Investing your money is really simple. There are, however, a few safety principles to know about before starting. Investing in the stock market carries risks. These risks can be basically mitigated if you set things up well- and that requires knowing a few key principles. This post: investing for beginners with little money (pt 2) explains these.
I’m not a financial advisor, this post is not advice. To see my disclaimer, scroll to the bottom of this article.
What to know before investing
To keep your money as safe as possible, there are 6 key principles to know before investing:
- Diversify (or buy diversified Index funds!)
- Have shorter term savings
- Don’t expect access within 5 years
- Always hold
- Low fee funds
- Dollar cost averaging
- Invest tax free
The linked post goes through all these principles in turn explaining how they work to give you the easier, most risk-free investing experience. In this post, I’m going to explain some of the key terms and things to understand.
What to invest in as a beginner?
To fully understand the stock market is extremely complex- but to know ‘enough’ is easy. The easiest (and therefore in my opinion best) place to start is investing in Exchange Traded Funds (ETFs) that track the stock market. When you buy an ETF, you buy it off a platform, into a wrapper, and the ETF contains a specific selection of stocks and shares from diversified industries. I called this section ‘what to invest in as a beginner’ but I am no longer a beginner- and I am not changing my strategy anytime soon. Look up the work of warren buffet- an investing tycoon who invests his money into low fee index funds too. I’ll explain what they are below.
Understanding the stock market
When I first learned about investing I got really confused about exactly what each product meant. I didn’t know what to search for on google. The information was overwhelming. This list of descriptions right here is the list I wish I’d had when starting. I’ve sketched it into this little picture for you too.
The basic stock-market terms you’ll need to begin investing:
- What is a stock or share?
- What is a fund?
- What is an ETF or index fund?
- What is a wrapper?
- What is an investment platform?
What is a stock or share?
A stock or share is buying a small stake in the ownership of a big company. You could own stock in Facebook or apple- those would both be ‘tech’ stocks.
What is a fund?
A fund is a selection of stocks. Typically it contains a diverse selection of stock which is essential when investing- and why I’m only talking about buying funds in this article- never individual stocks.
What is an ETF or index fund?
Index funds (and ETFs) track the stock market. They grow with the rate of the stock market as they represent the top-performing companies in whatever the index tracks. For example, the FTSE100 index fund has investments in the top 100 performing UK stocks. The S&P 500 tracks the top 500 US stocks. You can have indexes that follow just particular sectors (eg tech) too.
People say the goal in investing is to beat the market. Most people won’t beat the markets in the long run. Even fund managers whose job it is to try and beat the market will very rarely do so over the long term. You can google ‘do fund managers outperform the market? To see. Warren Buffet is a hugely famous investor who popularised these low-cost funds. Google him for a better understanding.
Even if a fund manager does beat the market in a particular year, they charge fees. An ETF or index fund has very low fees. Over the long term, fees are really important- they add up.
What is a wrapper?
A wrapper is the name of a financial product into which you put your investment. Think of it as a special savings bank account. The most common one is the ISA (Individual savings account). If you put your money into one of those you get tax benefits. There are different types of ISAs; cash ISAs, stocks and shares ISAs, innovative finance ISAs and lifetime ISAs. Of course, in this article, we’re talking about stocks and shares over cash.
What is an investment platform?
An investment platform is where you can shop for the index or ETF you want to buy. It’s like an eBay from which you can search your fund options. Different platforms do offer different products, but the main thing to look out for in these is the fees. I’ll explain this below in the low fees section. Examples of these are Vanguard, Hargreaves Lansdown, Fidelity, AJ Bell…there are many. I use Vanguard for most of mine.
Index vs ETF
An index is an automatic top-performing stock in an individual index and it’s buyable once a day. An ETF is a selection of stocks that have been selected. It’s still usually passive like an index fund (whereas a managed fund is actively managed the fund manager will be making trades and buying and selling to try and beat the market). But you can get more specific ETFs like ETFs in renewable energy
The other difference is not super important but I’ll mention it anyway. An ETF is itself traded on the stock exchange so can be traded throughout the day- this doesn’t make a big difference given the strategies we’re learning about here only a small bit of difference in how it shows up on the value lists.
Summary: Investing for beginners with little money
If you’ve finished this post, have a read of the net post where I explain the fundamental principles to keep your money safe while you’re investing.
This was post 2 of the 3 post series:
Part 1: Reasons to invest
I hope this post: investing for beginners with little money, was helpful, please feel free to comment or email with any questions.
Disclaimer (…investing for beginners with little money)
This post is for people with about a hundred to a few thousand pounds a year to invest- not for millionaires and not for people who are in dire financial situations such as in crippling debt, going through messy divorces or anything like that.
I’m not a financial advisor and I have no qualifications in finance. I’m just sharing the knowledge I’ve learnt on the internet and through books and podcasts over the past few years. For me, I feel confident that I know enough to invest my money- but make your own judgement and if you’re in any doubt book a session with a financial advisor.
