How to start investing… when you don’t have a clue.
If you want to get started with investing in the stock market, but don’t have a clue about where to start or how, it can be very intimidating.
The language barrier is a big put-off for beginners, as it is in all niche interests. Then there’s the fear of losing money and coming off worse than when you started – probably because of all the horror stories we’ve heard about individuals’ huge losses – and the media-fuelled perception of investors as either hotshot experts or villains.
However, investing doesn’t have to be a mystery. The first thing you’ll need to do is to learn the language, and the next thing you’ll need to do is choose the investment strategy that suits your personal circumstances.
What this article will look at and what it won’t
In this post we’ll look at investing in the stock market. It’s going to be a short, non-intimidating overview, and from here I’ll add links to more in-depth articles. We won’t be going into areas such as collectibles (fine art, wine etc), commodities, property or currency.
We’ll define a few terms that might be unfamiliar and look at whether investing is even right for you.
Understanding the terminology
Don’t let the jargon get you down! Here are some terms you’ll come across and what they mean:
You’ll often hear of ISAs being described as “tax efficient wrappers”. The word “wrapper” makes less sense to me than the concept of a box or tin – but the meaning is the same – it’s just something that you put your other goodies in to protect them so that you don’t have to pay tax on them.
In ISA will likely be your first port of call when starting with investing.
Stocks & Shares
There’s minimal difference between the terms “stocks” and “shares”, but this article by Nationwide describes how the origins of the terms denote a difference in the relationship you may have with the company you’re buying:
Shares suggests being a shareholder and owning a share of the company, hence a more direct relationship with the company, and stocks suggests a group of shares that is bundled together and sold on the stock market, so less of a direct relationship with a company.
So shares = more hands on, stocks = more hands off, but in reality, none of this actually matters.
A fund is collection of different investments such as shares or bonds. Many different investors can put their money into a fund. Imagine that instead of one investor buying a slice of one thing, you now have thousands of investors buying thousands of little slices.
An active fund (or a managed fund) is a fund that is overseen by a fund manager, who (actively) chooses investments. The fund manager gets paid for his/her work, naturally, and this fee will be passed on to the investors.
A passive fund doesn’t have a manager who actively picks and chooses the little slices, but instead, it tracks something called an index, and picks its contents based on what’s in the index. Hence, they’re called index trackers. Their fees are generally lower because of not having to pay a fund manager.
Exchange Traded Funds (ETFs)
ETFs are investment funds that work like index trackers, tracking the performance of a specific index.
An index is a measurement of the market. Without getting complicated, an index puts a group of companies together and measures how they’re doing. So the FTSE 100 collates the 100 largest shares on the London Stock Exchange, whereas the FTSE4Good index measures companies with a strong track record of Environmental, Social & Governance practices.
There are lots of different indices that measure lots of different criteria.
An index tracker fund will simply try to match its contents to the index it is tracking, so it will buy and sell investments to copy what the index looks like.
AMC – Annual management charge
GIA – General investment account
OCF – Ongoing charges figure
SIPP – Self invested personal pension
TER – Total expense ratio
Deciding whether to invest and how
Is investing right for you?
Well, if you are in debt or are living on the edge, then no – your priorities will need to centre around getting out of debt and establishing a firmer financial footing by saving first.
If you need to use your money within the next few years then saving it in as cash is also a better option.
If you’re looking to turn a fast buck in a get-rich-quick scheme then I would also say nuh-uh, as you’ll likely end up gravitating towards risky forms of trading that generally lose money.
How to start investing
Investing can be as simple as opening a stocks and shares ISA with your preferred provider, be it your bank or a share dealing service, and buying into a fund.
However, it’s a good idea to do your research to find out:
- How much the fees are for the investment platform
- How much the fees are for the fund
- How much individual trades cost
- Whether paying for extra advice or a management service is right for you
You’ll see that we consider being aware of fees to be pretty important – that’s because it’s easy to see your growth eaten away by charges you weren’t expecting.
Remember, don’t buy anything you don’t understand!
That might seem impossible as a beginner when you don’t understand anything, but you can always start with one aspect and learn that well.
What to know next…
This is scratching the surface of a big picture, so what’s coming up next?
Here are some topics we aim to cover:
How can you invest according to your conscience?
What is risk in investing, and how can you manage it?
Of course, we’d appreciate your questions as well – pop them into the comments box below!