How to Start Investing – Part 1

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I love living in the UK. One of the things I like best is how easy and cheap it is to set up in business. Now whilst this may not be everyone’s cup of tea, most people will want to save and/or invest for the future. And the simplest way to do that is just to buy shares in a business.

When I got started investing, I had already saved an emergency fund of 1 month’s salary. This is the minimum I would want to have in case something bad happened. After that, you have some flexibility in where to put your money. There are of course savings accounts, however they don’t pay much above the rate of inflation and you probably already have your emergency fund in a cash savings account anyway.

So how about investing? “Oh that’s risky”, “isn’t that gambling?” “you could lose all your money!” are phrases that you may have heard when discussing the stockmarket. However, we all use products and services every day that come from stockmarket-listed companies and most of us have exposure to the stockmarket if we have a company pension.

It is true that risk is involved, but there’s also risk in cash. If inflation is high, as it has been in the last few years, then it’s hard to make any real money as the inflation eats away at your savings. So if you had an interest rate of 5% on a cash savings account but inflation is 4% then you’re only making 1% interest. Not exactly great is it?

I got into investing because I wanted to save money in a way that it could grow, meaningfully, before going off to university as a mature student. Back then, it wasn’t as easy to invest as it is now. You had high expenses for trading e.g. £10 or more to buy or sell and an annual fee on top! Nowadays, thankfully, there are companies offering low cost/commission-free trading, such as FreeTrade, RobinHood (limited in the UK at present), and Trading212. What’s more, they are so easy and quick to set up since online verification of ID can be done within the app – there’s no need to wait for the postal service anymore!

I personally use Trading212 for one of my accounts and I love it. It’s simple to use, commission free, and has an enormous range of investments to choose from. You can also open different types of accounts with them, so it serves a multitude of needs. To top it off, Trading212 also pay daily interest on cash, which nobody else offers. This is quite a bonus as it means your money will compound faster than if left in the bank, even if the bank paid pay monthly interest on your cash savings, which many do.

So, it couldn’t be simpler to open an account with an investment company, but how do you choose what to invest in?! Well, it can be a minefield out there. Like going to Tesco and seeing 24 different types of baked beans… and then 24 different types of every other food known to man! It’s true, with investing, the world is your oyster and you can invest in pretty much anything these days from coffee (Starbucks shares or a commodity fund which tracks coffee prices) to cars (Tesla, Mercedes, BMW, etc.) and everything in between. If it’s a business, you can usually invest in it.

The stockmarket is divided into industries and sectors, so a typical rule of thumb is to diversify, don’t put all your eggs in one basket as they say. This is wise advise for general life and even more important for investing. Industries is the broader category and then you have sectors inside industries. In the UK, we have a large financial industry so I’ll use that as an example.

The picture above (from wikipedia) shows us how many sectors and subsectors are in the Financial industry. Now, whilst buying a range of stocks from multiple sectors within an industry instead of only choosing industries means you have more diversity rather than less, if you have say 10 stocks in your portfolio, literally half of them could be financials! Not very diversified is it?! So diversifying by industry first, category and subcategory second seems a better way to do it.

I hope this little intro helps. Next time we will talk about more ways of how to choose individual stocks – analysis time! If you have any thoughts or questions, please fee free to comment below 🙂