A Beginner's Guide to Investing - What You Need to Know

Tuesday, February 9, 2021

You may have heard sensationalist stories about hot shots making millions on the stock market, but what does investing – for us average folk - really entail? How much money can you make investing? What are the best investments? And, how do you get started investing? Read on to find out.

What is investing?

You can invest in a wide variety of things, from shares and bonds to farmland and art. The idea behind an investment, is that the initial cost incurred will be outweighed by the benefits you reap later on. You invest in something if you believe it will increase in value over time.

For the sake of this article, we will be focusing here on investing as it pertains to the stock market.

A stock market is the arena where buyers and sellers meet to sell shares. A share is a small slice of a company. When you invest in the stock market, you purchase one or more shares in a company. And if you own a share, you get to call yourself a ‘shareholder’.

How does investing work?

If you purchase one share in a company that costs £100, if that stock’s value increases by 50% - in theory -you will be left with £150. In some sense, you can sit back and make your money work for you.

On the other hand, if you put money into a savings account,  the value of that money will stay the same, or even decease  gradually over time. Naturally, investing can therefore seem like the smarter option.

Nevertheless, putting money in the stock market is still a gamble. In some cases, you will make a lot more money than you put in. In others you can suffer a painful loss and end up losing a significant chunk (or all) of your money.

In simple terms, if the company's shares you invest in performs well, you earn a profit. If it performs poorly, you could lose out.

There are numerous factors that impact how well a company performs, from factors such as supply and demand, interest rates and, oh yeah…a global pandemic.

There are some company shares that are deemed 'safe' , like those in Apple and Tesla - these companies have a good track record of increasing in value, and great projections for future success. However, even in these cases, there is never a 100% guarantee.

How much money can I make investing? And when? 

The million-dollar question. Of course, it depends on how much you invest, where, and also just how lucky you are.

The average stock market return is 10%, but this rarely occurs within one year.

Investing in the stock is not a “get rich quick” scheme.

The stock market benefits mostly those who make long-term investments. It is often advised to not invest unless you are planning to do so for at least five years. This way you can ride out any short-term wild surges or downturns.

January 2020 figures from Morningstar, a fund analyst ,showed that the performance of average funds in different industry sectors. The results were clear –the most significant profits were made on investments that stayed put for 10 + years, whereas only small profits were typically made in the space of one or two years.

For example, a fund investing in a mix of global stock markets was worth £150 in 10 years, as opposed to £22 after just one year. That’s a whopping 6 times the value. When it comes to the stock market, patience is a virtue.

Contrary to popular media depictions, most smart investing is rather…well, boring. You pick a few shares or funds and monitor them in the long-term – and then cash them in when needed.

How much should I invest? And, how much risk should I take?

When it comes to investing in the stock market, risk is part of the package.

Unfortunately, the investments with the potential for the highest returns are also those that bear the biggest risk. The important question to ask yourself is: Will I be okay if I lose this money? If the answer is no, it may be better to set up a savings account instead.

If the answer is yes, it is still advisable to diversify, and invest in funds. This is a management strategy that bundles different investments into one single portfolio. You can do this by investing in a handful of companies you know and trust. The idea behind this is an increased chance of a higher yield, and a lower risk since if one company crashes this can be offset by another booming.

So, how do I get started investing?

The easiest way is to start investing is to sign up to a platform. There isn’t just one platform from which you can buy shares or funds. There are in fact many providers on websites and apps.

A few popular platforms include: eToro, Freetrade, and Saxo Markets.

It’s worth doing your research as many sites charge a fee to use their platform, and some have access to more stocks than others.

If you're concerned and want to warm up before you put in the big bucks, you can always invest as little as £10, and just get used to the idea, before investing large amounts.

Happy investing!