Investing 101

Investing 101

How do I start investing in shares/the stock market?

That’s a question I’ve been asked a lot by friends recently. It can seem almost impossible to know where to start.

What broker do I use? What’s an ISA? What sort of returns can I make? These are just some of the questions you need to know the answer to. There is no doubt getting started is a daunting process.

However, in this article I’m going to break the process down into 3 stages. This will hopefully, encourage you to make your first investment.

ISAs

Here in the UK, the place to start is to open a ‘Stocks and Shares ISA’ (or a variation called a LISA; more on that later). An ISA is an ‘Individual Savings Account’, of which there are a few varieties. The purpose of an ISA is a chance to make savings exempt from tax.

Most people are only aware of the ‘Cash ISA.’ This is a savings account where you earn a fixed amount of interest. The amount is pitiful and is a complete con. I won’t rant for too long (although I easily could, it really annoys me) but the banks will take your money and invest it in the stock market and elsewhere themselves. They’ll make something around the stock market average of 7%, or probably more, and then give you a pathetic return of around 0.5%. The rest of your earnings will be pocketed by the bank. The only silver lining is that it’s guaranteed income for you, free from risk.

Or you can skip the middle man, who’ll take so much of the interest, and invest directly. 

A Stocks and Shares ISA allows you to invest up to £20,000 a year. It is a no-brainer to open an ISA. You’ll have all the options to invest in stocks and shares, but without paying any tax on the interest earned. There is no downside.

The other option to consider is a lifetime ISA (LISA). With a LISA you can deposit up to £4,000 a year, but the government will give you an additional 25% (so up to £1000) free. The caveat is that you can only withdraw the LISA as a deposit for your first house, or for retirement (after the age of 60).

At the moment a LISA is an upgrade to the ISA. If you decide to withdraw the money for a purpose other than the two specified, you will pay a withdrawal charge of 20% – which is the money the government gave you for free. However, from April 2021 this charge will increase to 25%. This means there is an additional ‘fee’ that extends beyond what the government gave you.

As a result, if you expect to eventually make a deposit on a first house, or you already want to start saving for retirement, a LISA makes sense. If not, a stocks and shares ISA gives you the same investment opportunities without the restrictions on what you can withdraw the money for.

Find out more about ISAs here.

Choosing a broker

Great, so you’ve decided to open an ISA. The next step you’ll need take is to choose a platform/broker to open the account with.

There are two key considerations:

What do you want to invest in?

Different platforms will offer different things to invest in. Vanguard for example will only allow you to invest in their own funds and ETFs. Whilst that might seem limiting, the dealing and account costs are very low, making this a cheap and safe way to invest. If you’d rather invest in your own choice of individual shares or funds, you might be better looking at other options.

What are the charges of the platform?

The charges tend to vary on how much money you have invested. Some platforms charge flat fees to use them. If you’re only investing a small amount of money, this could end up being much costlier than a percentage based charge.

Similarly, the transaction costs are also worth looking at. If the charges for making a trade are high, that could hugely eat into the potential gains of that trade. Being charged £10 for a trade is small if you’re investing thousands of pounds, but very high if you’re only investing a couple of hundred pounds.

I imagine if you’re starting investing like me, you won’t have tens of thousands of pounds to invest. In this case it makes sense to use a platform geared towards smaller portfolios. This will minimise account costs.

I personally use AJ Bell Youinvest. This isn’t an endorsement, but from my research they offer the best balance between choice of investments and dealing costs, for the amount of savings I have at the moment.

See here for a great comparison of some different platforms and costs.

What do I invest in?

Once you’ve set up your ISA/LISA with your chosen platform, you’re now ready to start actually investing.

This is by far the hardest part! The investment options seem endless, and I hope to cover some of the main financial products in future blog posts.

I don’t want to give any specific advice, but I would highly recommend for beginner investors two main rules:

You want to keep your investments low risk.

This is an initial recommendation for you to become used to financial markets. Risk is essentially how volatile an asset is, i.e. how much the value can fluctuate in either direction. The issue with investing in high risk assets is obviously the possibility of losing a lot of your money. I think a good rule of thumb when investing in something volatile is to not invest money that you can’t afford to lose.

As you get more accustomed to markets, you will be able to do better research and figure out how much you’re willing to risk. I think this comes with time though. So for your first investments, I believe it makes sense to put the majority of your money in low risk funds and trackers, and perhaps allocate a small amount (maybe 10-20%) into riskier picks such as individual shares if you so desire. This leads me to my second tip.

You want to diversify your investments.

That is to say: don’t put all your eggs in one basket. Markets and sectors can wildly fluctuate. Instead, as your savings grow, spread your money over different investments and sectors to hedge against the risk of any one of them crashing.

How much diversification is wildly debated. But having some sort of diversity is not. Putting your entire net worth on bitcoin should basically be considered as gambling.

Overall, I would say the key is to start out with low-risk and diverse investments. As you become more comfortable with financial markets, you will no doubt begin to work out what sort appetite for risk you have, and importantly what you want to invest in.

Conclusion

Beginning to invest can be a daunting process, but I strongly believe it’s a necessary one to achieve financial freedom.

If I had just one bit of advice to give, it would be this:

Start investing as soon and as early as possible.

Not only does money compound, but so does your knowledge. The earlier you start gaining knowledge about investing, hopefully, the higher returns you can get.

If you have any questions, don’t hesitate to send me a message on LinkedIn – I would love to connect!

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