Investing For Beginners

It’s completely natural to want to know what to expect from the stock market. There are many pundits and experts that try to predict the market. In reality, even experienced investors can only give you their best guess, because nobody can predict the future.

As we’ve covered market psychology plays a huge role in valuations. There is also macro-economic factors such as inflation and interest rates to be considered. This allows us to see certain trends in the market such as savings rates and the yield on government bonds improving.
We all likes to make an easy money on our cash savings, however making an educated bet on different types of assets (e.g. Netflix stock) can offer far greater returns. It’s all about taking on the level of risk to suit you.

Investing is risky especially when buying individual stocks and any money you put in could fall in value. Even with stocks that have performed highly for the past 5 or 10 years. There’s a reason you’ll see the phrase ‘Past performance is no indicator of future success’ – you’ve no guarantee your investment is going to do well.

#5 Beginner Investor Rules For Investing In The Stock Market

Investing in an Index such as the S&P 500 (largest 500 U.S. companies) is still no guarantee, but does allow you to spread the risk. Most global funds will heavily weight towards an index such as the S&P 500 and this has rewarded investors with an average annual return of 10.7% since it began in 1957. This hasn’t been without any pain and in times such as the financial crisis (2008/09) the index has returned -43%. When you invest, even in an index, you have to be in it for the long-term. As you have to outlast those periods of volatility to get those long-term gains.

There are 5 golden rules I have for investing in the stock market:

1. Diversify as much as you can to lower your risk exposure. This means investing in different companies, industries and regions. In short, don’t put all your eggs in one basket.
2. Saving is not investing. If you’re saving for something like a house deposit, you don’t want to take on risk. When investing it’s recommended you invest for at least five years, probably more like 10 or 15 when investing in equities.
3. Review your portfolio – but only on occasion. By checking your portfolio too often you’ll see the volatility corrections and crashes of the stock market. On the other hand, reviewing your portfolio allows you to revise your investment strategy.
4. Don’t panic. Investments can go down as well as up. Don’t be tempted to sell or buy shares just because everyone else is.
5. Invest only in what you understand. Ask yourself, why you’re investing. Only you can decide if investing is right for you.

Take a good, honest look at your finances. Can you afford to invest money in the stock market? If you’re struggling to keep up with credit card payments or your mortgage repayment has surged it might be a good idea to hold off. Build up a strong cash buffer, pay off bad debt and then revisit.

This might sound common sense, but many investors have had the feeling of having tons of money until the market crashes. The lure of enormous gains can cause many to side step personal finance fundamentals. It’s only when the tide goes out that we see who’s been swimming naked. When the stock market is rising, everything feels great. When stocks begin to fall, that’s when the real trouble can arise.

Wanting to make some quick money is not a good reason to invest in the stock market. Investing is for long-term strategic benefit such as maintaining or growing your wealth? Want to stay ahead of inflation and maintain your moneys purchasing power? Want to retire early? Pass on money to future generations? All great reasons to invest money. How and where to invest money, really depends on the answers to these questions.

In short, you should never invest more than you can afford to lose. On the other hand…

You don’t already need to be rich to invest in the stock market. It’s a great place for people who want to start building wealth.

90% of would-be investors don’t invest because they think you already need tons of money. You don’t. Investors such as myself ‘drip-feed’ regular amounts of money each month. It’s easier financially and psychologically to invest in this way. We’re risk averse and lump sum investing feels scary. Even as someone who has invested for almost 10 years, I would feel mildly uncomfortable doing this. As our rule of thumb, goes you should never invest more than you can afford to lose. Investing a little each month helps us abide by this simple rule.

That way, if the market crashes after you make an investment, you won’t feel like it’s the end of the world. You won’t feel like you’ve lost more than you can afford to lose. In this way we can be patient and allow enough time to ride out the dips and make a good long-term return.

Over time, you’ll build up a decent nest-egg (portfolio) with this drip feeding approach and over time is will snowball (compound). Many funds allow you to invest a regular small monthly payments as low ae £25 a month. This means you can start of incredibly small and scale up your deposits over time. As you income grows, you can deposit a little more of your pay check each month.

The cheapest way to invest in stocks is through a website, often called a platform. You can buy shares or funds from different providers, but for the cheapest offers you’ll want to do it through a website, often called a platform.

Check out Fidelity or Hargreaves Lansdown for low fees and great customer service.

It’s actually a two-stage process. First you need to pick which platform to buy your shares or funds from, then you need to decide what investments to buy. You can actually reverse this process; you can seek out funds and then decide on which platform to invest in. Funds are often a sensible choice for beginner investors. The reason they’re often a good investment for beginners because they can be very low cost and require very little investing knowledge.

Each investment platform and fund has its own charges. There is usually a platform fee, usually known as an account fee. Then there are fund management fees, which usually take the form of ‘ongoing charges’. This is a percentage of the fund valuation. Account fees and fund fees vary and you’ll be charged more for more complex or actively managed funds.

Stocks are just a unit of a company. A share is simply a divided-up unit of the value of a company. For example, on the 31st December 2022 there were 0.451bn Netflix shares in existence. At that time, the value of Netflix was $131bn. Which means the value per share was around $291. This is known as the share price.

Luckily, you don’t have to buy full shares; you can buy fractional shares. Which is great, because we often want to buy into lots of different companies all at once. This is what makes investing very affordable to everyday people. We don’t want to be splashing out $291 every time we want a single share in one company.

There are two ways you make money from investing. One is when the shares increase in value (and you profit when you sell), the other is when they pay dividends. If a company makes a profit, it gives some of it back to you – it could be on a regular basis or as a one-off. Often, companies that are still in their growth stage don’t tend to give dividends but investors are rewarded by the growth of their investment. On the other hand companies that are well established, might not grow as much but often issue a consistent dividend.

Whilst shares can feel complex and most people stay away, they are an appropriate investment for beginners with a long time horizon. After factoring in their volatility they often outperform other asset classes such as bonds. For a young investor wanting to know how and where to invest money, the decision can be as simple as an index fund containing stocks.

Investing in a fund is great for a beginner investor. It makes buying up these fractional shares cheap and easy. That’s because a fund can invest in hundreds if not thousands of stocks all-in-one go. Each time you make a monthly deposit, this is pooled with other investors money and used to buy up shares that meet the funds asset allocation strategy. Funds often vary by their investment in different geographical markets, industries of asset type (e.g. stocks).

This might be as simple and buying shares in the top 500 companies in the United States. This would be an index tracker fund of the S&P 500. The fund may be more complicated as invest in a combination of stocks and bonds from all over the world. It might track an index such as the MSCI World Index. Index funds are great for beginner investors. That’s because you really only need to understand the basic principles behind what you’re investing in. You don’t need to know about all the individual shares and stock valuations or the complexity that goes into buying them.

By contrast to an index tracker fund, you may choose to invest in a mutual fund where the fund manager hand-picks as 10 or 20 individual stocks. Whilst fund managers make a great investment pitch, they often charge you significantly more than index funds. At the same time they often underperform against their benchmark index (e.g. S&P 500). If you do opt for an actively managed fund, make sure to review it often, to make sure you’re not getting ripped off!

There are loads of great platforms to help with your stock market investing in the UK. You can invest in an ISA with specialist institutions that have been in the game for decades. Even as a beginner investor you can start investing in an ISA or SIPP right away. Like we’ve covered, you an invest in a managed fund for peace of mind or DIY with an index fund. Knowing how and where to invest, so check out our dedicated page of stocks and shares ISA available in the UK.

Investing in a stocks and shares ISA is a tax efficient way to manage your investments. Everyone in the UK over 18 has a £20,000 annual ISA allowance – which means you don’t have to pay any tax on any stock market gains you may make.

Find your stocks and shares ISA here.

You can choose to use all of this ISA allowance for a stocks & shares ISA, or you can put some in a cash ISA and the rest in a stocks & shares ISA. You can also invest in multiple investment funds within the same stocks and shares ISA. This is great because you might want to invest some of your money in dividend stocks in the UK and the rest in growth stocks in Emerging Markets such as China.

Stock market investing doesn’t have to be complex or scary. You just need to know the right strategy for you. One thing I would always mention to beginner investors is to always keep a stocks and shares ISA in mind. It will save you vast amounts of money in unnecessary taxes. Many of the funds we’ve covered can be wrapped in a stocks and shares ISA. If you take one lesson away in terms of how and where to invest money, it’s in a stocks and shares ISA.

Research, research, research, It all comes down to knowing what you want to invest in. If you’re not sure what type of investment to pick, or concerned you might take on too much risk, there are plenty of free websites packed full of detailed fund and stock market information. For example, you can start with the Hargreaves Lansdown beginner investment guide.

If you are unsure after this then you can consult a financial advisor. It’s so important that you pick an investment strategy that suites you needs and financial goals. Don’t let just anyone tell you what stocks or markets to invest in. Do your own research!

Check out our stocks and shares ISA guide to see which is the best platform for you.

Warning: When investing capital is at risk. The value of your investments may rise or fall in value. Put bluntly, you could lose it all. It’s also important to remember that a funds past performance is no indicator of future success.