The Absolute Beginners Guide To Investing
If you’re looking to generate an income and grow your wealth, you have to consider investing in shares.
By putting your money to work on the stock market, you can achieve both of these outcomes.
And the good news is, it’s much easier than you may think.
Don’t put it off. The sooner you start, the quicker you can see results.
So what is investing?
How can you do it?
And what do you need to know to get started today?
Let’s find out!
The Ins And Out of Investing
The workings of the stock market may have eluded you so far. But the fact is, the stock market is very easy to understand and open to all.
The stock market is essentially a market place for the trading of shares.
When you buy a share, you’re buying a portion of that particular business.
For example, if you buy shares in Sasol, you become a part owner in the company.
The more shares you own, the larger your proportional share.
As an owner of shares, you are entitled to a share in the company’s profits. In some cases, a company pays a percentage of these profits out to shareholders. These are dividends.
Dividends are crucial to investors looking for their share portfolio to generate an income.
Why Shares Are Crucial To Your Wealth Building Journey
To make money from investing, you’re looking for the shares you buy to rise in price over time.
In other words, you want to sell your shares at some time in the future at a higher price than you bought for in the first place.
The bigger the rise in price, the bigger your profits.
To generate an income from these shares, you need to invest in companies that pay dividends.
The prices of shares change all the time. It comes down to supply and demand.
When demand increases for a particular share, its price will rise. When demand drops, the price will fall.
Simply put, if a company is performing well, the price of its shares should rise to represent this.
How To Find Winning Shares To Buy
The key to making money is to find the shares with the best future potential.
There are a number of different ways you can go about doing this.
The way you choose to find shares is called your investment strategy.
There are two broad ways to approach picking shares: Use fundamental analysis or use technical analysis.
Fundamental analysis involves looking at the financials of a company and the many factors that will affect it, including what’s going on in the economy and the industry it operates in.
Technical analysis involves looking at what the price of a share has been doing on a chart and trying to predict where it will go from there.
For long-term investing, which is the best way to grow your money over time, fundamental analysis tends to work best.
There are many types of fundamental analysis, including…
As a value investor, you look to find shares that are trading cheaply compared to what their future potential holds.
To be a good value investor, you need to be good at analysing company financial statements to be able to find the great stocks from the junk stocks.
This is very different to value investing. A growth investor is looking for companies that are already performing well and look set to reward further in the future.
These types of stocks tend to grow faster than others on the market, rewarding you quicker.
This form of investing is all about trying to make money from dividend payments a company makes to its shareholders, as well as price appreciation of the shares.
Income investors may also invest heavily in other income producing securities, such as bonds.
Which Strategy Should You Use?
This requires research on your part to find a method that suits your investment goals and your strengths too.
If you don’t want to pick individual shares using a particular strategy, you can still invest.
You can opt for exchange traded funds (ETFs) instead. These are baskets of different shares that track the performance of the stock market.
This means you still benefit from investing and can still achieve your goals.
But having a strategy or method of picking shares is very important.
No strategy means that you don’t have a plan to follow. And if you don’t have a plan to follow, you’re more likely to let your emotions get in the way of your investing decisions.
Fear and greed are responsible for many investors losing money on the stock market. Your head should be making decisions, not your heart.
The message here is, don’t start investing until you have a strategy to follow.
How To Start Investing
Once you know what you want to achieve from investing, whether it’s capital growth, income or both, you need to find a stockbroker.
Without a stockbroker, you can’t invest.
A stockbroker acts as the middle man between you and the stock market. He will buy and sell shares or ETFs on your behalf.
Dealing with a stockbroker can be daunting, but it really is very straightforward and your stockbroker is there to help you.
You can opt to invest with an online broker or over the phone.
There are different types of brokerage accounts, including:
With this type of account, your stockbroker won’t offer you advice, but simply acts on your instructions.
In other words, you tell them which shares you want to buy and how many, and they do the rest for you.
This is the cheapest form of account.
This is a very hands-on type of account. Your broker will help you to decide on an investment strategy, taking into account your investment goals and risk tolerance.
You then give your broker permission to make decisions on your behalf, allowing them to buy and sell shares for you.
This is the most expensive form of account.
If you opt for advisory, it’s a bit like a discretionary account, but at the end of the day, you decide what to buy and sell, not the broker.
Whichever option you go with, ensure that you shop around to get the best deal on offer.
What Should You Do Now?
To begin your investment journey, you need to spend some time deciding exactly how you want to go about it.
If you want to do it all yourself, you must dedicate the time needed to understand how buying and selling shares on the stock market works.
You then need to find a suitable strategy and spend time honing your stock picking skills.
If you don’t want to dedicate this time, look to ETFs as an alternative.
Or, if you want to invest but don’t want to do much at all, consider employing the services of a discretionary broker.
This service will cost you much more in fees. Plus, you must bear in mind that there is no guarantee that your broker will end up producing a better performing portfolio than ETFs could give you or you could achieve doing it yourself.
But one thing is for sure, by investing your money on the stock market, you stand to reap the benefits in years to come.
Until then, here’s to profitable investing.
The Money Lab