More and more people are learning about taking their money further and getting it to work for them. Interest rates are low enough to make savings accounts almost pointless and investment brokerages are enjoying record revenue, smashing customer milestones. It’s important to learn how to invest correctly to avoid losing more than you put in.
What is investing?
Investing as a whole is buying into something you believe will increase in value over time. This could be property, precious metals, or companies. The stock market is how you go about putting your money into listed entities like BP (LON:BP) or Apple (NASDAQ:APPL).
By owning shares of a company, you can hold these and watch them grow in value as the company performs well and publishes strong financial results. Selling shares in 10-20 years time can allow you to enjoy notable gains, especially if you use a tax-efficient vehicle like a stock and shares ISA.
The market is a supply and demand simulation. If you buy a stock at £10 and the demand increases due to strong financials, it’ll increase in value as more investors want a piece of the action. The same happens in reverse for struggling companies where more people are selling.
Many companies also pay dividends to shareholders as a small thank you for holding shares, which help with compound interest and grow your portfolio.
What are shares?
A stock is a company and a share is a portion of that company. For example, if a company sells 100 shares and you buy 10, you’ll own 10% of that company. Companies sell shares to raise money and you’ll often see companies sell additional shares if funds are required.
As a shareholder, you are tied to the value of that share when you bought it. The better the company does, the more money you’ll make. This is why it’s incredibly important to do plenty of research before parting with cash.
Not all stocks are the same. The two major types of stock are common and preferred. Common stock is the most common (hence the name) and is likely what you will be trading through your broker and the exchange.
The main difference between the two is common stock comes with voting rights while preferred stocks generally do not. On the flip side, preferred stock owners have priority over assets and earnings compared to common stockholders. They often receive dividends and come first in line in the case of a liquidation.
What are bonds?
You can think of bonds as a type of loan. By purchasing bonds offered by companies or even governments, it’s possible to loan out your money for specific periods of time, earning interest in return. They’re often viewed as a form of low-risk investing due to the termed contract.
What are funds?
Funds can be index funds, exchange-traded funds (ETF), or simply a collective investment fund that tracks numerous securities (be it stocks or bonds). Instead of focusing your wealth on select options, said funds act as a gateway to quickly and seamlessly diversify your investment portfolio.
For instance, an FTSE100 ETF will include the top 100 largest companies traded on the London Stock Exchange that pass a screening for size and liquidity. Buying shares of this ETF will actually land you with shares of all the listed companies and is weighted against them all.
Funds often come with managed costs, especially if they’re actively managed.
What are brokers?
A broker (or trading platform) is a company that handles the purchasing, selling, and holding of all your shares and other investments. There are plenty to choose from within the UK alone, including Trading 212, eToro, Hargreaves & Lansdown, and Freetrade.
I’ve written about the best UK investing apps, so be sure to check that out for more details on each platform.
What is pound-cost averaging?
Pound-cost averaging (PCA) or better-known as Dollar-cost averaging (DCA) is the method of buying shares of a stock at set dates regardless of price. Attempting to time the market by buying low and selling high can be extremely emotional and most people lose money this way.
By setting aside a set amount each week and investing in the market, you will be buying shares at every high and low point, averaging out over time. The stock market historically rises and the longer you’re in the market, the better the outcome. Don’t keep cash on the side to buy low, just buy consistently.
Investing tips for beginners
- Start with an ETF or fund before choosing companies yourself.
- Don’t day trade and try to time the market.
- Understand the money you invest in the market is at risk. Only invest what you can afford to lose.
- Think about where you want your portfolio to be in ten or twenty years.
- Research everything before investing your money, including brokers.
- Consult a financial advisor to discuss your options and recommended investment routes.
- Use my dividend and investment portfolio tracker to see how you’re doing.