In today’s economic climate, good money management needs to go beyond budgeting, clearing debt and saving. As the population is living longer and with financial provision from the state falling, it has never been more important to learn about investment to build wealth for the future.
According to author Andrew Craig, personal finance is “an incredible societal blind spot” and many people are heading towards retirement unaware that they have nowhere near enough saved to maintain their standard of living after retirement.
For dummies, the stock market might seem like an alien land that comes with its own foreign language. Yet, whether it is to bulk up savings for retirement or to make some extra money on the side, everyone can learn to invest in stocks.
Stock market trading for beginners
First, you need to learn about stocks and shares. In principle, stocks or shares are equity in a public listed company so an investor owns a tiny piece of that business. These shares are traded on a stock market. Stock markets used to be physical places, but now most bids to buy and sell stocks are made electronically.
To make collective measurement of success easy to spot at a glance, the stock market is split into different indices based on company size and activity. The most famous in the UK is the FTSE 100, comprised of the largest 100 companies.
There are two options to invest in stocks: you can either buy company shares directly or buy funds. Funds are collective investments that pool investors’ money together to buy a range of stocks or other assets. Many first time investors opt for a fund as it is more diversified, which means that the stock specific risk is reduced.
There are many different types of funds that take different approaches to choosing which assets to include and exclude and how actively they are managed. Choosing the right fund for you will take time.
How to start investing?
Orders are usually placed through a broker and you can set up an account by depositing cash or stocks in a brokerage account. Once you open an account you will tell your broker how many and what types of stocks you’d like to purchase. The broker executes the trade on your behalf and earns a commission.
Some providers have no ongoing fund dealing charges while others can charge up to £10 each time you make a trade. – and that’s using the much-cheaper online trading platforms. Speaking to your broker will cost you a lot more.
Some people prefer not to rely on fund managers but to invest directly in stock markets. For beginner investors and investors with uncomplicated financial portfolios, DIY investment platforms such as robo-advisors can also provide guidance for less money. If you want to buy stock in a specific company, you can also join a low-cost programme called "direct stock purchase plans".
Most new investors tend to buy stocks influenced by their acquaintances and this is often known as herd mentality. The risk is you follow someone else's mistakes.
These strategies tend to not work that well in the long-term so it is important to research potential investments. This can be done using fundamental analysis.
In simple terms, this is a method of analysing and evaluating equities through qualitative and quantitative factors such as financial statements, economics, management, interest rates, production, earnings, competitive advantages and competitors. It takes time but is the backbone to many of the great investors' stratgeies, scuh as Warren Buffett.
Investing for dummies
Investors can make money by buying shares and then selling them when the price goes higher, but many experts say that the real money in investing is made by owning and holding securities, receiving interest and dividends, and benefiting from their long-term increase in value.
To do this effectively, investors need to put their money away for at least for five to seven years. Some professionals say to never invest money that will be needed in the next five years because if the market goes down, funds can’t be recouped in time.
There are a number of questions that can help assess a person’s appetite for risk and whether they should invest in stocks, property, or shares in a fund. These include whether you are looking for income or growth and whether you expect to remain invested for more than 10 years, or whether you will need to access the money at short notice. It is also important to indentify how much you are prepared to lose.
How to diversify?
Good practice is to diversify across asset classes such as shares, bonds, property and cash and then after spreading investment in different funds, diversify again within each of these categories. This is because historically different assets tend to move up and down as market conditions change. And conditions that cause one asset class to do well often lead to another class to have average or poor returns.
As shares can be more unpredictable than bonds, they tend to yield greater rewards and faster losses. According to Prudential, the average annual return on UK investments between 1989 and 2014, adjusted for inflation, is 5.2% for equities, 4.6% for bonds and -0.8% for cash.