If you want to learn how to invest in stocks but you’re not sure where to start, then we’re here to help. In this guide on investing for beginners, we break down the key steps you need to consider along with some practical hints and tips to get you off to a smooth start.
Investing in stocks and shares can transform your finances although you do need a plan and you need to be able to stick with it for the long term. If you can then the magic of compound returns can get to work. For example, did you know that £10,000 invested in the UK stock market 50 years ago would now be worth around £750,000!
1. Choose your investment strategy
A great first step for investing beginners is to decide how much time you’re willing and able to devote to investing. You can pretty much automate all your investing these days, making it simple and easy to grow your wealth. Or you can get much more involved, researching individual stocks and deciding which ones to buy and sell.
The simplest – investing with index trackers
You can buy a fund called an index tracker which simply follows the market up and down. You don’t need to worry about deciding what to buy because this approach means you buy a little bit of everything.
You can buy index trackers that follow global markets, the US market, the UK market, or emerging markets like China and India. Index trackers tend to be very low cost, making them easy to buy in small amounts. They’re often a great option for those just starting to learn how to invest in stocks and shares.
The middle ground – investing with funds and trusts
A small step up from index trackers is buying a fund or investment trust where there is a manager who will pick and choose individual stocks and shares on your behalf. They may follow a particular style of investing – like growth or value – or specialise in certain parts of the market, like smaller companies or an industry sector like technology or healthcare.
Funds and trusts tend to cost a little more than index trackers and you’ll need to do a little legwork to decide which ones you want to buy. But once you’ve bought them, they should be a fairly low maintenance way to invest.
The hands-on approach – buying individual stocks and shares
Buying individual stocks and shares requires more time than the first two approaches but it’s potentially the most profitable and the most interesting. The Motley Fool is a strong believer that just about anybody can beat the market by owning individual stocks over the long term, but only if they’re willing to put in the necessary effort.
Buying a share gives you part ownership of a company so you get to vote on certain matters, and you’re entitled to receive any dividends paid out. You’ll need to follow the progress of your shares and evaluate any new developments as they come along.
Still not sure how to start investing in stocks? Then try a little of each
If you’re not quite sure which of these three approaches to choose right now, then don’t worry. We would say that index trackers are probably the best first step for most people who are just learning how to start investing.
But there’s nothing stopping you from trying all three approaches and seeing what works best for you. Or you might decide to start with index trackers and then move into funds and trusts, then onto individual stocks and shares as you get more comfortable.
The most important thing is to have a plan and to make sure it’s one that suits your temperament so you can stick with it over the long term.
2. Decide how much to invest in stocks
How much do you need to start investing?
Many people are put off buying stocks and shares because they think you need a lot of money. That used to be the case, but it certainly isn’t anymore.
Dealing charges for buying individual stocks and shares are much lower than they used to be and it’s possible to set up plans that allow you to invest in stocks and shares from as little as £25 a month.
Investing in stocks and shares each and every month
In fact, setting up a regular plan to buy index trackers or funds and trusts can be an excellent way of investing for beginners, as you can build up a sizable position over time.
You can also stop worrying so much about the exact timing of any purchases you make. You simply invest your money as and when it becomes available. It’s a great discipline to put in place and one we thoroughly endorse.
How long should you invest for?
Most people are investing for their retirement, so their investing time frame can be measured in decades. We believe that’s the best way to invest as the price of stocks and shares can be quite volatile in the short term, but they tend to be much more predictable over the long term. Look at any graph of long-term stock market returns, and you’ll see it goes up and to the right.
However, we would agree with most people that recommend that you don’t invest money that you think you’ll need in the short term, which probably means anytime in the next 3 to 5 years.
3. Open an investing account
Get a broker
If you’re going to buy stocks and shares, then you’ll need to open an account with a broker. There are many different brokers available, offering a low-cost way of buying stocks and shares in the UK, US, and most other major markets across the world.
You’ll want to compare their charges and see which offers the best value for you. Some brokers have very cheap dealing fees while others are very competitive when it comes to monthly administration charges. Which one is best for you will depend on how much you want to invest, how often you want to buy and sell, and whether you want a wider range of investing options. You can compare brokerage costs with our broker cost calculator to determine the best option for you.
Opening an account is relatively simple. You probably need to link it to either your bank account or debit card and you may need details like your National Insurance number. The broker will carry out some basic identity checks behind the scenes and then you should be able to start investing in stocks. It will probably just take a few minutes from start to finish.
If you are just learning how to start investing, then a single account with a broker is probably all you need. However, many people end up with multiple accounts, if they find that one broker is good value for certain investments, while others might be better in different areas.
Use an ISA so you can invest tax-free
One thing we definitely recommend is investing in stocks and shares within an Individual Savings Account or ISA. If you’re under 40, you can also open a variation of this called a Lifetime ISA or LISA, where the government adds a bonus to your account, subject to certain conditions.
Investing in stocks and shares within an ISA or LISA means you pay no income tax on any dividends and no capital gains tax on your profits. Admittedly, when you first start investing, the amount of any tax you pay might be tiny, but it’s surprising how quickly that can change when you’ve been investing for a few years. Investing in an ISA could save you thousands of pounds in tax each year further down the line and it usually doesn’t cost anything extra to have one.
An alternative tax-protected way to invest is through a Self-Invested Personal Pension or SIPP. SIPPs probably have the edge when it comes to the amount of tax you can save but they are less flexible and, under current rules, you can’t withdraw any money until you are 55 years of age.
4. Choose which stocks to buy
Getting ideas for stocks and shares
Think about the products you use every day, the food you eat, and the services you buy. The chances are there is a well-known stock market listed company behind them. Or there might be a customer or supplier you come across while you’re working that seems to dominate its industry. Great ideas for stocks and shares are all around us.
Reading investing websites like The Motley Fool can be another good source of ideas. You can see which companies seem to be doing well and which ones look best placed to help shape our future.
You don’t need to buy every single good stock idea you come across, as otherwise you could end up buying hundreds of different companies. So, you’ll want to concentrate on what you think are your best ideas and maybe add the ones that come close to a watch list so that you can revisit them at a later date.
Researching your stock ideas
The Internet makes it easier to research companies you’re interested in investing in. Each public company should have a part of its website called ‘Investor Relations’ that will contain their detailed reports, presentations, and explanations about how their business works.
You can draw on your experience as a customer, read company reviews to see what others think, and ask people who have to deal with the company directly what they think.
Diversify your portfolio of stocks and shares
One concept that’s very important to understand when you’re learning how to invest in stocks and shares is diversification. In short, it means don’t put all your eggs in one basket.
You want to buy stocks and shares from different industries and make sure they are diversified globally rather than being concentrated in a single country. While it’s tempting to learn just how to invest in UK stocks, it can make a lot more sense to spread your net a little wider. That way you can ensure that your stock portfolio won’t be overly dependent on a few key areas, and you can smooth out the bumps that are a natural part of investing in any business.
5. What to do after you’ve bought your stocks and shares
Keep track of news and share prices
Once you’ve bought your stocks and shares, you’ll need to follow their progress. You can sign up for news alerts for the companies you’re invested in and you can keep track of their share prices via your broker or at financial websites like The Motley Fool.
It’s a good idea to jot down some notes about why you decided to invest in a particular company in the first place and list any performance targets that they have set for themselves. You can then go back and use these to measure their progress.
Keep your records for tax purposes
It’s a good idea to download any contract notes you receive for buying and selling shares and the transaction history of your account covering any cash going in and out, dividends received, and so on.
Not only might you need this information to measure your investing success or otherwise, you might need these records to help compile your tax return.
Review your portfolio on a regular basis
It’s a good idea to review your individual holdings on a regular basis and also to consider how your portfolio looks as a whole. Share prices move up and down all the time and you may find you have a little too much invested in one area or perhaps too little in another. In such cases, you might want to rebalance things a little.
Over time, you might find you build up a long tail of small positions. It might be time consuming to keep track of all of them so you might want to cut loose your least favourite ideas so that you can concentrate on your best ones.
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