So you now have some savings stacked up and you're ready to have a go at the Wild Wild West World of Stock Market. Do you find yourself wondering what are the first things you need to focus on? Well here are some tips on some of the things you need to take into consideration.
Finding a brokerage account
Once you've decided to invest in the stock market the first thing you are going to need is a brokerage account. This is a company that acts as the middleman between the buyers and sellers of stocks. Just to make sure we are clear on what stocks are, these are shares of a company that is publicly trade (i.e. listed on the Stock Market). This is a way companies are able to obtain funding instead of going to banks to get a loan, they trade their stocks to investors like you.
My best advice for those of you that have a pension fund account opened for you by your company, its is a great place to start. If you don't have that then do a bit of research online for brokerages in your country. Then base your decision on the criteria you most value, for me I focused on the brokerage that offered best customer support as I needed to know I could speak to a human whenever I had a question regarding my account. The hear more of my personal journey check out this video on YouTube:
How much to start with
My recommendation on this point is simple. Start small! Like most things, learn to walk before you run. They always say use money you wouldn't mind loosing, whatever amount you feel comfortable with. I would suggest $100 just because it will make it easy for you to understand the % gain or loss you have had over your account. If the value of your investment is now $103 then it increased by 3%, if on the other hand it is now $97 then you lost 3% of your initial investment. What you need to understand is that the stock market is volatile. Watching a small amount will make you learn more about yourself and what kind of investor you are when it comes to risk tolerance. I'll elaborate on this further below.
Deciding what to invest your money into
The next big question beginners tend to have once they have set up their account and funded it is: "what to invest in?" The options are truly endless. To keep it basic I would say focus on either choosing to invest in a fund or a company. A fund is a combination of companies, and these can be grouped by industries, region, etc. Funds can also be divided into two types: Your mutual fund (normally managed by the brokerage) and ETFs. An ETF (exchange traded fund) is an investment instrument that tracks the performance of an existing market, such as the FTSE 100 or the NASDAQ. When starting with a low amount of investment money (funds) this could be the easiest way to diversify your portfolio.
The other most straight forward option is investing in a company. The simple way to do this is by choosing a company you know of, like and believe will continue to grow in the future. It is of course important to conduct some due diligence and fundamental analysis to consolidate your intuitions.
Impact of Foreign Exchange on international investments
If you choose to invest in a company that is listed on a different market than the country you are based in then you will no doubt be affected by foreign exchange volatility. This is why sometimes you might invest in a company which provides you a return on your investment over time, however the increase in value is then offset when your currency is losing power over the currency the stock is traded in. This is currently taking place between the GBP and the Dollar due to negotiations on Brexit driving volatility on the pound. The volatility is unfortunately primarily on a downward trend. So if you are based in the UK and have invested in a US listed stock, your investment then gets converts back to pounds.
When you invest in the stock market there are a few points to consider such as understanding your risk tolerance as mentioned above. You are either risk averse meaning you have a low tolerance to risk or you are a risk seeker. There is normally a correlation between risk and reward. The more risk averse you are, the lower volatility you should seek and therefore your returns will also be lower. This is why funds tend to be best for these seeking to invest with a more passive approach. The FTSE 100 has grown a stead average on 7% annually over the last 40 years. Whereas stocks of companies such as Tesla have grown over 500% in just the last year. This of course has also had sudden daily drops of up to 10% and its precisely due to this volatility in the price that drives the stock to be risker, therefore can also provide higher returns.
This leads me to the second point worth highlighting diversification. Given the volatility and the drivers of one stock going up might be the same causing another stock to loose value, it is important to invest in different sectors. Political issues can also add to the volatility and therefore regional diversification should also be pursued.
I hope you have found these points helpfully and that they kickstart your journey into the wonderful world of investing. If you'd like to download my free spreadsheet that helps you understand how your investment can grow over time in the market click here. If you are not familiar with the concept of Compound Interest then definitely check out the blog post where I go into more detail on the topic.
Finally if you are interested in gaining more in-depth knowledge and learning more about investing, I dive deeper into the topic in my online course "30 Day Finance Workout Challenge". Why not start a new month with a new challenge?