02 Jun How To Invest In Stocks | For Beginning Investors
You’ve probably heard stories of people making a profit on the stock market, and we’re not talking about distant millionaires making more millions. Many people will know someone—directly or indirectly—who has made a respectable sum on the stock market. Not millions, but a decent little nest egg, enough to buy a car, go on holiday, pay off the mortgage, that kind of thing. We’re not talking about the kind of money you retire on, but certainly, nothing to turn your nose up at. Unfortunately, even these more modest sums are something of a rare occurrence, and the reality of stock investing is one of time and patience, but one that is much easier to succeed in than some would have you believe.
Stock trading is something that tends to scare away new newcomers; for as many stories of success you hear, there are always plenty of stories of people losing it all on bad short term investments or taking bad investment tips and finding themselves substantially poorer than they were before. In reality, building a stock portfolio can be a relatively safe affair just as long as you know what you’re doing. In this post, we’re going to take you through a selection of beginner investment tips to help you get started.
Of course, as with any financial tips and advice, we are ethically obliged to make it clear that there is no such thing as a “sure thing”. Low-risk investment is just that, low risk, not no risk. Investing is something anyone can benefit from, but those with low-risk tolerance should never invest more than they can afford to lose, no matter how small the chances are that they will lose.
Pick your poison
Before you can start, it’s essential to understand the basics of investing in stocks, and it doesn’t get more basic than understanding the different ways to invest in the stock market. We’ll take a closer look at the different ways in which you can invest in a moment, but first, you need to be honest with yourself about what kind of investor you will be. For example, do you enjoy crunching numbers and analysing data? Do you hate maths and would rather not have to do a lot of homework. Do you have a lot of time to put into investing in stocks and shares, or are you going to be pressed for time? The answers to these questions will, of course, vary from person to person, but you must be honest with yourself about what those answers are. Now, let’s look at the different ways you can start investing.
Investing in index funds is quite a reliable option when it comes to long term investment stock, and understanding the difference between investing in stocks and funds is simple enough. Rather than investing in a specific stock, you will invest in a stock index, such as the S&P 500 Index or the FTSE 100 Index. This method of investing is highly likely to match the long-term performance of the underlying indexes. It’s not going to net you a quick fortune, but it can yield a substantial return over time. This is also a good option for investors who don’t particularly want to spend a lot of time and effort researching.
For investors who do want to get into the weeds and do their research, individual stocks may be a more attractive prospect. Investing in individual stocks gives you the freedom to approach things however you like. You can buy or sell volatile stocks in an attempt to make money quickly, or you can find reliable stocks to invest in over the long term. Investing in individual stocks is undoubtedly more work, but it enables you to completely tailor your portfolio.
From the most involved investing method to the least, robo advisors are online brokers that essentially take care of everything for you, investing your money according to your risk tolerance, investing goals, and even things like your age and tax situation. This option has become very popular in recent years.
Determine how much you intend to invest
One of the most important pieces of investment advice is to decide how much you are prepared to invest before you have started investing. Your stock funds will be at risk; it’s just a question of how at risk and how risk tolerant you are. Beyond the risk, there is also the matter of goals and timeframe. Stock markets can be notoriously uncertain in the short term. You should probably avoid investing any money that you are likely to need within the next five years. For a prime example of why this is, consider the recent global COVID-19 pandemic. This is a crisis that essentially came out of nowhere and caused the market to drop by over 40%.
Of course, the other side of that coin is that the market rebounded to an all-time high in just a few months, but the point is you can’t be sure how your stocks funds will look at any given point, so investing money that you will need is a bad idea.
However, over the long term, stock trading becomes a more reliable way to grow your capital, and the longer the term, the better. Of course, the older you get, the less time there is for your investments to grow and, ultimately, for you to benefit from them. As a rule of thumb, subtract your current age from 110, and treat the result as the approximate maximum percentage of the money you have for your investing account. Whether you intend to buy stocks, invest in mutual funds, or just hand your capital to a robo advisor, this should be your upper limit.
How to start investing in stocks
Before you can buy or sell shares, you need an investment account. Fortunately, opening a brokerage account is easier than ever, but there are some things to consider before you do, the first thing being the type of account you will open. Delving into the different types of investment accounts and their advantages is a topic that requires a post of its own. You should consider why you are investing in stocks in the first place and how easily you will need to be able to access your money. Other considerations include tax implications and potential benefits to take advantage of, such as retirement contributions.
Choose your stocks
The best stock market investments are not just investments that give you a return but ones you feel comfortable investing in. If you have any personal concerns, such as company ethics, be sure to do your research. As a bare minimum, you should understand the company, fund, or robo adviser you are putting your money into. It’s also important to diversify your portfolio. Your entire investment capital should not live and die on one company alone. Remember, funds are mostly reliable over time, but individual companies can be highly volatile in real-time.
Some other useful tips include avoiding penny stocks and steering clear of high-volatility stocks until you are more experienced. You should aim to build a “base” to your portfolio with established, reliable businesses. The best stocks to invest in 2021 are not necessarily the best stocks to invest in now, and you should have a good amount of your capital in stocks that will stand the test of time.
You should have a clear investment strategy when you start out, and you should stick to that strategy while it applies, but you shouldn’t be afraid to shift gears when you need to. Perhaps things take a turn for the worse in your regular finances, and suddenly, you need the capital from your long term investments. Perhaps you were planning to take it slow and steady, but after gaining some experience, you spot an opportunity that’s too good to miss. Of course, this is not to say you should abandon all that caution we advised earlier in the article, but don’t let a rigid adherence to your own plan stop you from getting what you need out of your investments.