Investing for Beginners
Foundations of investing
If the goal is to grow your money over time, and you’re okay with risk, then building good investing habits is a great way to start. We’ve called this guide ‘Investing For Beginners’, but really these are the foundations of investing, ones with which anyone, regardless of experience, should be familiar.
We’re Wombat, an award-winning investing app based in the United Kingdom. Our mission is to help people build wealth, and contribute to the future they want to see, by making it easy to invest in stocks and funds.
Part one: Getting started
What is investing?
It’s a fair question, and a good place to start. Investing is when you buy part of a company and receive ‘Shares’ in return. Depending on the price of a single share, you might buy a whole one, several, or just part of a share, known as a ‘Fractional share’ (more on these later).
So why would companies want to sell shares to members of the public they’ve never met? In this guide, we’ll use a fictional company called Wombat Holdings. Why would Wombat Holdings want to sell you shares?
The answer, as with most things in business, is simple: Money. But before we go further, it’s important to understand that you can only invest in companies that are ‘listed’ on a Stock Exchange. A Stock Exchange is like a virtual shop where you can search for, buy, and sell shares in different companies.
Wombat Holdings, our fictional company, wants to sell you shares so that it can expand. When you buy shares in a company, they’ll use that money to build new products and hopefully, expand, make money, and be successful.
The more successful the company gets, the more valuable your shares become, meaning you’ll make a profit if you choose to sell them. Of course, the reverse is also true. If the company does badly, the value of your shares can go down, which is why it’s important to understand risk. More on that later.
When should you start investing?
What’s more important than when you start investing, is for how long you invest. One of the best proven strategies for building wealth is to invest for the long-term. This is because global stock markets are volatile. They can go up and down wildly over the course of days, weeks and months.
Investing regularly for the long-term, that is, over many years, can lead to benefits in two main ways:
- You’re more likely to build up lots of shares across different companies, funds, and industries, giving you more potential for returns.
- You’re more likely to ride out market uncertainty and major crashes if you stick to a long-term plan.
Whether you choose to invest when the markets are up (i.e. things are more expensive) or when they’re down (when things are less expensive), what matters most is consistency and patience.
What are the risks of investing?
The main risk associated with investing is that you get back less than you put in. This happens when the companies, funds, or industries that you’ve invested in, don’t do as well as expected, or perhaps go out of business.
There’s a general rule in investing that goes, ‘Only invest what you can afford to lose’. That means don’t invest all of your disposable income in shares that can go down as well as up.
Decide on an amount or a percentage of your disposable income that you’re content to invest (potentially lose) and not touch again for several years.
The other main risk of investing is not having enough diversity. It’s easily done. You invest in a couple of companies and they do well for a year or two, before their profits start to slip. Pretty soon, all of your hard work seems to be crumbling away. Investing in several different companies across industries can help you to spread out the risk.
How much should you invest?
If you find yourself asking, ‘How much should I invest?’ then the real question is, ‘How much can I afford to lose?’
Once your essentials such as bills, rent, mortgage, food, and so on have been accounted for, see how much you have left, and decide how much you would be willing to invest and not see again for some time.
Part two: Types of investments
Stocks and Shares
You’re likely to see the words ‘stocks’ and ‘shares’ used interchangeably all over the place, and in general, they can be. Stocks and shares are what you buy when you invest in a company. But there are some subtle differences.
‘Stocks’ is a more general term, referring to the holdings a person has in one or more companies. While ‘Shares’ is more specific, referring to ownership of individual portions of a company.
E.g. Martin holds stock in Nike, Apple, and McDonalds. He also bought shares in Disney last week.
The best stocks and shares for beginners are usually the ones that match your interests. This makes sense as you’re more likely to stay engaged in investing if you own parts of the companies that matter to you.
Funds and ETFs
Like stocks and shares, funds and ETFs can mostly be used interchangeably. ETF stands for Exchange-Traded Fund.
A fund is a collection of companies all rolled into one. This can be around a theme (e.g. Green technology, entertainment, etc.) an industry (e.g. Automotive, Biomedicine, etc.) an area (e.g. Asia, North America, etc.) or high performance (bundling big names brands together, for instance).
An Exchange Traded Fund (ETF) is a fund that can be traded on the stock market as a single unit. Investing in ETFs makes it easier to invest in several companies at once, while spreading out risk should one or more of the companies within the fund underperform.
If you want to buy shares as a beginner but can’t afford a whole share, then fractional shares are the way to go. Sometimes a whole share in a major company can be too expensive for a beginner investor.
Fractional shares are exactly that, a fraction of a whole share. When you’re starting out as a beginner investor, buying fractional shares can be a great way to build a more diverse portfolio.
Building a diverse portfolio as a beginner investor is simple with Wombat, as we allow you to invest from just £10. Fractional shares are only available in General Investment Accounts, though whole shares are also available in Stocks & Shares ISAs and Junior ISAs.
Part three: Best investment accounts for beginners
Stocks & Shares ISA
As a beginner investor, you want the most bang for your buck. Stocks and Shares ISAs are popular with investors of all experience levels and they allow you to make tax-free gains.
You can invest up to £20,000 per tax year into a Stocks and Shares ISA*.How it works is simple. Unlike a regular Cash ISA, in which your money sits and accumulates interest, with a Stocks and Shares ISA, your savings are invested in the stock market.
*ISA allowances are set by the government, so make sure to check www.gov.uk regularly for updates.
This of course means that your money can go down as well as up, but the main attraction of a Stocks and Shares ISA is that any profits you do make, you get to keep, free from tax.
A General Investment Account is unlimited, as opposed to the £20,000 per year limit on the ISA. It means that you can invest as much as you like in a given tax year. The difference is that with a GIA, profits over a certain amount will be subject to Capital Gains Tax.
Lifetime ISAs are popular with people saving for a first home or retirement. With a LISA, the government will contribute a bonus of up to 25% of whatever you put into the account.
The J stands for Junior. A Junior ISA is a savings account set up by a parent or guardian for someone under the age of 18. You can invest up to £9,000 in the 2023/24 tax year into a Stocks and Shares Junior ISA* These accounts are tax-free, and the money becomes available to the child at the age of 18.
*Tax treatment depends on individual circumstances and may be subject to change.
Part four: Saving vs Investing
Understanding savings and investments means understanding how to balance the two. There are pros and cons to consider with both, and the differences for your long-term wealth can be quite dramatic.
What do we mean by savings?
Whether you keep your money in cash in a box, in a debit account, or an ISA, you can consider these as savings. Typically, savings will only accumulate value in the form of interest.
One of the pros of a savings account is that your money is static, and will keep earning interest until you make a withdrawal.
But that lack of movement is also the savings account’s downside. Because your money isn’t being invested, it isn’t reaching its full potential. It’s less risky, but there’s also less reward. Plus, if inflation rises by 5% per year and your savings account has an interest rate of 1.5%, then it’s not even keeping pace.
Investments are different
While more risky in the sense that you can get back less than you put in, investing has the potential to help you grow your wealth in a more substantial way.
Whether you invest in shares or funds, in a General Investment Account or a Stocks & Shares ISA, there’s inherently more risk, but also more reward.
As mentioned, this is about finding balance. It’s often a good idea to have some savings that aren’t invested, alongside a portion of your income that is invested.
Part five: Dividends
You’ve probably heard the expression ‘to pay dividends’, and already understand that it means getting a payoff for something you’ve invested in.
That’s really all there is to dividends. They’re a share of a company’s profits. As a shareholder, if a company pays dividends, then you’re entitled to a share of whatever portion of profits they’re giving away. How much you get depends on how many shares or fractional shares you own.
Dividends are paid as cash directly into your trading account. What you do with them is up to you. Some people withdraw them, although for most beginner investors this isn’t worthwhile as the amounts are usually pretty small.
One popular alternative is to automatically reinvest your dividends back into the same company, or somewhere else. It’s an easy way of growing your portfolio and earning passive income, alongside your regular investments.
Part six: Building a diverse portfolio
We’ve already learned about why it’s important to invest in different places. It helps to spread out risk. But building a diverse portfolio is also about maximising gains in the short and long-term.
What is diversity in investing?
A diverse investment portfolio covers not only different brands and different industries, but also different personal goals.
Long-term investment goals are often better served by investing regularly in companies with a good track record of turning a profit years after year.
Short-term investment goals, meanwhile, can sometimes be satisfied by tracking up-and-coming companies and industries, and investing in them.
Wombat offers products for both. A Standard account gives you the tools you need to invest long-term, to open an ISA, a JISA, and to invest in UK, US, and EU shares.
A Wombat Instant account, on the other hand, is focused solely on the US market. With this type of account, you can trade US stocks instantly during market hours, with no waiting and no commission fees. Perfect for seizing opportunities when the stock markets make sudden moves.
Diversification extends to ETFs, too. That’s Exchange-Traded Funds. Wombat’s ETFs are themed, making it easy to invest in a wide range of industries all at once. There’s The Future of Food, The Space Age, The High-Ender, The Adventurer, and lots more.
Part seven: Key takeaways
Let’s recap some of the key points to take away from this guide.
- Stocks is a general term referring to an investor’s holdings
- Shares is a more specific term referring to individual portions of a company an investor owns
- Investing regularly with a long-term mindset is a solid plan to follow
- Only ever invest what you can afford to lose
- Invest in what matters to you so that you stay engaged
- Fractional shares are a portion of a whole share, and are more affordable
- ETF stands for Exchange-Traded Fund, and refers to a basket of brands traded as one
- There are different types of ISA, which allow you to make tax-free profits each year
- Dividends are a portion of a company’s profits, paid out to its shareholders
- It’s a good idea to diversify your portfolio, to both spread risk and maximise potential gain
Enjoyed this guide? Check out the Wombat Learning Hub for more short articles on investing.