It is all very well knowing that investing in stocks can provide you with capital growth and an income. However, while the idea of that's 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.
How to buy stocks
Buying stock 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. But if you are a beginner, it can be challenging to know where to start. Here are some tips if you are in that boat.
Investing in stocks for beginners
As an investment beginner, it is crucial to get the basics right first. That will often mean firstly 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 first, 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 first as it will be financially better for you in the long term.
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 the last ever day of work. Others will want to start earning an income from their investments which means they require 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. Your strategy and approach must change according to when you need to see your returns. If you are starting 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. Added risk means you are more susceptible to losing investment value, which may not be something you can tolerate. Given that you are close to retirement age, losing any value in your investments leaves you with very 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 online day and age, that can be mean signing up to an investment platform through a website or 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, 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.
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.
Stock picking vs passive investing
Once you have chosen who you will be buying stocks through, you need to decide whether you want to structure your own portfolio or invest passively. Structuring your own portfolio means picking specific stocks that you believe have the potential to grow. Therefore, 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 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.
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 the software taking a set of 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 too.
Key ideas when investing money in stocks
When investing, there are several ideas to bear in mind, 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 basic 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 at the same time. Or, you can regularly invest, drip-feeding funds into your pension pot by bolstering positions or by 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 low, you have more opportunity to make gains at whatever price you sell. Plus, it also means you start making returns on all your investable funds instead of leaving some languishing in low interest-bearing savings accounts, waiting for a good investment.
While investing a lump sum has its upsides - literally - it can also make life difficult at times. Trying to time the 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.
The risks of investing
Ultimately, when learning how to invest in stocks, it is essential to keep an eye on the risks of investing. Namely, 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. 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.
Investing money in 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 our retirement day, we must do all we can to improve the value of our pension pots ourselves. Investing in stocks has been seen to be one of the best ways to do that.