Investing for Beginners: The Definitive Guide
Do you care about your financial future? Do you wonder if investing for beginners is even possible?
I’m here to tell you they’re great questions to have! After all most people want a future in which their finances are flourishing if at least secure but when it comes to investing the murky world of the stock market can be a confusing place for anyone new to the game.
Aspiring investors who want to invest in the stock market know that they can get a better return on their money; we want to benefit from all of the wealth being created around us, we just don’t always know how to go about doing it.
And sometimes we don’t always act in our best financial interests. After all, there is usually something keeping us busy. Sometimes something more interesting than money, or something just easier to tackle.
The reason I ask you this question is because if you really value your financial future it’s important you put the time, effort and energy into shaping it into the best version it can be. And when it comes to investing for beginners caring about your financial future is at the core of why you should start investing. It’s about your relationship with money, how much you respect its influence on your life and whether or not you want to be in the driving seat in order to steer it in the direction that you want to go.
In this Investing for Beginners guide, we’ll detail why you should invest your money. We’ll take down the barriers so that the world of investment doesn’t seem so mystifying, dark or confusing. We’ll strip everything back, financially speaking, so that we can behold the naked truth… and discover whether or not investing is for everyone or just the privileged few.
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What is An Investment and Can I get Rich Quick?
Investment is, in the most basic sense, essentially the transference of a proportion of your wealth to a company, in exchange for partial ownership of that company via shares, in the hope that the company will grow in profitability and increase the value of your shares.
When you make an investment you are looking for the best return possible. You may hugely support the work of the company you are investing in but you are not making a donation to a charity to support a good cause. You buy shares in the company in the hope that those shares will provide a net return to you in the form of capital gain (your investment will go up) and/or you will receive an annual dividend income in the form of payments to shareholders.
The formal definition, as provided by Investopedia, describes “investment as a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.” And this is fundamental rule to remember when it comes to investing for beginners.
But before we launch into the wild wild west of investing via the stock market, which is what we’re going to cover here, I need to give you a quick heads up. There are endless ways that you can invest your money: real estate, investment bonds, mutual funds and some in the finance world would even have you believe that savings accounts are a form of investment… but they must be a smoking crack because trust me the last place you want to leave your money is in a savings account (just don’t use that as an excuse to go and blow it at the races).
For the purposes of this guide, we are focussing solely on the omnipresent mothership of all investments and the foundations on which our capitalist society, like it or loath it, is built: the stock market.
The stock market is one of the easiest and most passive ways to get rich, in terms of effort required against potential returns, but it won’t happen overnight and it’s important to take a long-term approach when planning any stock market investments. There are all sorts of day-traders, huge stock players and hedge funds who have made masses money overnight and, in the interests of complete disclosure… it is possible. George Soros a high-profile Investor made over a billion pounds on September 16th, 1992 when he bet against the British pound… but sorry, this really is not going to happen to you or me! Because those types of events are once in a generation type events, they are hugely complicated and require the fusing of so many different elements at a single point of time; which mean that betting against the British Pound in this way will probably never be repeated again. But, we can dream we made a billion… and you can read more about this fascinating episode here!
So back to the stock markets and the chances of profitability. I can tell you, they are good, way better than break-even. Even if you did not research any companies or use any trading platforms whatsoever and simply invested in a fund that tracked the main index, like the S&P (US), FTSE (UK) or DAX (Germany), an index is where all the companies that have shares are listed on – it’s a bit like a contents list for all the listed companies, then the chances are you would generate a return that is significantly better than a savings account.
The stock market varies wildly in the short term and worldwide events have had a do continue to have a massive impact on stock market returns (the financial crisis of 2008 and the coronavirus pandemic in 2020 have wiped trillions off company valuations) but, even taking these world-changing events into consideration the stock market, on average and over time, gives a historical return of about 10% per year. That’s a fact. History bears out this truth and you only have to look at the major indices over the last 30 years to see this evidence.
According to the FDIC (Federal Deposit Insurance Corporation) the average annual interest on savings accounts is a mergre 0.09%. Yes there’s a big fat zero in front of that 9, both of which are behind a decimal point!
With that in mind, let’s take a look at the average returns of the US stock market against the average returns of a savings account over the last 10 years:
At the end of 20 years invested into the stock market your $1,000 dollars has turned into just under $7,000 big ones! That’s at an average return of 10% a year. Some years it will be higher, some years lower.
So even for someone as dense as me, who miserably failed at school mathematics, can appreciate that whilst investing in the stock market is not a route to overnight riches, it does have the potential to exponentially increase your wealth over time. And one of the huge strengths of a stock market investment is that you don’t have to obsessively manage it day by day, minute by minute. You can invest your money, check-in on the stocks you have bought every now and then, or even better, invest with a platform that automatically manages your money and generates a return from you – the ultimate passive investment.
Mind Over Matter: Is Investing for Beginners… Or Just Rich People?
So when history shows a pretty good track record on returns it seems strange why regular people (i.e. anyone whose not a stock market investor or hedge fund banker) does not invest. I think a large part of it comes down to a perspective of the stock market that basically views it has a market too complicated for everyday people; a mantra that basically says over and over again ‘investing in the stock market is not for me’ or ‘investing for beginners, like me, is too risky’.
And I can guarantee you that that’s what I thought when I first made my investments in the stock market. Amazingly I also hadn’t read anything AT ALL about investing, absolutely zilch about investing for beginners, and I simply chucked all my savings into various shares, pretty much based on whim and rumour. It was an anxious time. But luckily I had the capacity to realise how dangerous that was and I set about reading as much as I could in an effort to educate myself on the language, science, opportunities and pitfalls of stock market investments.
The problem is we don’t give ourselves the time or space to learn properly about what investing is. My mom told me the other day that a few years ago she bought a couple of thousand worth of stocks in an oil exploration company (notoriously high risk investments). She bought the shares based on a chat she has with a friend and is not even sure if the company still exists. #facepalm!
My mom is not rich. She just basically heard a rumour and acted on it and is not completely sure what the situation is now or how to go about looking into it. I’ve promised I will help her. The point of this little warning is: you must be engaged, you must understand the terms and conditions or any investment and you must have an investor mindset. Don’t worry, it’s easier than you think. Most importantly… don’t approach your investments like my mom!
Reality Check: Is Investing Right for You?
It’s easy enough for me to say ‘don’t be like my mom’ but when it comes down to it, it can be quite difficult to look at things objectively and make decisions based on rational choices and sound judgement rather than emotional impulses.
Investing for beginners is about taking a cold, long, hard look in the mirror and ask yourself… “do you feel lucky punk?”
No, don’t do that! That sounds more like shooting from the hip, taking your chances and throwing caution to the wind… a great idea when your exploring a new place on your travels, but definitely not when it comes to your money.
I truly believe investing is for everyone but we do need to take a short reality check to make sure it’s right for you. It may sounds obvious, but you can’t invest with no money upfront for example. That’s part of the invisible agreement with the stock market. You have to be able to ‘front’ some cash, in order to make some cash. So with that in mind, there are two important questions I would like you to ask yourself (and be honest with your answers):
Question 1: Do you have spare money available to invest?
I always think the phrase ‘spare money’ is a bit of an oxymoron because who really has spare money? A Saudi Prince? A Russian Oligarch? It’s unlikely any of us really have ‘spare’ money. All money is valuable so we shouldn’t really think of it as spare.
But… the reason I am asking you this question is because you should absolutely only invest money that you are not reliant on for survival, which can be a tough question to answer when it comes to investing for beginners. What that means is; don’t remortgage the house, don’t invest your salary (if you need it to live on) and don’t sell your furniture to invest! You might miss it when it’s gone.
You might have savings doing nothing in a savings account (as savings accounts running at an average interest rate of 0.09% are wont to do) or you might have come into money unexpectedly. The point is don’t invest money that you can’t truly afford to lose. Of course, the idea is that doesn’t occur but you should be prepared to go into investing with the understanding that a financial armageddon could be just around the corner. I am writing this in the midst of a coronavirus pandemic that has wiped trillions and trillions of dollars off of the stock market in a matter of weeks. So yeah. It happens.
Question 2: Do you have the irresistible urge to act…. Compulsively?
The internet is littered with cautionary tales about compulsive gamblers. Individuals who have worked entire careers only to lose all of their wealth in the casinos. The stock market is a long way off being a casino but it is possible to lose everything that you invest if you make the wrong, compulsive decisions.
Warren Buffett, probably the most successful stock market investor of all time, has some sage advice for those willing to invest about the value of patience:
“The stock market is a device for transferring money from the impatient to the patient.”WARREN BUFFETT
Wealth Warning: If you are compulsive by nature, like to place bets at the races, buy lottery scratch cards on a regular basis and get a buzz, or feeling of excitement when you win then have a second think about whether investing in the stock market is right for you.
We can’t change our personalities overnight and for anyone who thinks they might be even slightly compulsive and who enjoys gambling on a regular basis then the stock market is probably not going to serve you well. I truly believe that investing for beginners can be a financially rewarding experience. Because even though the stock market is a considerably safer place to spend your money than the casino no investment can absolutely, 100% guarantee your returns (otherwise it wouldn’t be an investment) and the stock market can be a dangerous place for anyone who is compulsive in nature.
Disclosure: Why there is no such thing as a Foolproof, Guaranteed or Rock-solid Investment
There are guarantees when it comes to investing for beginners. Period.
Investment involves risk and if you want to get a higher return on your money you have to accept some element of risk. In fact the higher the return, the higher the risk. Making sensible investment choices is about understanding that risk, making an educated investment and being willing to accept it in the hope of a higher return.
Anyone who tries to sell you an investment with a guaranteed return is just.. Downright lying! And that’s because all investments are dependent on growth, in the stock market, in the housing sector, in consumer demand… etc. And that growth could stop.
No one has a crystal ball when it comes to investing and there is no such thing as guaranteed returns. Investing does require a calm, rational and sensible approach but it does carry risk and whenever you make an investment a leap of faith, to a degree, is required but, like an athlete who knows his own skill, that leap is a calculated judgement.
If you have the right temperament and you’re not afraid of a little bit of risk, and have some ‘spare’ funds available then it might be the time for you to start thinking about an investment strategy for choosing the right kind of investments.
Creating an Awesome Investment Strategy and Picking the Right Investments
When it comes to investing for beginners there are a ton of different strategies you can use when it comes to defining your investment style but ultimately we all want the same thing: to make money.
So instead it’s better to work from the ground up and define your approach to investing by the things that you want to get out of it.
Asking yourself the following questions is, in my opinion, a most excellent place to start!
Write your answers down. Once you can look at them in the cold, harsh light of day you’ll have a much clearer idea about who you really are, in terms of investing, of course.
So now you know what kind investment approach you might have its time to start thinking about the actual investments you’d like to make.
And this is where you can run into the investor equivalent of writer’s block: how the hell do I know what to invest in? Here are the best places to start:
By using these sources you can begin to research and assess companies for inclusion in your investment portfolio and if you want to trade and invest full-time then I really recommend you add this book to your research.
The scope of this post is to provide you with a glimpse into the wild world of stock market investing so that you can decide if the risk is worth it. If you decide to become a full time investor, or even an investor that is committed to growing their wealth through close research and evaluation of their invested companies, then I really recommend The Naked Trader. It’s a super relatable, easy-to-understand, no-nonsense approach to understanding how anyone can make money trading shares.
If you are busy and don’t have the time to commit to an investment strategy on a full-time basis then there are other options available:
Automated investment platforms are essentially where algorithms are used to calculate and make trades and some of the big hedge funds do use this technology.
But I’m not convinced.
If a computer programme was able to effectively predict market moves and make trades accordingly then they would have almost instantly out-competed every human trader on the planet. And that hasn’t happened.
I’m sure the technology is progressing at lightning speed and you will find masses of info online about how successful automated trading can be but I think it’s still very much a work in progress.
If you do decide to accept the outstretched hand of some automated, algorithmic trading platform just beware of the words, immortalised in film history, “You are terminated”. It could be that one day the robots decide us human investors are surplus to requirements in their inevitable takeover of the world.
That leaves social trading, which is essentially where an investment platform online provides you with the functionality to copy other successful traders. Why is this better? Because you know it’s a human making the investment choices and you can research all of the choices that they make in-line with your Awesome Investment Strategy you outlined earlier. It combines the best of both worlds and it means the robots haven’t completely taken over just yet!
We’ll cover the social-trading, ’hands-off-ish’ approach below. In the meantime there are some clear, tried and tested things that you can do to identify the companies that are going to soar.
7 Successful Tried and Tested Strategies for Scoring in the Stock Market
When a company enters the main index it usually does so because it has become one of the most valuable companies in that country. Indexes like the FTSE 100, the Dow Jones and the S&P 500 contain the most valuable companies in the UK and America by Market Capitalisation (the total worth of that company). Entry into these indices are like a promotion for that company. They are the indexes that major funds track and when a company enters they will look to invest, leading to a higher share price.
Is the company changing the world in a way that you respect? Will their business last the test of time. Is it known and respected by your peers alike? I have been following TESLA since it launched because I knew that, as a car company, it would change the world. It’s obvious, think about it. Climate change is a very real threat to our very existence. It’s a problem of enormous scale. And we will need huge transformation across all sectors in order to meet the challenge. That includes the transportation sector and I’m pretty confident that the car is not going anywhere soon. So what’s the solution; a car that has no emissions. It’s obvious, no?
Anyway, I knew this 10 years ago and I wish I had the foresight to invest in TESLA because the share price has risen a massive 4,000 percent. If you only invested $10,000 when it launched on the stock market, your investment would now be worth a value somewhere in the millions.
But I definitely missed the boat on that one! Largely because I was just starting out in my tentative exploration of the stock market and I had no clue about investing back then, let alone investing in American stocks (I’m not based in the US).
Tesla is definitely also a disrupter and again it has been a great investment choice for anyone willing to make an investment in the future, which every investment should be. Companies acting as disruptors could also be said to be operating in niche markets, or in fact creating new niches. The reason why these companies can be so super successful as an investment choice is because they often don’t have any competition.
And lucky for you, we live in the age of disruption. You might well think that every single niche has been fully occupied but that’s simply not the case. Think about AirBnB, nobody saw that coming. A 35 billion dollar company that started with a blow up air mattress that’s it’s founders put in their living room in order to make a bit more money to help pay the rent. They created a new niche entirely and, as a result, they pretty much had the playing field to themselves.
Tesla has a 10 year, if not more, head start on every other electric automaker in the world. UBER is providing a better, cheaper and more reliable service for personal transportation and Transferwise is reinventing money transfer because they don’t actually transfer any money, they just debit and credit their own accounts in the countries they operate in, which helps them to eliminate fees and provide a cheaper service for you.
A bid target is a company that is so attractive to other companies that they are compelled to make a bid for it and take it over. Remember individuals aren’t the only investors around.
The reason why this is such a good investment for you to make, if you can spot one, is because after a company has been bid for the share price will usually rise by 50% or more. Remember the company making the bid will have armies of accountants, lawyers and experts much more experienced than you or I, so finding a bid target can be a great way to boost the value of your investments.
How do you know what companies might get bids for? Do your research, look out for unusual buying activity, check out the rumour mill and any articles online or in the news that might pertain to a potential bid. The secret is learning to understand the signals. No company is going to broadcast the fact that they want to buy another company until they are ready to do so because they also want to get the right price.
So get out your divining sticks, your tarot cards or… try researching in order to flush out the potential bid targets for your portfolio.
When a company pays a dividend it’s like they have got so much cash they are literally giving it away (to their investors). Dividends are the annual payments that each shareholder gets and you get a payment for each share, so the more shares you have the higher your dividend.
Dividends can be paid on a quarterly basis and the money is in addition to the normal value of the stock, so it doesn’t reduce your initial investment. Some investors have so much stock that they can essentially live off their dividend payments, but if you can reinvest your dividends into purchasing more stock the compounding power of dividends means that over time, the rate of return on your investments could be made times what the return would be if you didn’t reinvest your dividends. In a nutshell, if you want more wealth reinvest your dividends into purchasing more stocks.
Because dividends are essentially a perk they are subject to change or cancellation. They are also the preserve of larger, more successful companies, which means dividend paying stocks, like Coca-Cola are often much safer investments but generally have a lower capital appreciation.
Any company that is looking to expand, grow or develop into new areas of focus is proactively seeking to maximise its wealth and the return for its investors. It could be a company seeking to snap up the competition or looking to develop a new technology. It could be applying its own technological expertise to a new area or seeking to develop the markets it operates in.
A very clear clue that this is about to happen is the word ‘transformational’. I know that sounds a bit obvious, but any company on the prowl will be seeking in some way to transform it’s operations. Stay alert to the language and seek out a great investment.
In the world of the stock market this is the magic phrase. You can try to predict which companies might be ahead of expectations in their final year results by looking at their half year results to see if their profits have soared. And whilst the phrase ‘ahead of expectations’ or ‘exceeded expectations’ might have already resulted in a share price increase by the time you come to invest, the strong likelihood is that the company, failing a disaster, will continue to propel itself to higher returns and better value for their shareholders.
The Low Down on ‘Hands-off’ Investment
A hands-off investment? Sounds too good to be true. Well that’s because until relatively recently it was.
eToro is a company changing that by merging the worlds of social media and stock market investments to create it’s online trading offering built around a pioneering concept called copy-trades – this essentially allows you to copy the exact trades of other, hopefully more experienced traders, to obtain the same profits as they do.
eToro allows you to trade in a number of different asset classes including CFDs (contracts for difference), Forex (Foreign Exchange), stocks, indices and crypto-currencies.
Top Tip: over 63% of retail investors trading in CFDs lose money. That’s because they are a highly speculative form of trading in which you essentially bet against the rise or falling pricings of financial markets and their components. When it comes to investing for beginners I’m not sure CFDs are not the right investments, plus there are so many variables. What you decide to buy is up to you, but personally I believe CFDs, Forex and Crypto-currencies are more suited to experienced investors. I believe it’s better to stick to the historically proven returns that can be found in the stock market and the companies that are listed there.
So what set’s eToro apart? It has the flexibility to accommodate different investment styles and levels of interest. To explain more easily, take a look at this video which I’ve linked to from the eToro website (it’s a bit cheesy but it explains the main benefits of copy-trades well):
Personally, for me, the best thing about eToro is the ability to create a virtual portfolio is a great research when it comes to investing for beginners. This is basically a practice account in which you can make trades, copy other investors and explore the platform with a completely risk-free, imaginary portfolio.
When you feel confident enough to try investing with the real thing, and you have proven with your virtual portfolio that it’s possible to make money, then you can credit your account and trade to your heart’s content.
eToro’s platform is super easy to use and it’s a combination of a virtual ‘practice’ portfolio and an ability to review and copy other experience, profitable investors, mean that this platform is the perfect space for those new to trading. If your looking for a platform that enables investing for beginners than eToro may be the best place to start.
Investing For Beginners FAQs
What’s the risk?
Investing for beginners comes with substantial short term risks but the potential for long term profitability. There is always significant up and down daily movement on shares on the stock market, which means for long term profitability you should invest for the long term. It’s important to note that no investment is risk-free and, dependent on your appetite for risk, the general correlation is: the higher the risk the higher the reward.
How do I open an investment account to buy stocks with?
Investing comes with substantial short term risks but the potential for long term profitability. This is mainly done through an investment platform such as Interactive Investor or Hargreaves Lansdown. When you open your account you will deposit funds and then trade in the specific stocks that you have researched and wish to buy. Alternatively, if you want to rely on the experience of full-time investors than an account with eToro may be a better option.
Should I invest all my money in one company or spread it?
Again it all comes down to your risk appetite. Investing in one company is incredibly risky. It has the potential for huge returns but also the potential for huge losses. For example, I invested £70,000 in one company called Seeing Machines, the company share price YoYo’d over the course of several years at one point tripling my investment to £240,000. But then greed set in. I thought if it had tripled it would inevitably quadruple. But it didn’t, the share price collapsed and I ultimately sold out at around 100k. A better strategy is to spread your investments across a handful of companies. By all means, weight them towards a preferred company, but one way to significantly reduce risk is to ensure you are invested in more than one company.
What is diversification?
Diversification simply means not having all your eggs in one basket. See the FAQ above!
What kind of fees do I have to pay for an investment?
Diversification simply means not having all your eggs All of the investment platforms have different fees that you will incur but in general terms a trade costs between £5-15 per trade. That’s why it’s better to invest in a hand-ful of companies as opposed to 20 or 40. Because if you invest in 20 to 40 companies you will incur massive fees as a result. The investment platforms might charge additional service fees on a subscription or percentage basis. Shop around to make sure you find a good deal. For me Interactive Investor and Hargreaves Lansdown have both proved good value for money.
Do I have to pay taxes on my investments?
Yes as with any other form of income you have to pay taxes, but don’t let that put you off. There are many ways to minimise the taxes you pay, depending on the country that you live in. In America, if you invest via a 401(k) your investment firm will be able to assist and you’ll pay taxes in the same way that you do with a normal paycheck. If you use your ROTH IRA, a retirement account, to withdraw the money then it’s usually tax-free. Similarly in the UK if you invest via a stocks and shares ISA or a SIPP (Self invested pension plan) you can usually appreciate your investments with little to no tax. You must do your own research because every situation is different.
I’m not sure about investing in individual stocks. Are there other options?
Yes! You can invest in bonds, where you loan money to the government at a fixed interest rate or index funds, which are investment funds that track the major indices. You can also invest in commodities like gold, real estate, peer to peer lending and countless other investments (but the focus of this guide is about investing in the stock market).
Live Long and Prosper!
So there you have it. My longish and hopefully useful Investing for Beginners Guide to Investing! Although it might seem like a lot to take in, it’s probably best to pause, have a think about the best approach for you and to take your investor steps cautiously and one at a time.
If you’re keen to get stuck in then you’ll need to open an online investment account with a reputable broker and start researching companies that you’d like to invest in. I also really recommend that you read as much as you can about the stock market. The Naked Trader is a great place to start, and you can click on the image below to order your copy. I’ve also listed a bunch of other books in the Financial Toolbox section of this site.
For a more hands-off approach than eToro might be right for you. Check out the benefits of this style of investment right here. It’s great for investing for beginners and allows you to practice on a virtual platform as well as the capacity to automate your investments and copy other, more experienced traders.
Whichever investment path you decide to follow its really important that you remember your in it for the long haul. You might be keen to know more about investing for beginners and you should always do as much research as possible.
But always remember you’re not trying to get-rich-quick in a Ponzi scheme, you’re investing into reputable, world-class companies that add value to people’s lives, over time, which is why when Star Trek’s Spok said “Live Long and Prosper”, in the grand scheme of things, he might as well have been talking about the stock market.
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