If you have ever wondered exactly how to start investing then I am going to break down the steps for you, and help you to understand why you should invest and the risks associated with investing.
What is investing?
Investing is different to just putting your money into savings.
Investing will help your money to grow, hopefully at the rate of, or more than, inflation.
When you save your money into a savings account it does earn interest, but not at the rate of inflation. Meaning that in a few years time your money won”t be worth the same amount of money.
Investing in stocks, also known as shares and equities, represent part-ownership of a company that’s listed on the stock market. When you purchase a stock or share in a Public Limited Company (PLC) you literally own a small part of the organisation. In the UK, the London Stock Exchange is where all the action unfolds. The most popular share index is the FTSE 100, which lists the 100 biggest firms in the UK, namely Marks & Spencer, Persimmon and British Telecom.
When you purchase a stock, you become a shareholder in the company, permitting you to vote on company issues at its Annual General Meeting (AGM) and you’ll also receive a dividend payment in the event the company enjoys a successful financial year.
If the company does well, its share price will rise, allowing you to sell your shares for a profit in the future.
When should we start investing?
One of the great things about investing is that you don’t need to have a lot of money to start investing. Some platforms and accounts let you invest from just £1.
How much money should you invest and when should you start investing?
There is a great saying that says the best time to start investing is 10 years ago. The next best time is right now.
In an ideal world you will have paid off your debt and have an emergency fund behind you before you start investing.
As for how much you invest – that is completely up to you and your financial situation.
If you can afford to put £25 a month into your investments then that is much better than not investing anything at all.
Step 1 – Understand the risk
The very first thing that you need to think about when wondering how to start investing is that you need to understand that there is a risk involved in investing.
With all investments (as opposed to savings) your capital is at risk and the value of your investment can go up as well as down.
You could get out less money than you have put in.
It is important to consider investments as a long term thing.
Step 2 – Choose to ‘go it alone’ or use a fund
Your style of investment could depend on a few things.
For example, you might get the thrill of buying and selling individual stocks and shares, or you might choose to play it safer and invest in a managed fund where someone else makes those buying and selling decisions for you.
Or you could do a mixture of both!
I do both, with a Stocks and Shares ISA from Nutmeg (with fees) and then using FreeTrade to buy and sell individual stocks and shares. Right now I am working towards owning a Tesla share.
Step 3 – Choose how and where to invest
I believe that a stocks and shares ISA is a great way to start investing.
That is because you are allowed to put £20,000 away into an ISA every tax year and your income/dividends are not taxed.
That means you don’t have to worry about paying tax on these investments or pay Capital Gains tax. Mine is with Nutmeg.
Or you might choose a platform that allows you to buy and sell individual stocks and shares, like FreeTrade.
Step 4 – Choose how much to invest
If you are just starting out with investing then there is nothing wrong with investing £5 a month, or £25 a month.
Whatever amount you are comfortable to ‘play’ with until you get to grips with investing.
You can always change this amount.
Step 5 – Make a deposit
Now that you have chosen how and where to invest, it is time to create your account and make that first deposit.
Then you can use this deposit to invest with.
Step 6 – Come up with your longer term investing plan
You will also need to consider your longer term investing plans.
Perhaps you have a goal amount you want to have invested in total.
Or perhaps you want to invest a set amount every month.
Perhaps you want to invest enough money to let the dividends pay off your bills.
Whatever your goal is, work backwards to find out how much money you need to invest every month to make your dream a reality.