Do stocks, index funds, and asset allocation have you scratching your head? Look no further- here’s your beginner’s guide to investing in the stock market. It’s easier than you think, and one of the most effective ways you have to grow your wealth. Let’s get started!
The bare basics of investing in the stock market
What is investing in the stock market? When you hold a stock, you just have a tiny stake of ownership in a public company, called a share. Public companies are those that list on the stock exchange precisely so they can fundraise through this system. Think of the company as a cake, and your share as a tiny slice of it.
What do you get out of this? If the company grows and does well over time, that ownership share, or the cake in our example, becomes more valuable and larger. If you wanted to sell your slice of this bigger cake, others would be willing to pay more for it than you did at the start, bringing you an overall profit.
Easy, right? The principles of investing in the stock market are very simple. The trick lies in knowing what to buy, how long to hold it, and keeping your eye on the ultimate prize.
How do I invest in the stock market?
You’ll start your investment journey by opening an investment account, or brokerage account. Once this is funded, you can buy your stocks from there. Once you’ve chosen your online investment platform, it’s time to start your journey. Ask yourself how you are going to invest. There are many different ways to invest, depending on your wealth and your interest in getting hands-on with the process. You could choose:
- To DIY your portfolio- keep reading for great advice
- To let someone else do it- you could look for a low-cost ‘robo-advisor’ that uses algorithms to help you choose stocks. Or you could, if the amount you want to invest is high enough, look for a brokerage service or independent advisor, although this will be expensive.
- To pursue an opportunity from your company- many investors start like this. Perhaps you get contributions to a company pension fund matched. Or you have an independent pension product in mind and want to grow money for retirement. Or you’ve even been given company shares as an incentive. While this is a good starting place, most investors will outgrow this quickly and want to get more from the process.
Opening your account
There are many brokerage accounts for the hands-on investor. Online brokerage accounts, a relatively new phenomenon, offer quick, low-cost entrance to the stock market. Always be aware of the costs (including commissions and account fees), the selection of products and stocks or ETFs, and the support they give, before making your final choice.
Robo-advisor services will manage your investment for you, taking out the legwork. Your investing goals will be created during onboarding, and a portfolio built for you from there. It’s great if you’re too overwhelmed to start, but do be aware they typically charge about 0.25% (or more) of the account balance and you would still need to adjust your strategy over time to get the best results.
The difference between stocks and index funds
Socks are ‘slices’ of individual companies. They can have huge rises in price, which many index funds don’t, but can also fall catastrophically based only on one company’s future. Most general investors won’t want to invest heavily in just one or two companies, as that means the risk of losing out is a lot higher if their share price drops steeply. Mutual funds allow you to purchase ‘mico-slices’ of different stocks in one transaction, usually along a ‘theme’ or specific risk category. Index funds and ETFs are similar, but they track an index instead of a set bouquet of stocks. This allows for a lot more diversification, lessening your risk of losing money. If you’re new to investing in the stock market, don’t have a lot of money to risk, or are saving for retirement in particular, this route makes the most sense.
How much can you spend?
Investing in the stock market doesn’t have to be expensive. Individual shares can be anything from a few pounds to a few thousand pounds. Mutual funds typically have a set price per month or period. For low-cost, diversified investment, index funds and ETFs work well. So there’s an entry point no matter your current financial position. Just remember- you want to invest money you can leave for long-term growth, and should not put yourself into debt to do so.
Investment is your key to long-term wealth, not short-term miracles. Some years will be up, and others down, but the year-on-year average gain for the stock market is about 10%, far higher than any savings medium.
While there are a ton of intricate strategies you can learn, you will be successful just by sticking to the basics. By far the hardest part of investing is not tinkering with your portfolio too much! Day trading is a risky strategy based on trying to out-time the markets, and by far too intricate for the average investor. Just find solid products and companies you can believe in, invest in, and leave well alone.
Asset allocation and managing your portfolio
Day-to-day fussing is bad for a portfolio, but that doesn’t mean you’ll ignore it forever. Asset allocation means deciding how much of what class of asset you want to hold. The ‘big three’ are cash, bonds, and stocks (including stock shares through index funds, ETFs, and mutual funds). Knowing how much you want to risk, and where, is part of creating your investment strategy. Over time, you will check in to make sure that you’re still meeting those goals. Also, over time, you will want to shift to less risky investments, possibly even refocusing on dividends over growth. Dividend stocks are stocks of companies that share profits with shareholders through dividends on a regular basis. These are usually well-established companies that tend to be both profitable and expected to continue paying dividends for the foreseeable future.
You will also make sure that you haven’t lost diversification and become heavily invested in one market or product.
Remember, investing in the stock market isn’t as complex or hard as it seems. You don’t need a ton of cash to get started and you don’t need a ton of experience. Focus on low-cost, proven index funds that build diversity and allow your funds to grow. You won’t beat the market, but neither will you lose your investment on the way. Leave ‘trading’ for those who want to chase moving goalposts. Focus on a buy-and-hold strategy that will grow your money steadily over time while you get experience. Active trading isn’t necessary for good growth.
Investing in the stock market is something everyone should consider for the long-term health of their finances. Don’t let fear of the unfamiliar prevent you from getting started on your journey to a healthier financial future.