Mark Lyttleton: A Beginner's Guide to Investing in the Stock Market
Read on for Mark Lyttleton's beginner's guide to investing.
Mark Lyttleton is an experienced angel investor, speaker and business mentor who specialises in providing early-stage businesses with the support they need to grow and scale. This article will provide pointers on investing in the stock market for novice investors, exploring the different options and considerations for a sound investment strategy.
Investing in stocks involves purchasing shares in publicly owned companies. If the company performs well or is taken over, these shares may rise in value, enabling the investor to earn a profit should they decide to sell. An individual investing in stocks is essentially hoping that the company will grow in value over time. A popular way for novice investors to become involved in the stock market is by placing money in an online investment account. This money is then used to purchase shares in public companies or stock market mutual funds.
Many brokerage accounts enable customers to start investing for the price of a single share. Some brokers also allow and encourage users to start by paper trading, enabling them to use stock market simulators and practice buying and selling stock without risking any real money.
For those keen to start investing in the stock market, the first consideration is how hands-on they want to be with their investments. They then need to set an investing budget, open an account, choose their investment strategy and focus on the long-term, managing their portfolio as necessary. It is good practice to build a diversified portfolio, enabling the investor to stay invested in the long term. Diversification reduces the risk of the investor panic selling should a particular stock or market see a sudden dip, as they have spread their portfolio across different companies and industrial sectors.
All investors start trading to grow their money over time. Yield can be an important component of the overall return and can vary significantly from one investment vehicle to another. Although rates on bank savings accounts have seen some upward momentum recently, this is still below the current level of inflation. Because of this, many investors are turning to the stock markets. However, investing in stocks always incurs an element of risk, since investments can go down in value as well as up.
Take for example the S&P 500, an index made up of 500 of the largest American companies. Since it started in 1957, it has produced an impressive average annual return of 10.7%. Nevertheless, looking more closely, as well as seeing sharp spikes, the S&P 500 has also taken some terrific tumbles – such as during the financial crisis of 2008, returning -43% in the 12 months ending February 2009.
A key consideration in devising an investment strategy is risk tolerance. Stocks are categorised in various ways, for example, value stocks, aggressive growth stocks, small-cap stocks and large capitalisation stocks. Each has its risk level. Once the investor assesses their risk tolerance, they can set their sights on stocks that are compatible with their risk appetite.
Another important consideration is the investor’s stock trading goals. Someone just beginning their trading career may simply seek to increase the money in their account. Alternatively, they may be saving for a deposit for a house, to pay off student debt or to fund their retirement. An investor’s goals will evolve, so it is important to review them periodically to ensure investment choices align with their current objectives.
In terms of investment approaches, these can vary considerably from one investor to the next. Some investors prefer a hands-on investment style, while others are happy with an automated, or passive, approach. An investor who is confident in their investing knowledge and capabilities may choose to build and manage their investment portfolio on their own via traditional online brokers, investing in a combination of stocks, index funds, mutual funds, bonds and exchange-traded funds.
For a novice investor with little or no trading knowledge, enlisting the help of an experienced financial advisor or broker would be prudent, helping them to make investment choices, monitor their portfolio and make changes as necessary. Another option that is growing is a robo-advisor, presenting an automated, hands-off approach that is typically more economical than working with a financial advisor or broker. Once the investor has outlined their risk tolerance, investment goals and other details, the robo-advisor can automatically start investing for them.
Another way of investing is by opening a pension or retirement account, with many presenting the opportunity to invest in stocks. These may include stock mutual funds, exchange-traded stocks or individual stocks and often have the additional benefit of tax breaks, although usually with some restrictions as well.
Diversification is a critical consideration for investors and an important concept to understand. When an investor spreads their portfolio across a range of different assets, they reduce the risk of one investment’s poor performance jeopardising their entire investment. Essentially, diversification involves the investor not putting all of their eggs in one basket, instead spreading their investments across various companies, markets and asset classes.
For many people, investing in the stock market is an effective means of building wealth, Nevertheless, it is important to understand that stock value can also decline, leaving the investor at risk of losing some or potentially all of their investment capital should a market dip or company go bankrupt.