How to start investing: a guide to investing

Before putting your money into the stock market or other investments, it’s essential to have a basic understanding of how to invest properly. The world of investing can be divided into two main styles: active investing and passive investing.

Both are effective ways to build wealth, as long as you stay focused on the long term, rather than seeking quick gains. The ideal type of investment will depend on your lifestyle, budget, risk tolerance, and interests.

Introduction to the Stock Market

The stock market may seem intimidating for beginners, but it doesn’t have to be. Understanding what a stock is and how to buy one is a good starting point.

What is a stock? 

A stock represents a unit of ownership in a company. When you buy a stock, you become a shareholder in that company and can benefit from its growth and performance.

How to buy stocks? 

Companies like Commonwealth Bank of Australia, Rio Tinto, and Woolworths are listed on the Australian Securities Exchange (ASX). The ASX, also known as the stock exchange, offers over 2,000 companies for investors to choose from.

With this basic knowledge, you’ll be better prepared to make your first investment choices and start your journey into the world of finance.

How to make money with shares

There are two main ways investors make money by investing in shares:

• Capital growth: This occurs when the share price increases after you buy it. If you purchase a share at one price and later sell it at a higher value, the profit you make is called a capital gain. However, there is a risk that the share price may fall, and if you sell your shares for less than what you paid, you’ll lose money.
• Dividends: Some companies distribute part of their profits to shareholders in the form of dividends, typically paid twice a year. These payments allow shareholders to receive a share in the company’s profits. However, not all companies pay dividends.

Is my money safer in a savings account?

Savings accounts and term deposits are low-risk investments. They offer security but generally provide lower returns. Investing in shares, on the other hand, presents the opportunity for higher returns, although with greater risk.

It’s advisable to keep part of your money in safer investments, such as savings accounts, and another part in shares if your goal is more substantial growth.

How to learn to invest

Educating yourself about the economy, interest rates, exchange rates, and government policies is essential. These factors influence a company’s performance and, consequently, the price of shares.

Starting small

When buying and selling shares, there are brokerage costs involved. To minimise the impact of these fees, many experts recommend starting with small amounts and focusing on sectors you know. This helps you gain a better understanding of how companies in that sector operate, making it easier to make investment decisions. Taking small steps and seeking continuous knowledge is essential for building confidence and avoiding mistakes along your investment journey.

It’s also crucial to understand how much risk you are willing to take. Finding a balance between maximising returns and maintaining a comfortable level of risk is key to your investment strategy.

What to look for when investing

When investing, it’s important to focus on a company’s future prospects rather than just its past performance. Annual reports and financial statements can be good sou

Where to invest?

Choosing where to invest depends on your goals and risk tolerance. If you have a high risk tolerance and are willing to research individual stocks, this may be the best path for you. If you’re seeking lower risk but still want higher returns than a savings account, bonds and investment funds might be more suitable.

Diversification

A diversified portfolio can protect your capital against market fluctuations. There are four main asset classes:

1. Cash: This includes savings accounts and is considered the safest investment, although the returns are generally lower.
2. Fixed income: Investments like term deposits and bonds fall into this category. They are low-risk investments but offer fixed returns.
3. Stocks: These provide the potential for capital growth and dividends but are more volatile.
4. Real estate: This includes residential and commercial properties, which have long-term appreciation potential.

Defensive investments

Defensive investments, such as cash and fixed income, generate regular income but have less growth potential. Examples include:

• High-interest savings accounts: These offer stable returns and are considered safe investments.
• Term deposits and bonds: These pay a fixed interest rate over time, providing predictable income.

Growth investments

Growth investments, such as stocks and real estate, aim to increase in value over time. While they offer greater potential returns, they also come with a higher risk of loss.

• Stocks: Representing ownership in a company, stocks can generate capital gains and dividends. However, their value can fluctuate significantly.
• Residential or commercial real estate: Properties may appreciate over time, but this is not guaranteed, and they can be challenging to sell quickly.

Choosing between these types of investments depends on your risk tolerance and financial goals.

Essential guide to diversifying your investments

As mentioned earlier, before you start investing, it’s crucial to consider your financial goals, the time you plan to keep your money invested, and your risk tolerance. Investments can range from real estate to stocks, each with its own benefits and risks.

Distributing your money across different types of investments, such as stocks, bonds, and real estate, can help reduce risk and provide a balance of income and capital growth.

Investments can be categorized into levels:

• Level 1: This involves directly investing in assets like individual stocks or real estate.
• Level 2: At this level, you can purchase a group of companies or assets in specific sectors, such as a portfolio of commercial properties.
• Level 3: This involves buying broader indices that represent entire markets, offering greater diversification and reducing the need to select specific assets.

For example, when investing in Australian stocks, you can choose between well-known large companies or groups of stocks with similar characteristics. Similarly, you can invest in global stocks, bonds, or commercial properties. Your choice among these investments should align with your goals and your ability to handle market fluctuations.

How much do you need to start investing?

The amount needed to start investing varies depending on the type of investment and the chosen platform. While real estate requires significant capital, investing in stocks can begin with smaller amounts. The most important factors are consistency and patience, which tend to outweigh the need for a large initial sum.

Costs and taxes

All investments come with costs, such as transaction and brokerage fees, which can impact returns. When buying or selling stocks, you’ll incur brokerage fees, and the smaller the investment amount, the greater the impact of these fees.

Active vs. passive investment

• Active investment: This involves researching, buying, and selling stocks on your own, requiring time, knowledge, and dedication.
• Passive investment: This consists of a more automated approach, such as through mutual funds or using financial advisors, which requires less direct involvement.

Conclusion

Investing may seem daunting at first, but by determining your strategy, the amount you wish to invest, and your risk tolerance, you’ll be on the right track to making safer and more effective financial decisions in the long term.