Since the Covid-19 stock market crash, a raft of new investors have decided to start investing in shares. Thousands of working-from-home employees suddenly had nothing to spend their disposable income on. They’ve seen share prices pummelled, and thought they’d have a go.
That’s got to be a good thing, right? After all, at The Motley Fool we’re always urging people to put their money into shares instead of behind the bar. Well, it can be a very good thing if it’s done sensibly. But if you do it badly, you can be burned and put off the stock market for life.
Many of those keen to start investing have seen share prices gyrating on a short-term basis. And they’re trying to make a quick killing from cheap shares. Some try to start their investing career using spread bets, contracts for difference, maybe even using margin accounts. Essentially, various ways of gambling on share prices without actually buying the underlying shares. And for those who do buy shares, many are trying their hand at short-term trading.
Stock market crash
Suppose you start investing by using £1,000 to buy a share that’s fallen in the stock market crash. If it gains 10%, you’ve got an extra £100 in your pocket, which is indeed a nice outcome. But suppose, instead, you place a £1,000 bet on the share rising 10%. You could maybe double your money and be laughing with an extra £1,000 in your hand.
But what if the price drops 10% instead? If you own £1,000’s worth of the stock, you’re down £100. Not nice, but not a tragedy. But if you gamble the £1,000 on the price rising, you can lose the whole lot. And a wipeout always hurts. Start investing in the stock market? You could easily stop for life.
There’s another factor too. Market watchers are increasingly suggesting that the recovery from the worst of the stock market crash has been too quick. They believe it fails to reflect the depth of the economic downturn we’re facing. And it could take a long time for companies to get back to business as usual.
How to really start investing
Newcomers trying to start investing now could easily experience a second dip. If it happens, they’ll be sitting on short-term losses. And that could make them steer clear of investing in shares forever.
It would be a shame for newcomers to be burned like this. They could lose out on a lifelong opportunity to build up a sizeable chunk of cash to fund their retirements. And getting started during a stock market crash really can give you an extra boost.
So if you want to start investing and take advantage of cheap shares, how should you go about it? I say open a Stocks and Shares ISA, buy top FTSE 100 shares paying decent dividends, and forget about them for at least a decade. And whenever you feel like taking the coronavirus gamble and heading to the pub, consider topping up your ISA with a bit of cash instead. That way you should make the most of the stock market crash.
