Introduction to investing – A guide for beginners
The hardest thing to do in investing is to get things started for beginners. You may have read stories of stock market crashes, people losing money, and all.
If you follow the right learning curve, investing can be easier than you think. Online trading tools have made it easier for anyone to invest.
We have compiled this guide for your investing journey as a beginner, without getting into the technical jargon.
Evaluate Your Investing Approach
Before investing your money, you’ll need to assess your investing approach. It means evaluating your risk tolerance and financial objectives.
You can set a short-term financial objective of earning some quick bucks. Else, you may decide to capitalize on the long-term gains. Both styles require different investing strategies and expertise.
First of all, decide how much risk you want to take. Can you afford to lose all the money you have set aside for trading in stocks?
Then, evaluate your investing approach. Whether you want to be an active trader with a hands-on approach or you want to be a passive investor.
Both these points combined will help you choose the right investment strategy. It will also help you decide which types of investments you should consider in the beginning.
Choosing an Online Broker
There are different types of online brokers in the market these days. Broadly, we can categorize online brokers as full-time brokers or discount brokers.
Full-service brokers offer comprehensive trading tools and investment options. However, they come with hefty commission rates and account management fees.
The minimum account balance and account opening conditions may not suit a beginner as well.
On the other hand, discount brokers will let you begin investing with a minimum initial investment. You can get going with as little as $100 or less.
The competitive online brokerage industry means you’ll get lower restrictions from discount brokers. Online brokers offer a wide range of investment tools and competitive commission rates.
Doing it Yourself or Using a Robo-Advisor
As a beginner, you can take both investing routes of managing all of your investments by yourself or using a Robo-advisor.
Managing your online brokerage account would require significant time and knowledge. If you can devote yourself, it might be the best option for you.
Active management of brokerage account comes with its pros and cons. You can learn to trade and develop expertise as you go. You can scale the investment as and when you want.
Doing it yourself approach is risky, however. As a beginner, you may not want to commit unless you are fairly comfortable with trading basics.
The rise of Robo-advisor brokers has made things easier for beginners. You can take a hands-off approach in the beginning.
Robo-advisor brokers can manage your investment account. They’ll do the leg work for you from choosing stocks to managing trades. If you set long-term goals, this option can serve you the best.
Opening an Investment Account – Using a Demo/Free Account
Once you’re through the initial stages of planning, it’s time to enter the practical world of trading. Your first step should be to create a free trading account that many online brokers offer as a demo account.
At this stage, you do not need to invest any money. Most online brokers wouldn’t ask for committing any investment for a free account as well.
You should familiarize yourself with trading basics with a free account. Online brokers offer different types of trading platforms. These platforms come with several fundamental research and technical tools for trading.
Many online brokers will ask for a minimum deposit for opening a real trading account though. You can open an investment account with as little as $100 or below these days.
You can decide between a brokerage account or a retirement saving account here. Many beginners set up an individual retirement account to begin their investment journey.
Investing in Stocks vs Mutual Funds
Stock trading can be risky but rewarding. It isn’t as hard as you think as a beginner though. You can reduce the risk exposure in the beginning and gradually lean towards high-risk strategies.
An advantage of stock investing is that you can invest in a specific company. For instance, if you want to invest in a blue-chip stock. You may want to invest in a growth stock as well.
On the other hand, mutual funds offer a reduced risk exposure. Mutual funds are inherently diversified investment funds. These funds are managed by fund managers.
Mutual funds comprise different assets including stocks, bonds, and commodities. When you invest in a mutual fund, you are buying a piece of investment in these assets.
Mutual funds can be industry-specific or asset-specific as well. You can also invest in different mutual funds, ETFs, or Index Funds to diversify your investment.
The decision to choose between stock trading and mutual funds will depend on your financial goals as well. If you seek long-term financial goals, mutual funds can be your option. Stocks can be an option for you if you seek quick gains and if you can tolerate the risks.
Diversifying the Risk Exposure
Perhaps the most tried and tested advice to beginners with investing is diversification. It means to spread out your investment exposure. So that you never lose all of your money with a single losing asset.
If you are investing in stocks, you can diversify by investing in different industries. Also, you can choose to invest in international stocks. There are several different ways to diversify investments in individual stocks.
Mutual funds and ETFs offer natural investment diversification. These funds invest in hundreds of different assets. Thus, these funds offer a natural hedge against your investment risks.
Costs – Commissions and Fees
Trading costs can be substantial at times. Especially, if you seek an active trading approach to begin with.
Remember, most online brokers these days embed their commissions in spreads. Spreads are the difference between a stock’s buying and selling position.
The total trading costs will include trading costs such as commission on transactions, overnight interest, deposit, and withdrawal fees. These costs will also include non-trading fees such as currency conversion at the time of funds deposits/withdrawals.
Commission structures of stocks and mutual funds are different. Mutual funds incur funds management costs instead of transaction costs. However, the bottom line is to consider these costs before you enter trading.
Focus on the Long-Term Goals
Contrary to the common notion, investing is a long-term approach. You should focus on your financial objectives in the long run too.
Even if you seek quick gains through active trading, your cumulative returns will realize in the long term. You should align your investing approach with your financial goals to seek consistency.
There are numerous trading tools and strategies that attract beginners. However, it can be a daunting task for beginners to learn all of these tools. The best investing strategy at this stage would be to stick to the basics.
Beginners must take a simplistic approach in invest. Choosing the right type of investment strategy and online broker is a key decision. Then, you should learn to diversify the risk exposure. Taking a hands-off approach through mutual funds or seeking active returns with stock trading should match your risk tolerance.
Finally, you must focus on the long-term financial goals to succeed with investments.
A few links to help you
Simply Wall Street is a great tool that does a lot of the hard work for you
Yahoo Finance is also a very up-to-date website for viewing the most recent financial figures for free.
Learn Investing is our own portal that aims to help you develop your knowledge on investing.