Simply put, investing is a means of growing your capital by putting some assets away now in the hopes of seeing more of it later. However, investing for beginners can understandably be overwhelming. There’s a lot to consider, and everyone’s financial situation is different. That’s why it’s important to do your research and educate yourself before investing. Use this as your guide to the basics of investing. Afterwards, you’ll feel better prepared to make adequate decisions about your own financial circumstances and future.
Why should you invest?
Building up cash isn’t enough. It is important to stash some cash in an easy-access account for emergencies. But if you have substantial savings then leaving it all in cash is a bad idea. This is particularly true when the cost of living is rising as rapidly as it is now. The price of goods are becoming more expensive over the long term. Meanwhile, low interest rates offered by banks and building societies are not enough to beat inflation. This means if you leave all your life savings in a poorly performing account, the value of it is actually falling.
Your money can really multiply in the long run. Investing gives your money the best chance of growing. For example, let’s assume you invested US$10,000. If you put the money in a savings account paying you an interest rate of 1% that pot would be worth US$10,510 after five years.
By comparison, if you invested the money (assuming 5% growth) then the same pot would be worth US$12,763 after five years. And actually, due to the impact of inflation eroding the spending power of the cash in your savings account, in real terms, it would be worth even less.
The power of compound interest. This is what Einstein called the “eighth wonder of the world”. Imagine a snowball, rolling down a snowy hill. The longer it rolls down the hill, the more snow it captures, and the bigger it gets. And the bigger it gets, the larger the surface area it has to capture even more snow. Now replace the snow with money. The longer you give an investment to grow, the better. You have your original investment, plus the return you make each year, and that in turn will earn interest. Effectively the interest earns interest and so your money grows at a faster rate, which is why it’s a snowball effect.
What should you do before you start investing?
- Pay off any expensive debt such as a credit card or overdraft. Otherwise, the interest payments would offset any investment gains you stand to make.
- Read more about whether to pay down debt or save. Paying off debt and saving money for emergencies are both necessary to achieve good financial health. If you have a limited budget, you might be wondering which one you should tackle first. Understanding the benefits of both can help you create an individualized plan for mastering your money and help you choose your most adequate financial strategy.
- Make sure you have savings of between three and six months’ earnings and keep it in one of these top-paying easy-access accounts. This is money for emergencies like your boiler breaking or a sudden change in your life circumstances. If you are still worried about investing, it is important to bear in mind that nothing is risk-free when it comes to your money. This is because when investing, the markets can go up and down, but with saving inflation can eat into your pot. So while keeping your money in cash may feel like the safest option, you will be losing money in real terms. The rising cost of living means your money won’t go as far in the future.
10 things you need to know before investing
1) With investing, you’re always taking a risk. Investing is a long way from putting your cash in a savings account where it sits to earn interest. Instead of the security of guaranteed returns, you’re taking a risk with your money. The hope is that you make a lot more than you put in (a profit), but there’s the possibility you end up with less (a loss).
You can invest in almost anything, from the most mainstream popular targets, such as shares, bonds, funds, crypto assets, government bonds, and the property market to the rather more exotic, such as farmland, vintage cars, or fine art.
2) A stock market is like a supermarket where you can buy or sell shares. To keep it as simple as possible, and for the purposes of this guide, a stock market is simply a place where buyers and sellers meet to sell shares – each share being a tiny part of a company listed on an exchange, such as the NASDAQ, NYSE or the London Stock Exchange.
Why do shares exist in the first place? To grow, and hopefully boost profits to turn a business into a financial success, firms offer investors the chance to back them with their own cash. Going public gives growing businesses access to vast amounts of capital to grow their earning potential, in turn returning some of the new value created to the people who invested in the company.
In the stock market, in return for your cash, a business offers you a share in its future – so you essentially own a slice of that company and become a ‘shareholder’. And if you wish, this slice of the company you own can then be traded with anyone who wants to buy it.
Why does a company’s share price rise and fall? The price is initially set by the firm offering shares but its price on any given day can be determined by poor financial results, the world’s economic health, and so-called ‘sentiment’, ie, if Meta buyers think the company will struggle, its price will fall. Or if a company doubles its growth in a year and prospects look rosy, then its price will likely rise.
3) You can make money, but you can also lose it all – there are no guarantees. Most new investors ask “what kind of growth can I expect from investing?”. Potential growth drives most people’s decision to put their cash into investing in stock, crypto, or real estate. The answer is rather blunt: we can’t actually tell you what return will an investor get (and don’t believe anyone who says they know). But we can give you an idea of what can be achieved through educated projections. Although rates on savings accounts have seen some recent upward momentum, inflation is still soaring well above them. Understandably, the incentive to look elsewhere for decent returns remains strong.
4) Be mindful of common investing mistakes. There’s no getting around it: Investing can be complicated, especially for beginners. Here are some of the biggest investing mistakes that beginner investors make:
- Setting and forgetting your investments: Be sure to monitor your investments on a regular basis using an investment tracker to ensure that you are still on the right track.
- Stagnant portfolios: Not increasing your investment as you make more money can also be a mistake.
- Emotionally buying or selling: Getting overly excited or panicked about fluctuations in the market can lead to poor investment choices.
- Waiting too long to start investing: Many potential investors spend decades being indecisive and not taking the step, losing many valuable opportunities that can potentially change their life for the better. That is why it is important to educate yourself about investing, get to understand market peculiarities, and how to make educated decisions about what to do with your money.
5) ALWAYS remember the five golden rules of investing:
- The greater return you want, the more risk you’ll usually have to accept.
- Don’t put all your eggs in one basket. Try to diversify as much as you can to lower your risk exposure, ie, invest in different companies, industries and regions.
- If you’re saving over the short term, it’s wise not to take too much of a risk. It’s recommended you invest for at least five years. If you can’t, it’s often best to steer clear of investing and leave your money in a savings account.
- Review your portfolio. A share might be a dud or you might not be willing to take as many risks as you did before. If you don’t review your portfolio regularly, you could end up with a share account which loses money.
- 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.
6) Only you can decide if investing is right for you. It doesn’t matter if you’re about to buy your first share or pick a stock market fund for the first time, always ask yourself WHY you’re looking to invest. Over the long run, historically stocks and shares, and even crypto have outperformed money in savings accounts. But that’s no guarantee they’ll do so in the future. It’s all about your personal circumstances. For example, you might be one of the many who have despaired at the rotten rates on offer in savings accounts and are prepared to take a risk in the hunt for bigger returns. Or you may have drawn up a well-researched plan to save 10,000 USD over the next decade to help pay for your children’s school fees. In both these cases, it’s a clear green light to go and invest.
7) You should never invest more than you can afford to lose. Too many people think you need to have a load of cash to be able to invest in the stock market – you don’t, and many smaller investors who ‘drip-feed’ in small sums on a regular basis can do much better than those who simply dump a big lump sum into the market. As a rule of thumb, you should never invest more than you can afford to lose. This is because, in the event of a stock market crash, you could face losing a huge chunk of your wealth if you have too much of your money invested. Many financial advisers would suggest you invest for at least five years. This allows enough time to ride out any bumps in the market that might see you take a loss on your money.
8) A share is a small unit of the value of a company. A share is simply a divided-up unit of the value of a company. For example, if a company is worth 100 million USD, and there are 50 million shares, each share is worth 2 USD. Those shares can, and do, go up and down in value for various reasons. Companies issue shares to raise money and investors (that’s you) buy shares in businesses because they believe the company will do well and they want to ‘share’ in its success. Shares can pay dividends too. There are two ways you make money from investing. One is when the shares increase in value (and you profit when you sell), and the other is when they pay dividends. Dividends can be paid out once or twice per year, or you can elect to reinvest them and add to the accumulated value you hold in that company even faster.
9) A fund is where lots of investors pool their money together to invest in lots of different shares. A fund is simply another way to buy shares – but instead of you buying a slice of a company directly, you give your cash to a specialist manager who pools it with money from other investors (like you) to go and buy a job lot of shares in a stock market. Each fund is made up of ‘units’ so if you want to invest, you’ll need to buy units – and these come at a cost which varies from day to day.
10) Research, research, research!
If you’re not sure what type of investment to choose or are concerned you might take on too much risk, there are plenty of free websites, guides, books, and online classes packed full of detailed and useful fund stock market, crypto, and real estate information, among other types of investments.
Hopefully, now you know a bit more about the world of investments. Just remember there are no guarantees when talking about investing. Investing comes with risk, as the value of your investments can go down as well as up. If you decide to do it, it’s recommended you invest for the long term (five years or more), as the longer you invest, the longer you have to ride out any bumps in the market. And the more you learn about investing the easier it’ll be to make the right choices.