Buying stocks is often a great decision to make. Stock markets have, on average, returned 10% every year since their inception. Therefore, they're a fantastic way to increase the value of your cash or pension pots to an amount of money you can live on come retirement. But if you are a beginner, it can be challenging to know where to start.
It's all very well knowing that investing in stocks can provide capital growth and an income. However, while that idea sounds great, how exactly is it done? How do you choose the right stocks to invest in? And then, how exactly do you buy them? And, importantly, how do you sell them? And when do you sell them? Here, we look to answer all those questions by examining how to buy stock for your investment portfolio in our beginner’s guide to stock investing and stock trading.
Investing in stocks for beginners
As an investment beginner, getting the basics right first is crucial. That will often mean building up a buffer fund that you can rely on should your investments in the stock market lose a great deal of value. Secondly, it can be more beneficial to pay off any high-interest debts, as they will often eat into your cash supplies. The high interest on debt will usually be more than the returns you see on stocks. Therefore, it is best to pay them off as soon as possible as it will be financially better for you in the long term. So look at every single credit card you have and pay off as much debt on them as you can before you even look at what interest rates you can achieve on investments.
Then, once you have your finances in good order, you need to consider your investment goals or objectives. Different investors want different things from their investments. Those investing for retirement will want to grow the money in their pension pot, so they have the most cash possible come their last ever day of work. Others will want to start earning an income from their investments, requiring stocks that regularly pay a healthy dividend.
Tied up in your investment objectives will be your investment timeline. The amount of time you have to invest has a direct bearing on how you invest in stocks. So your strategy and approach must change according to when you need to see your returns. If you are starting to contribute to your pension savings, for example, early on in your career, it is broadly seen as ok to invest in riskier stocks. The rationale is that you have time to recoup any losses you do sadly make.
If you are only starting to invest for retirement in a few years, you have to find the balance between risk and return. For example, you may need more significant returns to plump up your pension pot, though that often comes with added risk. On the other hand, added risk means you are more susceptible to losing investment value, which may not be something you can tolerate. Furthermore, since you are close to retirement age, losing any value in your investments leaves you little time to recoup them.
Investment platforms vs stockbrokers
When you have these basics sorted, you can then begin to put the mechanisms in place that allow you to trade. In this day and age, that can mean signing up to an investment platform online or mobile app.
There are so many different online brokers to choose from that it may be overwhelming at first to select the right one for you. However, whittling them down according to what asset classes online platforms offer is an excellent place to start. For example, it may be that you do not want to invest only in stocks. Instead, you want to be able to trade bonds, ETFs, indices or Forex too. If that’s the case, you will want a platform that provides the ability to do all of these things.
However, it could be that you really do just want to invest in stocks. You may want to choose a straightforward platform as a result. In doing so, you may find that the fees are cheaper given that your provider offers only a select service. That specialised service can mean a better commission structure for you that is comparatively low-cost.
However, looking at the fees of an online brokerage firm or platform is not the only determining factor in your final decision. For example, you need to ensure that the platform you use works for you. One person's intuitive is another person's complicated, so it is good to research first. Many platforms these days will allow you to use a 'dummy' account to ascertain if you get on with a provider’s software.
Secondly, be sure that you can use all the tools that the platform provides. Many will have different analytical tools to help you make better investment decisions. However, if you do not understand them, you are paying for something you do not use. The same can be said of research. You may not use your potential platform's analysis at all, yet that can be an area that really drives up the costs. It will be money well spent for some, while for others, it will be something they pay for with no added value.
Finally, ensure that your platform is regulated by an authority you respect. As well as looking for ones that fall under UK regulators, you can also use online platforms regulated by entities outside the UK, like CySEC. We're not here to tell you which authority is better than another. The critical point is that your platform is regulated by an authority you trust, giving you the protection you need when transferring funds to your potential platform provider.
Of course, it is possible to go far more old school and invest through a stockbroker. Many stockbrokers will have an online offering these days. Still, they will also offer the ability to trade over the phone. You call them up, ask them the current share price of a company you want to purchase and follow their subsequent procedures. Depending on who you have a brokerage account with, they may be able to offer you investment advice to support your investment decisions.
Stock picking vs passive investing
Once you have chosen who you will be buying stocks through, you need to decide whether to structure your own portfolio or invest passively. Structuring your own portfolio means picking specific individual stocks that you believe have the potential to grow. Identifying stocks that you think are cheap compared to their actual value is vital. Doing so should mean that they will go up in value so that your assets grow as the price goes up. Picking stocks that do eventually go up in value can be a way to beat the average return of an index. Stock picking is done with the thought that your knowledge will outperform the broader market.
Investing passively means buying exchange-traded funds (ETFs) and index reflecting assets. They copy entire indices so that you buy a unit of a fund that mimics something like the FTSE 100. The motivation behind investing in this way is that you do not have to pick particular stocks. Researching stocks and identifying potential investment opportunities is a time-consuming exercise. Plus, it does not always bear fruit. While there may be times that you get it right, and a stock goes up by far more than an index, there are other times that it won’t. In fact, there are times that your investment value will go down. Investing in an index fund or ETF is a way that you benefit from entire market gains.
Somewhere in the middle is buying mutual funds. Mutual funds are investment products that you can purchase units in. Those running a mutual fund take the money from selling units and pool it into one large pot. A mutual fund can consist of either investable assets like bonds or alternative assets.
People are often attracted to mutual funds because someone else does the stock picking and asset allocation for them. Asset allocation is when a fund manager structures a portfolio so that it only invests in a specific amount of an investable asset class at any one time. That is often delineated on a high level simply as stocks, bonds, real estate investment funds or other alternative investments. However, asset allocation can be more granular and identify what percentage of the fund can be invested in a category or sector at any one time.
The other option is to employ a person to invest your money. Many people usually access the expertise of a fund manager through a pension fund or other institutional savings pots. If they are not investing through such an institutional fund, many will have to resort to pooled funds, mutual funds, or passive investing. The reason? Employing a person to be your own personal fund manager is expensive.
That may not be an issue for you, but if it is, seeking financial advice first may be helpful. An independent financial advisor can provide valuable guidance when investing in stocks and point you in the right direction of what investment products may be good for you. That may mean pooled funds that you buy units in, but it could also be other financial products that may be more suitable for your circumstances.
Automated investing with robo-advisors
Automated investing is also an option. While still a relatively new way of investing, robo trading, as it is also known, is growing in popularity. Robo trading occurs by software taking results from an extensive questionnaire completed by an investor. It then takes those results and turns them into an investment strategy. The software can then place trades according to what the investor wants from their portfolio. By using algorithms, the hope is that the software can invest according to an investor's requirements and beat the market.
Simply because this is a vaguely new trend in investing, it is not one to dismiss immediately. It may be suitable for you and your situation, and you may be attracted to its benefits if you believe they outweigh the risks. The benefits are the hope of improved results for your own specific circumstances, with reduced fees. The risks are lack of past performance history (though that is never a guarantee for future performance anyway) and, quite honestly, a fear of the unknown.
Key ideas when investing money in stocks
There are several ideas to bear in mind when investing, regardless of whether you are a novice or experienced trader.
When to invest in stocks
Firstly, knowing when to invest in stocks is arguably just as important as knowing how. Timing investments is one of the key ways you can improve your returns. The investment basics of buy low, sell high should mean that you always make a return on your investments. However, there is slightly more to it than that. For example, you can invest a lump sum on one stock or across several stocks simultaneously. Or, you can regularly invest, drip-feeding funds into your pension pot by bolstering positions or adding more stocks to your portfolio.
Investing a lump sum
Investing a lump sum can mean that you can optimise your returns by investing in one lot when prices for stocks are at their cheapest. The problem with this strategy is how do you know that they are at their cheapest? What metric are you using to calculate that? While that can be tough, it can give you the ability to make considerable gains. By buying at a low share, you have more opportunities to make gains at whatever price you sell. It also means you start earning returns on all your investable funds instead of leaving some languishing in low interest savings accounts, waiting for a good investment.
While investing a lump sum has its upsides, it can also make life difficult at times. For example, trying to time the stock market so that you buy at the lowest point is hard to do. In comparison, investing little and often has been seen to help improve returns. The reason is that doing so actually maximises the times you invest when the markets are low. It also evens out your exposure to the volatility of the stock market. While in the short term, that may mean you are not buying a stock at a price dip, over the long term, you will often find that simply being in the market over the long term can be better than having an extended period out of the market. That can easily happen if you consistently try to time your entry point to be as shrewd as possible.
The risks of investing
Ultimately, when learning how to invest in stocks, it is essential to keep an eye on the risks of investing. The big one is that you can lose all your money. While this is unlikely to be the case if you invest prudently, it can still happen. Stock markets can plunge suddenly - as shown by the 2008 financial crisis and even more recently just after the start of the Covid-19 pandemic.
Therefore, you must bear this in mind and try to have a risk management strategy in place. This can mean investing in other asset classes that are uncorrelated to stock market returns to diversify away market risk. Or it could mean just investing in stocks that are perceived to have minimal risk attached to them. Doing so can protect your downside, so you don't put yourself in danger of losing all your funds. So, before you begin even downloading the latest investing app, you need to consider your risk tolerance which is a product of your ability (and want) to take on risk.
Beginner investors may be guilty of forgetting the tax implications of the fluctuations of their stock holdings. In any tax year, any realised gains you have made are subject to capital gains tax. The only exception is if you have a stocks and shares ISA. Stocks and shares ISAs allow you to earn interest tax-free, which is a massive benefit to this type of product. It can be a profitable way to build long-term wealth. You can do so by picking your own stocks or paying a management fee for a company to run your portfolio.
Having an investment account for stocks
Investing money in stocks may be complicated and intimidating, but it can also be incredibly worthwhile. Growing personal wealth is one of the key ways a person can improve their financial health. With better financial health comes enhanced mental health, as financial worries are one of the biggest causes of stress. Plus, given that many of us will not be able to rely solely on the state pension come retirement day, we must do all we can to improve the value of our pension pots ourselves. Investing in stocks is one of the best ways to do that.
Ultimately, with the wealth of ways to invest in stocks available nowadays, there is more chance that there is a method that works for your own specific circumstances. The hope is that by finding the best way for you, you increase the chances of increasing the value of your money while mitigating any risks to which you are particularly sensitive.