How to invest in the stock market for beginners
Investing in stock and shares for beginners can be a bit daunting. This is because of various terminologies that beginners find confusing.
I started investing in stocks and shares during my undergraduate degree program at the university. At that time I was 20 years old.
I bought my first share when a financial institution launched an initial public offer (IPO). More about IPO later in this article.
In this post, I want to give you a beginner’s guide to investing in stock and share. Stay with me.
Why invest in the stock market
The main reason why it is important to invest in the stock market is the opportunity to grow your money.
Over a long period of time, if your money is left in a savings account, it will lose value because of inflation.
As well, investing in the stock market gives you the opportunity to be part of exciting projects happening worldwide. The majority of companies producing products and services we use on daily basis are listed on stock exchanges worldwide. Every human has the opportunity to own a piece of the biggest companies in the world.
Think about the number of people using social media platforms like Twitter, Facebook, etc. these social media companies are listed on the stock exchange.
Amazon is one of the biggest companies in the world. Many people use the Amazon marketplace to buy their everyday items. Amazon is on the stock market.
Apple and Microsoft who make computers and mobile phones, Johnson and Johnson who produce consumable products, automobile companies like Tesla are all on the stock market. I can go on and on to give you names of companies across the world who are valuable companies.
To learn more about why you need to invest in the stock market, please read an article I wrote specifically about this topic by clicking here or below.
What you need to get started
It is important to first go through what you need to be able to start investing in the stock market.
A brokerage account is different from a normal bank account. In other to buy a share of any company, you need to go through a stockbroker. Stockbrokers are like middlemen between the company you want to own their share and yourself. Without stock brokers, you cannot buy a share of any company.
There are stockbrokers in every country. Some stockbrokers will charge you some fees for using their platform while some do not charge any fee. The most popular stockbrokers in the UK are
|Stockbroker Name||Charges||Stock & Share ISA||Individual Shares||Index Funds and ETFs|
For people in the UK, it is important to consider a Stock and Share Individual Saving Account (ISA) when you open a brokerage account.
A Stock and Share ISA is also called an Investment ISA. It is a tax-efficient account that enables you to invest in a wide range of shares, funds, investment trusts, and bonds.
The major advantage of investing using Stock and Share ISA Account is that your investment is exempted from capital gains tax (CGT) whenever you decide to sell.
As well, you will be exempted from tax on dividend income.
How to own share in a company
There are two major ways to own a piece of a company you are interested in.
Initial public offering (IPO)
An initial public offering (IPO) refers to when a private company makes its shares available to the public for the first time on a stock exchange. Private companies go public mostly to raise capital that will enable them to grow bigger.
You can choose to buy shares in a company when they go public for the first time. There are advantages and disadvantages to this.
Existing shares in the stock market
The second way to buy a share of course is to buy shares of companies that are already available in the stock market.
The stock market is open all year round and they have opening hours depending on the country. You can buy shares through a stockbroker.
How much should you invest in the stock market?
You can get started investing in the stock market with as little as £1. However, £100 and above might be the ideal amount to start with.
You can invest as much money as you want in the stock market but it is important to diversify by buying a variety of asset classes.
Some stockbrokers will allow you to do regular investing if you choose to. Regular investing enables you to set up a standing order whereby a certain amount of money leaves your bank account every month into your brokerage account.
This enables you to be disciplined with your investing.
Investing in the stock market should be approached as a long-term investment. Adopting a long-term investing strategy will help you to regularly set a certain amount of money aside monthly to put in your investment portfolio.
What are the asset class in the stock market?
Asset class simply refers to the type of investment. The three major asset class are;
Stock and Share
A share of a company or shares of multiple companies. These have sometimes also been referred to as equity.
In plain English, a Bond is a way of lending money to a government or a company, and by doing that you get interested.
This is a type of asset class where shares of a variety of companies are put together to become a product called a fund. It could be Index Fund or Exchange Traded Fund (ETF).
What is the cost of investing through stockbrokers
There is a cost to investing in stock and shares which comes from the stockbrokers. It is important to know stockbrokers are businesses that also need to make a profit.
They have a number of charges depend on the broker. Some of them do not charge any fees while the majority of them will charge you fees to manage your stocks and funds.
Below is a table that shows the brokers who charge fees.
|Stockbroker Name||Account fee||Dealing fee|
Individual Shares vs Funds
There are two major ways to invest in the stock market. You can either buy individual shares of companies or buy funds. For experienced investors, you can diversify by having both funds and individual shares in your portfolio.
This is when you buy a share of a particular company. For example, you can invest in Apple by buying one or more shares of Apple. When you have more money to invest in the stock market, you can buy more shares of Apple or look for another company listed on the stock exchange and buy its share.
Buy buying individual shares, your portfolio will grow over time and you will have multiple shares and companies in your portfolio.
Advantage – The benefit of individual shares comes with an opportunity to buy shares of companies that have the potential to grow. When their share price increase in the future, you make a lot of profit if you decide to sell.
Disadvantage – The major disadvantage can be if the company or companies you own their share are not doing well or go bankrupt. In this case, your investment can significantly reduce in value.
Fund is almost the opposite of individual shares. The simple way to explain ‘fund’ is this. If you want to buy fruits, you can decide to buy only apples or bananas or grapes.
If there is an option to buy a basket of fruits that contains a variety of fruits inside the basket, it might be better to buy the basket of fruit instead of going about choosing various types of fruits.
With the example of individual share above, so instead of buying a share of Apple and Amazon separately. You can buy a fund that has Apple, Amazon, and other shares of various companies inside it.
Funds generally are diverse and hold a variety of companies shares. A fund can have shares of companies in various sectors like consumer goods, utility, energy, automobile, Technology, etc.
Advantage – Fund has less risk than an individual stock. If any company in the fund goes bust and out of business, in most cases, the fund will still be there as the impact of that company going out of business might not be greatly felt.
Disadvantage – Funds are not without disadvantages. The main disadvantage comes from the inability to control it. If you go for a passive fund, It mainly tracks an index and the performance of the index is what determines how it performs. If the overall market is down, the value of your investment will be down and on the other side, if the overall market is up your investment will be up.
Final thoughts on Individual Shares vs Funds
As someone who has been investing in the stock market for a long time, funds are what I think is better for a beginner to invest in. There are passive index funds and ETFs that help you to reduce the risk of investing in the stock market if you are a beginner.
Investing in the stock market can be overwhelming, by investing in index funds and ETFs you will save yourself from buying individual shares that might not perform well.
This does not mean you cannot buy individual shares. You can surely invest in individual shares but you need to research properly on any company you want to invest in if an individual share is a route you want to go.
When you get to a stage that you have properly educated yourself about the stock market, it is important to diversify and have a variety of asset classes in your portfolio.
By this, I mean invest in bonds, index funds, ETFs, and individual shares.
Should you invest in shares?
Investing in shares is the right thing to do for various reasons. Investing in shares is one of the investment types that has lasted for hundreds of years and has been tried and tested by the richest people in the world.
There are times when the stock market might be volatile. However, if you invest for the long term, it will be very hard to lose money in the stock market.
These are the reasons why you should consider investing in the stock market.
- Investing in shares help you to own a company. It might be just a tiny piece but you are part owner when you invest in a share.
- Opportunity to increase your wealth. Money saved in the bank will worth less over time because of inflation.
- Historically, over time the stock market goes up if you invest for the long term.
- The stock market can help you earn tax-free income if you invest in shares through a tax-efficient brokerage account.
- Through investing in share, you become a producer and not just a consumer. As a shareholder, you join companies that are providing valuable products and services in the world economy.
- Buying a share can help you to keep the money for retirement.
- If you invest in dividend stocks, you can earn passive income.
What should you invest in?
The choice of investment usually depends on your stage in life. To reduce risk, people that are close to retirement are better off not having too many growth stocks in their portfolio. Bonds, Index fund and ETFs are good options for people close to retirement.
For young people who are just starting their career and people perhaps before age 40 can consider individual stocks that have the potential growth in value over time.
As a beginner, it is wise to consider Index Fund and ETFs as the choice of stock market investing. If you choose to invest in individual stocks, you can consider the following.
There are companies that have a bright future ahead of them. These companies might be new in the stock market or they might just be scaling up their business. It can be risky to invest in such companies but if you are able to choose the right company, your investment can increase significantly.
Amazon was once a growth company. When it was first listed on the stock market in 1997, each share was sold for $18. As of the time of writing this article, each share of amazon is over $3000, which is a 3000% increase over 10 years.
If you are thinking about earning passive income from your investment. You can consider investing in shares of companies that are on the list of dividend aristocrats.
Dividend aristocrats are companies that have consistently paid a dividend over a long period of time.
Sectors to consider
The common-sense approach to choosing companies to invest in is to consider the various sectors of the economy. It is important to do due diligence and research before buying any shares. In some cases, a financial adviser might be required before you make a decision.
The logic I use is to consider companies that are producing products and services we use regularly. In some case products are service that we almost cannot do without.
Below are examples
Consumable – A company in this category is Johnson and Johnson. This company produce consumable packaged products. There are other companies like Unilever, PZ and some other ones that produce consumable products like detergents, beverages and other food items. These are products that we cannot do without. As long as there are human beings these companies will continue to strive as long as they are innovating.
Medical and Pharmaceutical – We all need medical care at one point or the order in our life. Companies that are manufacturing medical equipment and medicines do well over time. The likes of Pfizer and AstraZeneca can be a good company to invest in because they’ve been around for a very long time.
Renewable energy – In recent time, renewable energy has been a hot topic. A lot of companies are investing heavily in this sector.
Utility – We all need to use water and electricity on daily basis. Some of the companies who provide these services for us are in the stock market.
Tech – Think about the number of people who use Facebook for business or just social media. Amazon is not just an eCommerce company, Amazon is also a technology company that provide a lot of tech services. Apple and Microsoft are giants in computing. These are few examples in the tech sector and there are a lot more. Think about millions of people who use these technologies these companies provide. This is the reason why it is difficult to go when you consider companies producing services or products you use.
Investing in the stock market can be overwhelming for beginners. Especially due to various numbers of terminologies and technicalities involved. But what I have come to realize over time is that there is nothing in life that doesn’t seem complicated to a beginner, it only gets easier with practice.
Another factor to consider when considering investing in stock is that most usually require a long-term mindset. If you want an investment that will make you significant profit in a month or two then do not think about the stock market. Whether it is stock, shares or funds, it is best to have a long term mindset.