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How to start investing in stocks

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If I were to start investing in stocks and shares now there would be several factors I’d want to consider first. With many thousands of different investments available, it can be minefield for beginners.

That said, all investors started somewhere. Before I’d start investing, I’d look at the following considerations.

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  • How long to invest? – From my more experienced vantage point, I’d say stocks and shares should typically be considered as long-term investments. But every investor might have a different time frame in mind. Some invest for many decades, to fund retirement for instance. Some aim to grow investments for a few years to fund other life needs such as a home or car. Knowing how long I’d be willing to invest for could help me decide what to invest in.
  • Risk appetite – The level of risk an investor is willing to accept can be a personal choice. There are low-risk, medium-risk, and high-risk options. Understanding risk and volatility is an important lesson I’d need to learn before I start investing. For example, a high-risk investment could be a tiny oil miner reliant on discovering new finds. Whereas a relatively lower-risk investment in the same industry could be a FTSE 100 blue-chip big brand like BP.
  • Growth or income – which is more important to me? Would I want to grow my investment capital or receive a regular income from my stocks and shares? Buying growth stocks like Peloton or Square could potentially significantly increase my investment in value over several years, but provide little or no regular income. Whereas dividend-paying shares like GlaxoSmithKline could provide me with a regular income.

Next steps

As an example, let’s say I’d want to start investing with £10,000 and aim to invest for five years in low- and medium-risk stocks. In addition, let’s say I’m more interested in growing my capital than receiving an income for now. So, what next?  

Now that I have a framework, I’d look to build my portfolio in a Stocks and Shares ISA to protect myself from tax liabilities. And I’d want to spread my investments, diversifying to reduce risk.

There are several factors I’d look for when picking individual shares. I like to find companies that are growing earnings and in expanding sectors. I find the best stocks are those where there’s a catalyst for change. This could be a new product, service, or management strategy. I also like to ensure they have strong balance sheets, with ample cash flow and are well-funded.

An alternative to picking individual stocks and for a more hands-off approach is to invest in a managed fund like Scottish Mortgage Investment Trust.

Risk factors

Before I start investing, it’s important to consider the risk factors that come with investing in stocks and shares. Unlike bank savings accounts, capital isn’t guaranteed with stocks. In the long run, greater return is expected from stocks partly due to the added risk taken by investors.

Some shares can be more volatile than others. If fluctuating share prices cause distress, I’d want to pick some lower-volatility shares instead. Spreading capital across several investments could also help, in my opinion.

Overall, I think investing in stocks and shares can be lucrative and rewarding. If I were to start investing again, I’d just want to start as early as possible.

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Harshil Patel owns shares of Scottish Mortgage Inv Trust. The Motley Fool UK owns shares of and has recommended Peloton Interactive and Square. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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