If you’ve ever wondered how to start investing, I’ll break down the steps for you, and help you understand why you should invest and the risks associated with investing.
What is investment?
Investing is different from simply putting your money into savings.
Investing will help your money grow, hopefully at or above the rate of inflation.
When you save your money in a savings account, it earns interest, but not at the rate of inflation. This means that in a few years your money will not be worth the same amount of money.
Investing in stocks, also known as stocks and shares, represents partial ownership of a company listed on a stock market. When you buy a share or stake in a public limited company (PLC), you actually own a small part of the organization. In the United Kingdom, the London Stock Exchange is where all the action unfolds. The most popular stock index is the FTSE 100, which lists the 100 largest companies in the UK, namely Marks & Spencer, Persimmon, and BT.
When you buy a share, you become a shareholder in the company, allowing you to vote on company issues at its annual general meeting (AGM) and you will also receive a dividend payment if the company has a successful financial year.
If a company performs well, its stock 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 allow you to invest from just £1.
How much money should you invest and when should you start investing?
There is a saying that the best time to start investing is 10 years ago. The next best time is now.
In an ideal world, you will have paid off your debt and will have an emergency fund behind you before you start investing.
As for the amount you invest, it depends on you and your financial situation.
If you can put £25 a month into your investments, that’s much better than investing nothing at all.
Step 1 – Understand the risks
The first thing you should think about when wondering how to start investing is that you need to understand that there are risks involved in investing.
With all investments (rather than savings), your capital is at risk and the value of your investment may rise or fall.
You can get back less money than you invested.
It is important to look at investments as a long-term thing.
Step 2 – Choose to “go it alone” or use one of the funds
Your investing style can depend on a few things.
For example, you may feel the thrill of buying and selling individual stocks and shares, or you may choose to play it safer and invest in a managed fund where someone else makes the buying and selling decisions on your behalf.
Or you can do a combination of both!
I do both, using Nutmeg’s Stocks and Shares ISA (with fees) and then using Orca to buy and sell individual stocks and shares. I am now working on owning a stake in Tesla.
Step 3 – Choose how and where to invest
I think a stocks and shares ISA is a great way to start investing.
This is because you are allowed to deposit £20,000 into an ISA each tax year and your income/profits are not taxed.
This means you don’t have to worry about paying taxes on these investments or paying capital gains tax. Mine is with nutmeg.
Or you can choose a platform that allows you to buy and sell individual stocks and shares, such as Orca.
Step 4 – Choose the amount you want to invest
If you’re just starting out investing, there’s nothing wrong with investing £5 a month, or £25 a month.
Whatever amount you feel comfortable “playing with” until you can invest.
You can always change this amount.
Step 5 – Make a deposit
Now that you’ve chosen how and where to invest, it’s time to create your account and make that first deposit.
Then you can use this deposit to invest with it.
Step 6 – Create a long-term investment plan
You will also need to think about your long-term investment plans.
Maybe you have a target amount that you want to fully invest.
Or maybe you want to invest a set amount each month.
Maybe you want to invest enough money to let the profits pay your bills.
Whatever your goal, work backwards to figure out how much money you need to invest each month to achieve your dream.
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