New To Investing? Here's How You Can Get Started

New To Investing? Here's How You Can Get Started

Reading time: 7 minutes

Although investing initially seems daunting, learning to manage your financial future can lead to substantial growth over time.

Fortunately, you do not need a degree in finance or economics to start prudently investing. By understanding the basics and developing a straightforward, sensible investment strategy, you can put your hard-earned money to work to help you reach your financial goals. 

Investing Defined

‘It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for’ – Robert Kiyosaki

Eliminate all the jargon, and investing is simply putting money to work: setting aside funds and investing in things you believe have the potential to increase in value over time. While the goal of any investor is to grow their investment pot, it is vital to understand that there are no guarantees; investments can rise and fall, so preparation is critical. 

Common Ways to Begin Investing

The different investment options available nowadays can be overwhelming. For newer investors, common investment choices include stocks, bonds, index funds, and cash.

• Purchasing company shares entitles the investor to partial ownership, often with the added benefit of regular dividend payments and the right to vote at annual meetings. 

• Bonds represent loans made by an investor to a company or government that yield periodic interest payments and the return of principal (the loan amount) at maturity. 

• Funds offer investors a way to purchase a ‘collection’ of assets ‘in one go’. They are actively or passively managed and are often a good way to begin investing as it has built-in diversification. For example, you can select a fund that tracks the S&P 500 and gain exposure to 500 companies across various sectors without purchasing individual stocks.

• Cash includes liquid short-term assets, such as one’s savings account or money market debt instruments, like US Treasury bills. 

Selecting an Investment Strategy

It is common for investors to allocate their investments across different asset classes, such as stocks, bonds, and commodities, an approach known as portfolio diversification. This helps limit exposure to one asset class and balance risk and reward.

First and foremost, investors must choose whether to adopt a ‘passive’ or ‘active’ investment strategy. Passive investors often engage in a low-maintenance approach. You can think of this as a ‘buy and hold’ strategy. You invest in, say, an Exchange-Traded Fund (ETF) that tracks the S&P 500 and targets similar returns to the underlying market index. Active investors, however, 'actively' select investment opportunities. Through research and expertise, the aim is to purchase assets that they believe have the potential to exceed benchmark market returns, a concept known as generating ‘alpha’ in investment circles.

As a new investor, you may focus on fund investing, a passive strategy typically involving investing in index funds that track an underlying index. This offers the advantage of low fees and commissions and diversification benefits. ETFs are similar to index funds (providing diversification across a broad range of asset classes); the difference is that ETFs, as their name implies, trade on stock exchanges just like regular stocks and, thus, can be bought and sold during exchange hours. Newer investors will likely focus on stock and bond index funds.

Those who prefer more active management could consider value or growth investing. Value investing is a strategy that seeks to locate undervalued stocks, which requires knowledge and extensive research. Growth investing looks at companies with strong growth potential that are forecasted to grow at above-average rates. Another time-tested approach includes dividend growth investing, which concentrates on stocks that provide regular dividend payments.

In the bond market, investors may purchase and hold bonds until maturity – another buy-and-hold strategy. While this opens the investor up to interest rate risk, this approach can offer a reliable income stream and is suitable for investors seeking stability. Another bond investment strategy worth exploring is known as ‘bond laddering’: buying bonds at staggered maturities, offering regular income payments and helping limit interest rate risk.

Other considerations that need to be accounted for are asset allocation (which determines the mix of asset classes you will invest in based on your goals), periodic rebalancing to meet your desired allocation, risk tolerance, and investing time horizon. 

Investments generate returns in different ways, the most common being capital appreciation (or capital gains): the selected investment gains in value, so does your return on investment. However, depending on the asset’s performance, it is crucial to understand that investment values can also depreciate. Another way in which investors generate a return from their investments is through dividends (stocks) and interest payments (bonds). Experienced investors may also trade in derivatives to generate additional returns, such as selling ‘covered calls’.  

How Much Do I Need to Begin Investing?

The amount of money needed will depend on several factors.

Starting small is often recommended. A prudent approach is to invest small amounts of capital at regular intervals rather than a lump sum. This is referred to as Dollar-Cost Averaging (or DCA). Irrespective of market conditions, DCA entails investing fixed amounts of money regularly.

An investor must also determine their time horizon, which will help govern the level of risk and return to target. All investments carry risks; the higher the risk on a particular investment, the higher the potential return, and the greater the loss should the investment not work out. Short-term investments are generally more volatile, while long-term investments offer greater growth potential.

Investors are unique in the level of risk they are comfortable with. Some investors approach the markets aggressively, often taking larger-than-usual risks, leading to a volatile portfolio. These investors are generally experienced and have gradually worked up from conservative investing. Therefore, they are familiar with their risk profile. Conversely, conservative investing does not indulge in high-risk investments and prioritises capital preservation.

Where Can I Start Investing?

With FP Markets, you can begin investing and access more than 10,000 products via CFDs (Contracts for Differences). CFDs permit speculation and hedging across various asset classes, such as stocks, bonds, ETFs, currencies (Forex), commodities, and digital currencies. 

CFDs are derivative products traded in the Over-The-Counter market (OTC); therefore, physical ownership of the underlying asset is not permitted. All CFD trades, whether you invest in stocks, bonds or ETFs, for example, will always be settled in cash. CFDs allow investors to trade rising and falling markets with flexible contract sizes and leverage. Trading on margin (leverage) allows investors to increase their exposure with a small initial investment value. Importantly, using leverage can amplify both reward and risk.

FAQs:

1. What is investing?

Investing is setting aside funds to purchase assets you believe will increase in value. 

2. How do you begin investing as a beginner?

First, consider your objectives; why are you investing? Then, develop a basic investment strategy to help you decide which asset classes you should invest in. 

3. How much do I need to begin investing?

All investors are unique. How much one invests will depend on one’s financial situation, investment strategy, long-term goals and risk.