The rise of apps like Robinhood in the US and Trading 212 and Freetrade in the UK has attracted more investors to the stock market. Many have been tempted to invest in listed companies because of the market crash caused by covid-19. Others by the huge publicity, especially earlier this year, around the sharp rise in the share prices of technology stocks. Despite the stock market becoming increasingly democratised, getting started can still be intimidating. But remember, everyone started somewhere, even the legendary Warren Buffett.
My own journey started back in university. I started buying shares while studying and over the subsequent decade, I’ve seen markets go up and down. I believe everyone should feel able to benefit from making money on the stock market and here’s how I think you should go about it.
1) Do some reading
For some people it can be all too easy to jump in. On Facebook groups I’ve seen plenty of new investors asking ludicrously basic questions. This indicates to me they’ve done no independent reading or research. The markets often punish the lazy. To be successful on the markets over time, rather than just lucky sometimes, you need to understand what makes companies profitable, what makes shares go up and down. What do different ratios like a P/E ratio and a current ratio mean?
Without reading and understanding, you’re just gambling and therefore shortening your odds on winning. The aim should always be to want to grow your money over time by investing in shares. To do this you need to do some research and hard work.
2) Make it happen
On the other hand, sometimes the opposite can occur and you can end up doing nothing. Paralysed by fear. You have to take a leap of faith once you have some understanding of the stock market and have read up on a company or companies you want to invest in.
Once you have done your research you should feel confident to take your first step into the market. I’d start cautiously at first because, as with anything new, there’s the potential for mistakes. You could even start practicing with demo accounts which many stockbrokers offer, or which can be found easily enough online.
3) Keep aside some cash
In the early days don’t go all in. Accept it’ll take some time to learn how to invest in the stock market. Make sure you have enough cash set aside both for your personal life and then also for taking advantage of buying opportunities as and when they arise. I’ve very rarely had all my money invested in shares.
The market will always at some point push most share prices down. We saw that most recently in March with covid-19. Look at any chart of the FTSE 100 in the UK or the NASDAQ in the US and you’ll see fluctuations. Sometimes big undulations. Having cash in an ISA or in your shares account to buy shares when they are cheaper than they have been is potentially a good way to make money. Remember buy low and sell high.
4) Leave some money to professionals
The problem most private investors have is making buy low and sell high a reality. This is why it can be sensible to hand over at least some of your money — especially if it’s a large amount — to full time professionals who should be better able to make use of a team of analysts and invest in the best companies. This isn’t always the case though, so choose the best funds or investment trusts you can. Again, base the investment as always on thorough research. It’s well known that many funds and investment trusts underperform so this will likely only be part of your portfolio.
Of course with trackers (or ETFs) there’s the potential to cost effectively invest in the market without paying high management costs, or having to choose individual shares yourself. Many people think this is the easiest way to make money from the stock market. It’s almost certainly the route to go down if you lack the time or the will to spend lots of time reading about listed companies and about the stock market.
Although on my own journey I’ve always invested in individual shares. In my view, in the early days, it’s worth investing directly into companies. That said, some of my best investments have been funds and I think they deserve a place in a portfolio — along with ETFs and other investments.
5) Build a portfolio
The aim in my opinion should be to over time build up a diverse portfolio of investments. This is what I mean by building a portfolio. Make sure your investments are diversified. Ideally, especially if you’re new to the stock market you don’t want to be too reliant on one industry to do well. There’s a temptation right now to invest in the big US tech stocks. While that’s in some ways understandable, it’s equally wise over time to make sure your investments cover a wide range of industries and ideally countries as well.
With a spread of investments, you have less exposure to any one of them performing badly. If you invest in just one company which then goes bust, you lose all your money. If it’s only one part of a wide collection of investments than the impact will be more bearable.
My view is that the stock market is a great way for any person to increase their wealth. It’s not though something that can just be dabbled in half-heartedly. If you want to create a passive income from the stock market or use it as a way to make more money then you need to work hard at it. There’s no shortcut.
I’d be tempted to ignore most people on social media, especially on Facebook groups and use reliable sources of information. Especially when getting started as you need to build a real base of knowledge. As opposed to collecting a bunch of opinions of varying quality.
Over time investing in the stock market can seriously build your wealth. I know it has for me and the journey still has a long way to go. Getting started in the stock market could well be one of the best financial decisions you make. It could even be one of the best life decisions you make.
To read more about investing in shares you can visit my website here.
