Everything you need to know about investing money

Does the thought of investing your money fill you with dread?

Unless you’re in the loop on how it works, the stock market can seem like a scary place, which is often the reason many people stay away from it.

Taking a gamble on an investment with your hard-earned cash isn’t something you should enter into lightly.

Before you begin, you should arm yourself with knowledge – and that’s exactly what we are here for.

Here is our beginner’s guide to investing money, minus the complicated jargon, and with the help of experts who know what they’re talking about.

We dive into safe versus risky investments, where to start your money-making journey and common mistakes that people make.

What is the stock market?

Simply put, the stock market, sometimes called the equity market, is where you can buy or sell shares in companies.

The value (price) of these shares change on a daily basis. The more popular a stock is (i.e. the more people want to buy it) the higher the price will climb.

On the flipside, if a large bulk of shareholders start to sell a particular stock, the value of it will fall.

Basically, the stock market is governed by supply and demand.

‘The stock market is a tool which allows you to buy, own and trade pieces of companies or other assets,’ says Alan Donegan, host of the Rebel Entrepreneur podcast and co-founder of the PopUp Business School.

‘You can buy a slice of a large company and be an owner and if that company does well you can sell it for a profit. 

‘Publicly traded companies sell shares of their company on the market to investors (people like you and me, funds and organisations). 

‘We buy the shares in the companies and then we can partake in a percentage of the profits (dividends) and increased value (capital growth).

‘ Of course the pain comes if the company fails, because you get to enjoy the losses as well!’

You can also keep your eye out for private companies looking to launch on the stock market, with a so-called IPO – an initial public offering – which is when they open up their shares (or rather, sell them) to the average Joe (the public).

Michelle Pearce-Burke, founder of Wealthify, shares her knowledge with a nifty examples:

‘So, if you own a share in Netflix, then the price of your share will be tied to how that business performs.

‘For example, in the last couple of months with everyone stuck at home, subscriptions to Netflix have been doing well, the company has thus been making good money and so the value of a Netflix share has risen.

‘If you had owned Netflix over the last couple of months, you may be feeling quite pleased with yourself and want to lock in the profit you’ve made by selling it.

‘A stock market is the place you go to do this, as it brings together buyers and sellers, acting as a marketplace to trade your stocks. Examples of a stock market are the FTSE 100 in the UK or the S&P 500 in America. They are just fancy names given to each marketplace.’

Are you with us so far? Good.

Where to start if you want to invest your money

OK, we know we told you that we’d stay away from the business jargon, but it’s actually quite important to understand, so here’s a quick course in investment lingo.

Alan says: ‘When you speak to someone who has been doing this for a while they use words like equities, broad based index funds and dividends.

‘To your average person, none of this makes sense. You first step is to learn the language of finance and to get to a point where you can understand it.

‘A great starting point to learn about investing is The Simple Path to Wealth by JL Collins or Quit Like a Millionaire by Kristy Shen and Bryce Leung.’

Once you’ve got that down, look up information on the three main routes to investing in the stock market: stock picking, buying managed funds or index investing.

Depending on which expert you listen to, it might be worth having a chat with an advisor before you start investing.

Alan, for instance, recommends that you avoid traditional advisors, but Alex MacEwen, founder of The Wealth Consultant, is all for it (then again, bear in mind that this is kind of what his company is all about).

‘If you are new to investing, I would always advocate speaking to a financial adviser or wealth manager in the first instance,’ he tells us.

‘However, this is not always possible, or economical for smaller investors with less than approx. £50,000.

‘A few things you need to clarify before you start, which may aid your decision as to which platform might be best for you:

  • How much do you wish to invest? Is it a lump sum or are you going to make regular deposits, or both?
  • What is it you are investing for (deposit on house, school fees, retirement)? In essence, what is the outcome you hope to achieve?
  • How much are you willing to pay in fees? Make yourself aware of the total fees that you may end up paying (platform administration fee, investment management fee, performance fees, exit fees)
  • How much risk are you prepared to take?

Next up: choosing a stock.

How to recognise a ‘good’ stock versus a ‘bad’ stock

Rather than call them good versus bad, let’s call them low-risk versus high-risk.

Because make no mistake, there is always a risk that your stock will plummet, no matter how successful the company is at the point of purchase.

‘I am often asked by friends of mine: “I have saved up some money and I would like to start trading the markets…what’s your advice?”, says Nick Cowan, CEO of the GSX group, who, like Alex, recommends seeking professional help before you buy your first stock.

‘I always reply “Don’t!” You wouldn’t get into a car without taking lessons – similarly you should be very careful to start trading in stock if you’re inexperienced – let someone professional take the strain.

‘It’s very easy to think “I’m bright, successful, smart – I should be able to take my £20,000 and start trading markets and double my money!”.

‘I have been a professional trader for 35 years and I still get it wrong – but I have learned over the years how to manage my risk, manage my money and read markets as to possible future moves – what professional traders need more than anything is an endless supply of bright, successful, smart people with £20,000!

‘So if you’re new to it – save yourself the stress and give it to a qualified licensed advisor.

‘Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn’t successful.

‘This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts. Over the long-term, an investment in stocks has historically had an average return of around 10 – 12%.’

If you’re going it alone (i.e. without an advisor) do your research on the company you’re considering buying shares from – the more you know about them, the better.

Or see if there are start-ups with promise that are looking to launch on the market.

FTSE, index accounts and passive investing explained

‘When people talk about the FTSE (pronounced foot-see) they are referring to the UK stock market. i.e. a collection of stocks that are registered in the UK, like Tesco, Lloyds or BT,’ says Michelle.

‘There are normally numbers after FTSE, such as the FTSE 100 or FTSE 250 – these numbers tell you which and how many stocks are included in the count.

‘The FTSE 100 includes the 100 biggest public companies in the UK and is the most commonly used and referred to. 

What is an index account or so-called ‘passive investing’?

‘The FTSE 100 is also called an index because it is just that – an organised list of the biggest 100 UK companies. 

‘Picking individual stocks to invest in is a tough thing to do, involving lots of time, research and resulting cost.

‘Which is a better investment – HSBC or Lloyds, Tesco or Ocado, BT or Vodafone? It’s not clear-cut and academic research repeatedly shows even top professionals struggle to get it right. 

‘An index account, or index fund, represents a different way of investing.

‘Rather than trying to pick specific companies, you buy them all! There will be some winners and some losers, but the law of averages balances it out. 

‘So, if you believe that the UK economy is doing well and the UK stock market will rise accordingly, buying an entire index like the FTSE 100, that contains the biggest 100 UK companies, is a good option, and typically cheaper too.

‘People also refer to this investment approach as “passive investing”.’

How do you buy or sell stocks?

Ever seen that episode of Friends, where Monica kept calling up the stock market on her phone to buy and/or sell her favourite stock, MEG, chosen based on her initials alone? (Don’t do that by the way).

Well, that’s not quite how it works.

You can either open a ‘brokerage account’ on an investment platform or get yourself a broker, who will charge a commission. There are sites that offer a no-commission deal, but where you pay a monthly flat fee for the service.

Michelle says: ‘The best place to start is looking online for low-cost or free platforms. You can either opt for a DIY platform where you pick your own stocks and manage them, or you can choose a managed service. 

‘Unless you know what you’re doing, a managed service allows you to invest your money but leaves the actual investment decisions of what to buy and when to sell, up to investment experts.’

These days, there are also a myriad of investment money apps that you can use, such as Moneybox, Nutmeg, Wealthsimple and Wombat, to name but a few.

Top tips: a quick guide to investing money

Gemma Godfrey is an expert in investment with years of experience, having run an online investing service and been the head of investment strategy at a publicly-listed wealth management company.

Now the executive editor at Times Money Mentor, she shares her top tips with Metro.co.uk:

Nick says: ‘If you decide not to seek advice and trade directly by opening an account somewhere that permits you to trade on the market (there are plenty of spread-betting venues for example) then there are a few rules that I would recommend following – namely:

‘When you place an order to buy (or sell short) a share – always have something called a stop loss and a target price. Meaning, if you buy a share at £1….then make sure you set a limit at which the position will be sold (or closed out) and never move that limit downwards. ‘

We’re confused, too – let’s run the math in an example:

‘For example, this could be £0.95 meaning you know for a fact what your loss will be,’ Nick adds.

‘Meanwhile, you may decide to set your target at £1:30. So you now have set a 6x risk reward ratio – you lose £0.05 if you’re wrong versus £0.30 if you’re right!

‘If the share price goes up to say £1:10, change your stop loss to £1:00 – which means you will breakeven at the very worst if things go bad.

‘If the stock continues going up, move your stop loss limit up so that you lock in some of your gains until it reaches your target. Reduce the probability of losing money when possible and at all times protect your equity!

‘Amateurs nearly always run their losses and take their profits too early – this is the human ego at work.’

What kind of investments are there?

When it comes to investing money, the world is your financial oyster.

From shares to gold, property to bonds, there is plenty to choose from.

‘Shares are just one of a myriad of investments,’ says Michelle.

‘Another one you may commonly have heard of is a bond. A bond is a different sort of investment, whereby rather than owning a piece of a company, you are loaning money to it.

‘Just as you may take a loan from a bank to buy a car or a house, a company can take a loan from you. In return for you loaning the company money, they’ll pay you a fixed amount of interest on a regular basis in addition to giving you back your money at the end of the loan period.

‘A bond can also be created by a government. Bonds are typically considered a safer form of investment than a share, though it depends of course on which company or government it is. 

‘Outside of shares and bonds, there are numerous other investments. If you own a house for example, you are already an investor in the property market – congratulations!

‘You may also invest in other physical things like gold, fine art, or wine. There are numerous other types and ways you can invest.’

There you have it: investing money 101 – now all you have to do is take the plunge.

As a final, very important note, if you’re new to this, be careful with buying or selling shares right now, as coronavirus is undoubtedly affecting the market.

And as we all know, Rona is a fickle madam – and the UK’s economy will look very different once the pandemic is over, so keep that in mind before you part with your cash.

If you want more tips and tricks on saving money, as well as chat about cash and alerts on deals and discounts, join our Facebook Group, Money Pot.

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