As noted in the last post – investing in yourself is the first place to invest and in my opinion, is actually the most important. If you don’t understand the areas you intend to invest in, your investment will be more likely to return a loss and no one wants to lose money! Once you’ve taken the time to invest in your own education, the next place I would focus on is stocks and shares. This may sound daunting at first, but with the right education, it becomes less overwhelming and you realise that the possibilities are endless!
For more educational tips, check out our ‘Top Reads‘. This could be a good place for your journey to either begin or continue. After this post of course!
So, how do I invest in stocks and shares?
There are many ways that you can invest, however for the sake of clarity I will be focusing on:
- Single stocks
- Index funds
Investing in single stocks
You can invest in both large and small companies as long as they are publicly traded. You do this by buying a share of that company. This means you own a small portion of the whole company – usually a tiny percentage.
The better the company does, the more money your share will be worth. The more shares you purchase at an initial price, the greater they will all be if they from up.
Example
If you purchase one share for $1 and it goes up to $2, that is good. If you bought 50 shares for $50, they would be worth $100 in this example, which is better.
The more you invest, the more you hope to make in time.
Once you have purchased the shares, you can either sell them at your leisure and make an instant profit (perhaps) or hold them and wait for them to go up further in value (perhaps).
It is really important to remember, that not all companies are created equally, thus they don’t perform equally. Some businesses outperform others, as a result, some do better than others. You will not always be guaranteed a profit. You may get a loss!
The general consensus would be to hold your shares until their value goes up substantially – even then most people wouldn’t sell all their shares in a company that’s thriving.
Dividends
Some companies pay a dividend and you’ll get a small return for your money. Different companies pay dividends in different ways and varying amounts – quarterly, annually or biannually.
Dividends are paid out of company profit, therefore if the company is struggling to break even, the dividend will likely be removed.
What should you do with your dividend?
This very much depends on your age and how much your shares are worth.
If your shares are worth over a million and the company pays a 4% dividend, then, in theory, you should receive over $40,000 year.
However, if you’re reading this, it’s likely your shares are not worth much yet if anything. In which case you’ll want to reinvest them to help them grow. By reinvesting your dividends you can eventually buy more shares, which will be worth more in the future.
As it stands, you’ll only earn a few dollars a year, unless you have lots invested, better to keep building.
Eventually, and I mean eventually! You’ll be able to buy more shares without having to really add any more money – your dividends will earn enough to pay for them. However, at this point, you should continue to either buy more shares monthly or yearly to get to where you want to be.
At this point in your investing journey, you should definitely be adding more money to your investments!
Remember the more you invest the more you get back – if the company you’ve chosen continues to do well that is! This is called compounding over time – you are reinvesting the interest and dividends and then they become your total investment. If you want a greater understanding of compound interest this video by Investopedia is really helpful:
Summary
This is a fantastic but risky way to make lots of money over a long period of time. Just make sure you invest in the right company, to do this you need to do a lot of research! An important thing to note – well-established company’s share prices will be high already.
For this reason, many people decide to place their bets on smaller companies in potential emerging markets. If you invest a lot of money into these companies while shares are cheap, then your return if they grow will be amazing! Remember, this is very risky!
Investing in index funds
Now, buying one of these indexes allows you to own a portion of many companies! As there are many companies in one index, you would have to pay a lot to own just 1 share in each!
However, this is not the purpose – the purpose is that if you own a portion of many companies, you are spreading out the risk – this is known as diversification.
Example – if I only invest in Tesla and they go bust – I’ll lose all my money! However, if I invest in an index fund and Tesla stock is among them, if Tesla goes bust, then I haven’t put all my eggs in one basket. The risk has been spread out as the fund would only invest a small percentage in Tesla.
If Tesla had been under-performing and consistently losing money, they will likely be removed from the index and replaced by another that is better performing.
This is a much safer and beginner-friendly form of investing. Although, just because it is beginner-friendly, doesn’t mean that professional investors don’t invest too!
Warren Buffet is the most successful trader in history and currently the 4th Richest man in the world, according to Forbs Rich List at the time of writing this – bet $1,000,000 that ‘including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years. The bet pit two basic investing philosophies against each other: passive and active investing’. Buffet is very good at keeping his money! 10 years later, he won the bet and lead millions of people from around the world to start investing in the S&P 500. Read the full article on Investopedia – a useful source for investing and building an understanding.
How do you make money with index funds?
Well if you pick a fund and reinvests the dividends, as well as considering the above about compound interest, your investment will definitely start to grow. Sorry for the math below – I can’t think of any other way to illustrate it. I’ll try to be as clear as possible.
Example – if over a 30 year period you are able to invest $300 per month with an 8% interest rate (S&P500 is around 10%), you should have amassed around $461,000.00.
You would have contributed $109,000 in that time period (including the $1,000 initial payment).
Click here to see how the S&P 500 and Dow Jones have done since inception. All figures were calculated using this compound interest calculator.
So, how do you receive money from these stocks and shares?
There is this thing called the 4% rule, which suggests – when your ‘pot’ is big enough, you should be able to live on 4% of the total investment a year. This should last forever after this point – in fact, it should continue to grow! Thus how much you will live on each year, depends on how much you’ve managed to accumulate. To do this, you would sell 4% of your portfolio each year to fund your life.
The same rule also applies to single stock investing as well. Let’s say you are using either method and you want to live on $40,000 a year. Your investment portfolio would need to be around $1,000,000 when you’re ready to start withdrawing the 4%.
To do this we would use the same strategy in the earlier example, but the monthly investment would be $660 and not $300.
Although there is less risk, there is still a risk! If interest rates decrease to 5% you’ll need to invest around $1,000 a month to reach that $1,000,000 goal! Also if interest rates decrease when you are ready to start withdrawing – you may well have to live off less than 4% for a period of time.
Even then it probably would not be possible to withdraw at 4%, so perhaps we would need to diversify our portfolio further, by moving into the 3rd place to invest – property! If you want more information about the 4% rule. See the video below about different ideas of how to balance your index portfolio for beginners:
Summary
Index funds are a fantastic way to make money over a long period of time. It is much safer than investing in single stocks as your portfolio is diverse. However, the rewards could be a lot less.
Personally, this is my chosen method as I see too much risk with investing in a single stock – perhaps in the future with more experience under my belt and more money in my wallet!
How do I start investing in stocks and shares?
If you want to invest in a single stock, you will need a broker or a broker service – you might have seen a ton of adverts on YouTube for ‘Trading212’, ‘Plus500’ or even ‘Webull’.
These different platforms allow you to start investing in individual companies (single stock). You could also invest in a hedge fund that has a fund manager. This is not something I would advise as they usually have high fees as you might have read in the above article from Investopedia.
Investment companies such as Vanguard and Hargreaves Lansdown offer a range of mutual funds – these are designed to spread out risk and capture market gains. These are both the cheapest and ‘safest’ of the bunch. All will have fees, but some are cheaper than others. Personally, I use Vanguard for their ease of use, customer service and lower fees! Not necessarily in that order.
For further information about stocks and shares take a look at this article from the Money Advice Service or check out some of the key investing books listed below, or hop over to the ‘Top Reads‘ section for even more educational resources.
Happy investing.
Glossary
Stocks/shares – Generally, in American English, both words are used interchangeably to refer to financial equities, specifically, securities that denote ownership in a public company.
Dividend – a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits.
Diversification – Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio.
Passive investing – broadly refers to a buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market. Index investing is perhaps the most common form of passive investing.
Active investing – refers to an investment strategy that involves ongoing buying and selling activity by the investor.
Disclaimer – This is not a recommendation, this is merely information for educative purposes. If this is something you are interested in, please make sure you do lots of additional research and if necessary, contact a financial adviser.
