How to get started investing

If you’ve never invested before it can be dawnting. I remember the first time someone told me they invested in stocks and shares and I was so confused, like where do you go to do that, do you go to a bank? Who decides where to invest? Do you need hundreds of thousands to start?

Well it turns out, these days, it’s not as complicated as it seems, so I’m going to break it down for you.

So first question, why bother, what actually happens to my money?

What happens to money over time? Well lets say you don’t invest, and you just keep your money in a bank or in your house. If you have $1000, and you just keep it like that as cash, what’s going to happen is you’re going to have less money over time. Not because the mice have nibbled at your bank notes but because of inflation. All inflation means is that over time, generally things become more expensive. A loaf of bread will go up a few pence, your McDonalds cheeseburger might increase, your fuel or clothes might cost more. All that means that over time, the same amount of money actually buys you less, so therefore it is worth less.

The US inflation over the past 5 years varies from 1 to 4 percent but the average for 5 years was 10% and UK 12%. So each year your money is worth that amount less, so in the US after just 5 years your 1k is worth about $900. Now one solution might be to put your money in a savings account, that pays you to store money and that’s what’s called interest. This can be useful at counteracting inflation however currently the best savings rates you are likely to get are about 0.5%. That’s pretty low. When you consider inflation, your money is still worth less next year. So what you need is a way to make your money worth the same or more next year.

Investments

So we can do this with investing. So let’s talk about what an investment is. An investment is something you put money in that you expect to make a profit on. You can invest in many things from exclusive watches, that may increase in value, to businesses where you take some money to start the business with the aim of making money, or buying rare cars in the hope they get more valuable or in this case stocks and shares.

Stocks

Stocks and shares are essentially small portions of a business. If you owned 100% of the stocks and shares of a company, you would essentially own that company. But huge companies are too big for one owner, so they list parts of their business on stock markets. These stock markets are just like your local grocery market, except everything you buy is a small share of a company. The theory is, that by owning a share of a company, that company will do well and in the future analysts will value that company more valuable, meaning your small share of that company is more valuable than when you bought it. So let’s say again we take that $1000 and we invest it in a company. After a year, that company might have done really well, sold lots of products, become famous and therefore the value has gone up by 10%. Our $1000 in shares would now be worth $1100.

Fantastic right? So why don’t we all buy shares and make loads of money?

Risk

Well here’s the risk. All investments, including stocks and shares are not guaranteed to make 10%. Sometimes they’ll make 20 or 50%. Or sometimes they’ll drop by 10, 20 or even 100%. So there’s a chance that your $1000 is worth $0 if that company goes bust. Or there’s a chance it’s worth $2000. Usually it’s somewhere in between. Risk is the same for watches I mentioned or rare cars, if people suddenly lose interest in that brand, you may have something that’s worth less in future. And that’s why investments are what we call risky.

Now there’s different levels of risk. If you invest in a huge company like Ford motor company or Walmart, the chance of those going bust is pretty slim. They are so massive, and so old, you imagine you will likely get a profit each year. However, because they are so massive already, the chance of them increasing in value by a long way is also slim. You’re not going to get 200% increase in your shares from a company like that, they are called low risk.

Now take something like Tesla, just a few years ago before it became super famous, it was what you call high risk. It’s was a new company, still fairly small (And even is small today when you consider how many cars they make compared to other brands), but it was fairly cheap to buy shares in. So by buying Tesla stock back then you were taking a big risk that the company went bust and you’d lose all your money. However in this case, the company grew really big. It’s now worth a staggering 3000% percent more in just a few years. So back to your $1000 dollars. Over just 5 years your 1k is now worth 31000. Insane right? Imagine you invested 10k. It would now be worth 310,000.

So when investing, you always have to balance your risk, how much you want to put in low risk stocks that gain you an almost guaranteed few percent vs high risk that you might lose everything but also might gain huge. Everyone has a different risk appetite and you should decide yourself what yours is, and not necessarily copy someone else.

Dividends

Now all we’ve talked about with investments is that your portion of a company could be worth more in the future. But stocks and shares do have another advantage. Most companies also pay dividends. So what does a dividend mean? Well let’s say a company like Apple has a really good year selling iPhones. They might make a few hundred million pounds profit. So they then use some of that profit to pay ‘shareholders’ that’s people who own a share. This is often just a few cents or pence per share, sometimes a bit over a dollar per share. But if you have a few hundred shares this can be lucrative passive income. Now different companies pay very different dividend rates, and some pay daily, weekly, monthly or even yearly. Dividends are great because it means your stock or share is not only worth more but it’s also been paying you over time. This is where compounding profits come in.

Compound

Compound really is the power of investing. Let’s say again you have $1000 in shares and it pays you $50 a year in dividends. Well if you invest that $50 into the same share, the next year it will pay you an even bigger dividend, of $52.50. You invest that in again, and next time it’s bigger. Multiply this every year and you reap big rewards.

Which Stocks Should I Buy? So now you’re wondering which stocks to buy. Well as mentioned, there are chances that your investment increases but there’s also a chance of it decreasing. So what a lot of people do is they spread out their risk by investing in a Tracker or Index Fund. Now these are really cool because essentially they are just a bag of stocks. What you are essentially doing is investing your money across a whole bunch of companies. Let’s take my favourite one, the Vanguard S&P 500. This index fund invests in all of the top 500 companies in the USA. So if Tesla by some huge misfortune goes completely bust, and you’ve invested your money there, you’ve lost it all. But if you invested in the S&P 500, only a small percentage of that stock is in Tesla, so you’re not even going to notice that loss because chances are all of the other companies like Coca-Cola, Apple, Amazon, etc are going to have grown and therefore the total index fund will have grown. Now I’m not giving any advice. I’m no financial expert but I’ll just show you a bit of history.

This is the S&P 500 graph. As you can see it’s gone up from the beginning. In this case it’s gone up by over 100% in 4 years. Imagine trying to get that kind of interest rate in a bank account! Now the trick here is not to check your stocks every day. As you can see, the price varies wildly. So you might buy some shares today that in the next day, week or month actually goes down in value. But with index funds, generally holding on to those stocks long term does increase. So it’s best not to invest money you need next week, instead only money you want to see sit there for years. And don’t check every day then panic sell when it dips down because at that point you’ve made a loss.

How Do I Buy Stocks

So in the past, you would have to go to a financial broker like Hargreves Lansdown, and you still can by the way. They will charge you anything up to about $11 per trade (that means per sale or purchase of shares). Obviously this makes things trickier because you have to believe that even after your investment makes money it must make more than $22 to pay for your selling and buying fees for you to profit. These outfits are probably best suited if you have large chunks of money to invest.

Nowdays, however, you can use services like Robinhood, Webull or Trading 212 to invest, completely free. That means when you buy and sell a share it is completely free. All you do is download one of these apps, transfer money and begin buying. If these specific apps aren’t available in your country, just search “online broker Canada” or “online broker India” or whatever country you are in. Now on the one hand these commission free apps are great because it means people can invest really small amounts really easily. But it does also mean people jump in before doing enough research and lose money fast, so do your research and perhaps take advice from a real financial advisor, which I most certainly am not.

Is That It?

Well that is a really simplified version of the stock market. There’s many more things to talk about such as Spread, Shorts, Day Trading, Tax, Share Classes, Stock Splits and loads more terminology and technical details. If those things interest you, let me know in the comments below and I’ll make some more in depth videos.

But for now I hope this helped you learn a bit about investing and how to get started.

Written on February 2, 2021

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