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How To Invest In Stocks With Confidence: Step-by-Step For Beginners
I remember when I took the leap to make my very first investment.
Even though I had trained as a Chartered Accountant, I still had so many unanswered questions.
In fact, I feared that my hard-earned cash would disappear into the ether of the internet.
Back then, there was so much information and it all seemed far too overwhelming.
I had no idea exactly where to begin.
Should I invest in shares? Or bonds? funds? Or try to buy property?
How about using a Financial Adviser? Should I instead try to do it all myself?
Should I buy stocks and shares because I like a company? Or because my friends are buying?
What if I don’t know enough and lose all my money? Is investing only for the rich?
So many questions and little to no answers that I could reliably use to gain the confidence I needed.
Having been on the journey to learn to invest my own money over the last decade, I can give you some answers.
It also helps that I have worked in Investment Management for over a decade, and can share enough to give you confidence.
To make this subject super easy to understand, I have crowdfunded a bunch of questions from the readers of this site.
I have also added a bunch of questions that I get asked all the time through emails and in the comments.
Before we dive into how to invest in stocks, it helps to go back to basics about the subject of investing.
What Is An Investment?
An investment is something that you commit your money into in order to generate a return.
It is also something that you can get involved in using Other People’s Money, hence why Asset Management is a big industry.
When most people think of an investment, they typically think of “stocks and shares”.
This is not a coincidence.
The reason for this is because a lot of our media and advertising budgets are focused on getting you interested in “stocks and shares”.
Whilst this is not necessarily a bad thing, it is also for a reason – To make you invest.
This works so well that people invest with no clue in the world about what an investment is or why they are doing it.
Although we’ll go into what a stock is below, it’s worth mentioning that there are a variety of other investments available to you.
These include property, land, bonds, businesses, digital assets, peer-to-peer lending, art, wine, etc.
Essentially, there are a variety of investment asset classes with various pros and cons.
Why Invest At All?
The only reason to invest your money is if you have some financial goals.
This could include such things as seeking Financial Independence, preparing for retirement, buying a home etc.
These goals will have differing time horizons and as such, require a mix of investment in different types of assets.
Essentially, you have to choose the right vehicle depending on the journey.
The type of investments you choose to make will also depend on your attitude to risk.
If you don’t like risk, then you’d most likely invest in assets such bonds where you’d preserve your capital.
However, if you are ok with risks and want high returns, then investment in shares/stocks would be a possible choice.
The important point here is that you aren’t just investing just because you feel like it or see others doing it.
As cool as investing sounds, it is risk-taking and requires you to understand what you’re doing.
You can make lots of money but can also lose all your money when it comes to investing in stocks.
What Is A Share?
“Stocks and Shares” is something you hear a lot about.
What are they? Any differences?
Both words are usually used casually to refer to some ownership of publicly traded companies.
But there are some differences…
Stocks is used more generically and describes the ownership in one or more companies.
Shares, on the other hand, has a specific meaning.
It refers to the ownership of a particular company.
E.g. if a company is worth £500m and the share price is £10 each, then it means it has 50m shares in issue.
Owning a share means that you own part of those 50m shares that the company has issued.
Note that you can also own shares of other financial instruments such as funds, REITs, ETFs, Index Funds, Limited Partnerships, etc.
However, stocks is only applicable to ownership in a company traded on a stock exchange.
Why Invest In Stocks?
Stocks is at the extreme end of the investment spectrum.
That’s because it comes with a lot of risks and also the possibility of a lot of returns.
I invested in shares of Amazon a few years ago for my kids and they’ve seen at least 4 times their money in returns.
This is highly unusual though as that money could also have disappeared.
Contrast this with our other investment in index funds, which have seen an average return of about 6%.
Investing in stocks is necessary for exposing you to risk, which is necessary for high returns.
The key though is to understand that investing in stocks should only be done if you have a long term horizon.
As a reminder:
- First, you must have financial goals,
- then you must have a decent time horizon and
- you must be ok with having risk exposure.
How Do Stock Markets Actually Work?
Think of the stock market as a marketplace where buyers and sellers meet.
In today’s world, this happens online and the thing being bought and sold is stocks and shares of companies.
Every time you buy a stock, it is because someone somewhere is selling that stock too.
You might be wondering, why do stocks and shares of companies exist at all?
They do because companies are trying to raise money in order to expand their operations.
The money they raise is then invested in things such as marketing, staff, products, tech etc.
So when you invest in stocks and shares, you own a slice of an actual company.
It’s easy to forget that that company is made of people with hard-working employees (people with families).
So whenever you own a piece of a company, it means that potentially, thousands of people are working for you.
How To Invest In Stocks
There are 2 ways to invest in the ownership of a company through the stock market:
- Invest in stocks of a company directly.
- Investing in Funds
Investing in stocks means that you buy the shares of a company directly and in exchange for cash.
You do this via a broker (more on this below) and you pay some transaction fees such as stamp duty as a result.
Note: When you invest in stocks directly, it is high risk! I.e. You can make a lot of money and possibly lose it all too.
Investing in Funds means that you’re spreading your money (via a pool with others) across many companies.
I.e. you get diversification.
Each fund that you invest in comes in units. So when you invest, you get units that get priced daily.
The fund (i.e. a company that pools funds from many people), then makes the investment into companies.
By owning units in the fund, you also own small bits of the underlying companies the fund has invested in.
The value of each unit you own can rise and fall in the same was as owning shares directly.
Investing in funds has the advantage of reducing your specific risk tied to companies but you still have general market risk.
Given this is a less risky investment, your potential returns are also reduced.
In a world of “get rich quick”, many people invest directly in stocks and ignore funds.
This is often a big mistake.
Funds are not perfect neither and come in different shapes and sizes.
There are active funds i.e. funds managed by someone (at a cost) who makes investment decisions for you.
These usually have a specific theme:
E.g. geography (European, emerging markets etc) or Industry (tech, utility companies etc.) or type of asset (bonds, shares etc).
The type you choose depends on your needs and attitude to risk (risk-averse or risk loving).
And there are passive funds i.e. low-cost funds that typically tracks an index.
These trackers track things called indexes (i.e. list of companies).
One of the most popular indexes (i.e. lists) is the S&P500 – A list of 500 of the largest companies in the US stock market.
In the UK, we have lists such as the FTSE 100 – largest 100 companies on the London Stock exchange.
These passive funds are typically called Index Funds or ETFs (Exchange Traded Funds).
Personally, I prefer to invest in passive funds (instead of active funds) and see it as a better investment strategy.
It is also a way to invest that is recommended by Warren Buffett. Low-cost index funds tracking a broad index.
Feel free to read more about Passive Investing here.
How Much Can I Make From Investing In Stocks?
There are 2 ways that you typically make money from investing in stocks and shares:
- The shares that you buy go up in value beyond what you paid. This is called a capital gain.
- You get paid a dividend income by the company you invested in. Often paid quarterly if paid at all.
The type of returns (change in value invested) that you generate depends on what you invest in.
If you invest in stocks directly, you can make multiple times your investment.
However, you can also lose all your money.
This approach also comes with day to day worry about your investment.
Especially in a world where you can see your investment via your smartphone.
If you invest in active funds, you might see decent returns.
However, it is more likely that your wealth would deplete over time through fees.
If you invest in passive funds, you’re more likely to see a good return as they’re low cost.
This is because you’ll have more of your money working for you over time.
Note that all investments can lead to a loss of ALL your money although it’s less likely with passive funds.
Should I Invest My Own Money or Use A Financial Adviser?
This depends on your personal circumstances.
There is a case for using a Financial Adviser if you have a complicated situation and need advice.
You might also want to use one if you are looking for Financial Planning beyond just how to invest in stocks.
Generally, I’d recommend you learn and do your investing yourself, especially if your approach is to keep it simple.
Investing is a skill that gives you confidence over managing your hard-earned money.
It’s also a skill that you can teach your loved ones so that they too can manage their money.
Avoid tips from friends or from a cab driver.
I’d even go as far as saying you should avoid stock tips from investing magazines!
The key to DIY investing is to know why you’re doing it and understand what you’re investing in.
Do your own research and make sure that you can live with your decision to invest in stocks.
I’d highly recommend not getting involved at all if you’re in debt (especially high-interest debt).
Read our related Reader Case Study on whether you should pay-off debts or invest.
What Accounts Can I Use To Invest In The Stock Market?
In the UK, you can invest through tax-efficient and non-tax efficient accounts.
Given these are tax-efficient, there is a cap on how much you can invest in them in a year.
An ISA for example only gives you access to £20,000 per year per person. So £40,000 as a couple.
With an investment in a Stocks and Shares ISA, your investments are tax-free i.e. nothing to pay when you sell.
The beauty of the Stocks and Shares ISA is that your allowance is annual and you have access to your money.
You can also buy shares in a SIPP, and this is tax-free when you sell, however, you can’t touch your money till age 55.
Even when you come to take your money out at 55, only 25% lump sum is tax-free. The remainder is taxable.
The annual allowance you have with a SIPP is £40,000 per year, although this is reduced if you earn over £110,000 p.a.
Note that pensions generally are susceptible to tax rule changes.
So where possible, a Stocks and Shares ISA should be chosen as the first resort.
Even with the dealing account, you still get a £12,000 Personal Allowance for Capital Gains Tax (CGT).
This means that you’d need to make gains from selling stocks and shares of more than £12,000 before paying tax.
How To Invest In Stocks For Beginners With Little Money
You don’t need a lot of money to start investing today.
With £10 a month, you can start investing, although, most platform providers expect you to invest £25+ per month.
The advantage of drip-feeding your investments each month is that:
- You get used to investing consistently each month,
- The investment each month is a form of diversification i.e. pound cost averaging.
Note although monthly investing is recommended, you can buy one-off shares whenever you can or have the money.
One very important point to note as a beginner is that you should not put all your money into the stock market.
Many fall for the lure of making a quick buck and forget that investing in the stock market is a gamble.
Only invest a proportion of your savings that you can afford to lose, and do so for at least 5 years.
Doing this helps you ride the up and down bumps expected with investing in the stock market.
As I have mentioned before, please do not go into this if you’re in debt (i.e. you have non-mortgage debt).
I’d also highly recommend that you do not borrow money to invest in the stock market.
Should I do Stock Trading As A beginner Investor?
Trading (buying and selling shares frequently for a profit) comes across trendy as a way to make a quick buck!
You’ve probably read about many people’s apparent successes trading.
As ever, be very wary of anything that the masses flock to.
I’d highly recommend avoiding trading as a beginner investor.
Trading is an investment strategy for highly experienced investors and even they lose money.
On top of that, most professional traders are doing it with other people’s money and not theirs!
In addition to avoiding trading, I’d highly recommend you also avoid penny stocks.
How To Invest In Stocks Online
If you have no idea where to begin, there are many free sites that offer you information on companies and funds.
Not only can you get detailed information about possible investments, but you can also open an account with them.
Stocks and Shares ISAs and dealing accounts are available with most providers.
What Does It Cost To Invest In Shares?
The costs associated with investing in stocks vs funds vary depending on which type you buy.
For investments in stocks, you typically pay:
Dealing fee – when you buy or sell a share. This is a one-off fee.
Stamp duty – a tax in the UK at 0.5% of your investment. You pay an extra £1 if you invest over £10,000. This is a one-off fee.
Account fee – This is an admin fee paid monthly, quarterly or annually for using a platform to buy shares.
Some platforms waive this fee if you make a minimum number of monthly trades.
If you invest in funds, you typically pay the account fee above but also an ongoing annual fund fee.
This is usually expressed as a percentage of your total assets and usually called a Total Expense Ratio (TER).
The lower this percentage the better for your wealth.
Fees can range from around 0.10% with passive funds to around 3.5% with active funds per annum.
Read more on Understanding Investment Fees and Why It Matters.
What are the best stock market investments for beginners?
In our view, the best stock market investments are low-cost passive investments.
I.e. investing in Index Funds and ETFs.
These give you some peace of mind and if done properly, you get the market’s return.
It is not a get rich quick path, but it is more guaranteed to help you build wealth over a long term horizon.
The power of compounding interest is necessary for your investment and related dividends to grow over time.
How To Invest In Stocks: Step-by-Step Guide For Beginners
To further help you take immediate action with investing, here is a step-by-step guide:
Step 1. Set some financial goals.
Take your time to not only set goals but convert them into numbers. E.g. I want to retire early aged 55 with savings of £700,000.
Step 2. Decide on how exactly you want to invest in the stock market.
You can either be a DIY investor and choose to invest in stocks or funds yourself.
You pay for someone to do the investing on your behalf.
A robo-adviser might be an option for you too as it offers you low-cost investments based on your goals.
You get asked about 10 – 15 questions and then you get allocated to a suitable basked of investments.
The advantage here for a newbie is that you don’t pick any investments and it gets done for you.
It’s ideal for you if you’re fed up with low-interest rates and have a horizon of 5 years or more.
Feel free to check out platforms such as PensionBee, Wealthify, Nutmeg etc.
Step 3: Open An Investing Account
You ideally want to start with a Stocks and Shares ISA account in the UK as it is tax efficient.
As mentioned before you get a £20,000 allowance per annum per person.
Step 4: Remember the difference between How to Invest in Stocks and Funds.
These differences have been covered in detail above and you now know the associated costs too.
Step 5: Set a Budget For Your Investment In The Stock Market
Decide how much you want to invest monthly.
This should usually be led by your goals, time horizon and expected returns.
I’d recommend starting small and focusing on being consistent.
You do this by setting up a direct debit or standing order. This way, you are investing each month.
Step 6: Start Investing
Investing can be complicated with so much overwhelming information for a beginner investor.
My recommendation is to keep things simple and understand why you’re investing and what you’re investing in.
Keep an eye on fees and don’t just invest because everyone else is.
Learn the process of how to invest in stocks and have fun doing it.
If you would like to learn more about how to invest your money with confidence and without worry, see our course called Super Simple Investing.
It's a course that we are creating for the complete beginner and newbie to investing.
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What other questions do you have about how to invest in stocks? Please comment below.
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