Stock
  • 15% Total International Vanguard Stock
  • 40% Total Vanguard Bond

An 80/20 Aggressive portfolio includes:

  • 60% Total Vanguard Stock
  • 20% Total International Vanguard Stock
  • 20% Total Vanguard Bond

These model portfolios give the following comparative results:

 Result of $50,000 InvestmentAccumulated Return (%)Value Loss – 2008 (%)Value Loss – 2002 (%)Return Variability over 10 Years in Comparison to S&P 500  (%)Modelled Return over 10 Years in Comparison to S&P 500  (%)
40/60 – Conservative$193,435286.87%-14.03%-2.26%44.25%72.80%
60/40 – Moderate$211,527323.05%-22.78%-7.8163.86%78.19%
80/20 – Aggressive$222,267344.53%-31.02-13.5684.84%80.81%

 Data courtesy Morningstar Advisor Workstation

As expected, the conservative portfolio’s loss of 14.03% in 2008 was the smallest. Compare this loss to the 37% loss by the S&P Index that same year. Again, as expected, over the same time period this portfolio had the smallest growth rate with a finishing value of $193,435.

In 2008, the largest decline of the three was the aggressive portfolio with a loss for the year of 31.02%. With an ending value of $222,267, this portfolio had the largest increase in value over the same period.

The point we’re making here is that when you combine different investments in different allocations, it will impact on both the downside risk over time and the growth of your portfolio. 

No. 8: Summary

Throughout this investing tutorial we have introduced and discussed a range of investing vehicles and investing concepts, including –

  • Stocks, Bonds, and Mutual Funds
  • ETFs
  • ETFs and Passive Index Mutual Funds
  • Active Management
  • Alternative investing, like real estate
  • Compounding, and why you should start early
  • Why diversification is important
  • Investing expenses
  • The correlation between different investments
  • Building a diversified portfolio
  • Robo advisors
  • Technology and its impact on investing.

Additionally, we need to be very clear that investing is definitely not ‘one size fits all’. Different investors have different situations and use different strategies, remembering that some investors, depending on their goals, may use one or more strategies, or alternatively choose a range of investment vehicles.

Set a Plan and Have a Strategy

Before you invest your money it’s important to have a set plan and a destination in mind, just like you were going on a car trip. Your time horizon will be determined by your goals, which may be purchasing a home or planning for your retirement. These goals and their projected timeframe will, in turn, dictate your risk tolerance. Portfolio diversification is vitally important to ensure that segments of your investments are always doing well, even while other segments may not be performing. By following this approach you can create an investment portfolio that lines up with your tolerance for risk, and which balances protection against risk with potential investment returns.

We hope that the above tutorial has sparked your imagination and provided you with a sound basis for creating your own diversified investment portfolio. Now that your investment journey has begun, it is important to continue learning and staying informed.


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