If you’re tired of working the 9-5 and seeing little improvement in the numbers in your bank account, you may want to look into investing money for the future. However, diving into that world can be a daunting endeavour. To make things simpler, we’ve compiled a list of resources for absolute beginners who want to start investing, but don’t know how to begin.
Thanks to inflation, every year our money loses more and more of its value. Even putting money in a savings account to accumulate interest doesn’t necessarily mean its value will increase, unless the interest on that account can compete with the rate of inflation. But we don’t only want to avoid losing money, we also want our money to grow. That’s where investing comes in.
According to Investopedia, “Investing is a way to set aside money while you are busy with life and have that money work for you so that you can fully reap the rewards of your labor in the future. Investing is a means to a happier ending”.
The easiest way to start doing this, and one that many people have been doing for decades, is investing in stock. This is great for beginners because you don’t need a lot of money to get started, and you don’t have to spend a lot of time managing your assets. But what are stocks?
A stock is a share of ownership in a single company. Stocks are also known as equities.
Stocks are purchased for a share price, which can range from the single digits to a couple thousand dollars, depending on the company.NerdWallet
So, when you buy a share in a company, you’re buying a small piece if ownership of that company. As the company grows and becomes more successful (if it does, but we’ll discuss the risks later), so does your small piece of it. Thus, the value of it goes up.
So how does one go about buying shares?
In the past, you’d have to buy stock through a broker – usually a living, breathing person – who would hook you up the the shares you liked. Now, fortunately, it’s much simpler and easier, thanks to online brokers. Each country has its own online brokers which abide to the specific laws of that country. You can also open an investment account through your bank, but these are often a little clunkier and less user-friendly than an online broker.
Look for a broker in your country which allows you to invest in index funds, and which has low rates – so you can grow your money while paying less.
How to choose stocks
It’s generally recommended that – especially for beginners – you avoid choosing individual stocks altogether. Investing in individual stock comes with a considerable amount of risk – especially as, in this context, the success of the past is not a reliable indication of future performance.
According to Warren Buffet – one of the world’s most successful investors – most people don’t have a temperament that suit investing in specific stocks. It’s therefore more suitable for those of us who get anxious when the market drops to invest in index funds, and let the magic happen for long periods of time. Index funds are a kind of mutual fund that let you invest in multiple companies with a single transaction.
They essentially mean you’re investing in market indices (like at S&P 500, the top 500 companies in the USA), rather than in individual companies, so if one company goes bust, you don’t lose everything. Index funds diversify your investments so you’re not even relying on one specific sector. Additionally, because you’re relying on a computer algorithm and not an individual human broker, your fees might be much lower than an actively managed fund.
Finally, historically, index funds outperform actively-managed funds. Nobody can predict what the market will do in future, so this way you’re just hitching a ride with the entire market rather than one sector or company.
Some Tips for beginners:
- Get your emotions in check. Many people feel very pleased and excited when they see their stocks going up. Conversely, they panic when their stocks go down, and start selling them off in a flurry – often at a lower price than at which they were bought. Instead of freaking out when stocks are low, if you’ve invested in a brand you have confidence in, this may be the time to buy more – that way when it goes up again you’ll see greater returns.
- Invest in what you know. Stick to business models you’re familiar with. This will differ from person to person, but it’ll make it easier for you to decide which stocks might take off in the future. For example, if you’re a gamer, buy stocks from game companies you predict will see success in the future. Most investors want to make money in every industry, which means they may not understand exactly what they own and why they own it.
- Study up. That’s why you’re here right? You need to know what’s happening before you start taking part in any game, and investing is no different. If you’re new to investing, you’ll need to study up on some basic concepts such at the P/E ratio, return on equity, stock market orders, and some fundamental strategies.
- Look at the bigger picture. Don’t stress about the day-to-day, week-to-week, short-term changes in the stock market. Looking at the short term causes you to ignore the long-term patterns which could pay off for you later.
- Learn Market Cycles. Figure out which stocks do well in which seasons, and at which times of the year. That way you won’t be spooked by a dip in the market. When you start investing, you’ll need to learn which stocks do well at which times, historically. Where you are in the market cycle will influence how you arrange your portfolio.
- Start as soon as possible. The earlier you start the better, but don’t invest any money you think you’ll need to spend on other things for the next five years. The market is unpredictable, so you’re unlikely to be able to predict when you’ll be able to take it out and make a profit on it. The sooner you start investing, the sooner it’ll become a habit.
Risks of investing
It’s fair to have some anxiety about putting money into a place where you can’t access it anymore. An even bigger fear than many have is that they’ll lose the money the’ve invested entirely.
If you buy shares, and sell them for less than what you spent on them you will absolutely lose money. If you panic when you see the value of your shares dropping and you sell them, you’re likely to lose out if and when those stock prices rebound later – as they often do.
The fact of the matter is that these are often long-term investments, which will take years or even decades to come to fruition. Ideally you shouldn’t put money into stocks and shares that you’ll want to access within the next five years, or even ten. Holding on to them longer, the value of your investments will grow, as – generally – over time, the stock market itself continues to grow up (barring a couple of crashes from which it recovers).
It’s extremely unlikely – without a total global apocalypse – that if you’re diversified, you’d lose all of your money even with the occasional market crash.
So yes, it’s risky, but with patience its a risk that could pay off tenfold.
Not into reading? Start investing after watching the following videos
Your future self will thank you if you start investing early and smartly. In fact, you’ll probably find you wished you’d started much earlier. Hopefully these tips will guide you in the write direction and make getting started feel a little less daunting.