What to do and what to avoid when investing for the first time

0

Investing for the first time can be difficult because there are so many options to choose from and none of them are without risk.

Investing can be done through the money market where your money works for you when you buy debt securities and at the end your principal is returned to you plus interest or by investing in the capital market where you buy an asset and wait that he likes himself.

Getting it right the first time will lift your spirits and encourage you to keep investing, so you should avoid the mistakes that most new investors make.

Information is key when investing and like everything, investing has its rules and an investor should know what to do and what not to do when investing for the first time.

What to do?

#1. Draw a plan

Investing is a long-term journey that can last a lifetime and outlast you, so before embarking on this journey, it makes sense to count the cost. You need to know why you are investing, because your why will determine your how. You could be investing for your retirement, to buy your dream home, or for your children’s school fees, and the investment/asset allocation strategies for these goals will be different.

When making a plan, you need to determine how much time you have to achieve your investment goal. If you are in your 20s and have more income, you can afford to buy more risky assets because you have more time to recover from losses than someone in their 50s.

Your plan should also consider your source of income. If you are an employee, you can set up standing orders for direct debit to take money from your salary to invest it and if you do not have a stable income, you find a way to finance your investments.

If you don’t have a plan, you risk changing your portfolio every time and it costs money because every time you buy or sell an asset, your broker charges a fee. These fees, while small, are a lot of money when they pile up down the road. To avoid all this, you should draw a plan at the beginning.

#2. Pay off your debt

Credit cards encourage you to spend money you haven’t earned and the interest charges are always huge, especially when you settle your debt late and you are charged a late settlement fee.

Remember that interest reimbursement on credit cards is linked to the LIBOR rate which is not fixed. This type of debt therefore prevents you from budgeting your resources, because you do not know how much interest you will be charged each month.

The safest thing is to pay off all credit card debt and other forms of debt or at least pay off some of it to reduce the debt. This will give you a clear view of how much you have left to invest.

As you begin your investment journey, you need to be careful with credit cards and other forms of borrowing. Don’t spend more than you can afford to repay in a timely manner so you don’t rack up interest charges and late repayment charges.

#3. Determine your risk appetite

There is an element of risk in every investment, although some are riskier than others, but the higher the risk, the higher the reward. You need to be aware of what you are getting into and the risks of losing your money.

You can choose to save your money in the Bank or invest in the capital market and both carry their own risks.

First of all, if you choose to save your money in the Bank, it will be safe and will earn you little interest but guaranteed. However, there is a risk of inflation which is a general increase in the price of goods and services and this means that the money you save today may be worth even less when you want to use it tomorrow.

Second, if you choose to invest in the capital market, there is market risk: the risk that stock prices will fall, Sector risk: the risk that a company may no longer be competitive due to government policies unfavorable, etc. the risk of industry regulators tightening regulations, forcing companies to relocate or even close up shop, and there is market risk: the risk that a company will suffer a loss and not pay dividends.

All of these risks can affect investment returns.

Although investing in the capital market is riskier, it is also more rewarding in the long run because, unlike the fixed interest investors earn by saving money in the bank, fixed deposits and treasury bills , if a company is successful, there are no restrictions on the amount of dividend it pays out to its shareholders. Some companies even offer free shares to shareholders after a good year of exit.

Depending on your investment objectives, you can choose to be an aggressive investor and allocate your entire portfolio to equities, a moderate investor and have a balance between equities and money market instruments, or to be a prudent investor and allocate your entire portfolio to safe stocks but low interest debt securities such as bonds, term deposits, etc.

It is up to a new investor to determine the level of risk they are willing to accept and to allocate assets to their portfolio accordingly.

#4. Choose a good broker

There are different brokers to choose from, so pick one that doesn’t charge exorbitant fees, has tight spreads, and has a good mobile app that you can download to your device for easy investing.

Before investing money with the broker, you should also check whether the broker is regulated by the relevant regulatory body for the safety of your funds.

For stock trading and forex trading in the UK, you should choose an FCA regulated broker. But some online brokers may display fake licenses or regulations, so you should check them with an independent source.

The Safe Forex Brokers UK broker comparison website suggests that you can check the broker’s registration/license number on the FCA website and verify their contact details including address, website, number phone number, approved investment products, company status to check if the broker is licensed to operate in the UK. These details should be cross-checked on the broker’s website to ensure that you are not opening an account with an unlicensed clone or broker.

#5. To diversify

If you invest all your money in one asset class and something goes wrong, you can lose your entire investment. The silver bullet here is to invest in different stocks from different sectors such as technology, precious metals, agriculture, etc. (ETFs) and mutual funds might just be the best option.

ETFs pool funds from different investors and invest the funds in a basket of assets, allowing for diversification. ETFs trade like you would stocks on a stock exchange, and market forces determine their price. When you buy shares of an ETF, you own a slice of that basket of assets and your slice contains all the shares of the different companies in that basket.

ETFs can be set up in different ways, for example they track indices such as the S&P 500 Index. When you buy shares of an ETF that tracks the S&P 500 Index, you own shares of the 500 most capitalized companies listed on US stock exchanges such as Apple, Microsoft, Facebook, Berkshire Hathaway etc. and it is a good diversification.

Mutual funds are similar to ETFs as they also allow you to buy into a basket of assets, some even track gold indices giving you exposure to companies that trade gold and others precious metals.

However, they are not traded on an exchange, so you will have to go to the fund manager to buy shares of a mutual fund. You can choose mutual funds or ETFs to be part of your investment portfolio.

What to avoid?

#1 Complex financial products

As a first-time investor, stick to stocks, bonds, and other simple financial instruments.

Don’t get into complex products like derivatives. A derivative is a product that derives its existence from one or more underlying assets such as a stock, commodity or currency. Examples of derivatives are futures, options, swaps, contracts for difference, etc.

#2 Not performing fundamental analysis

Buying ETFs and mutual funds is ideal for new investors, but if you intend to select individual stocks, you should study the balance sheet, income statement and cash flow statement of the company or companies to find out if their assets can cover their liabilities. plus equity.

It’s called doing fundamental analysis and it’s better than investing based on online chatter, online rumors and advice, or fear of missing out (FOMO).

#3 Buy penny stocks

Some companies may be new startups or small companies, so their stock price may be very low, but that does not mean that all of these companies will grow. Sometimes a low stock price can mean a poorly run business. Whatever the case, these stocks are considered penny stock.

If you invest in such a stock, it could be a very long time before the stock starts to appreciate or the company pays you dividends. You may not be able to sell the shares when you want because demand is low, which means they are illiquid.

While it’s true that some stocks can be undervalued and a struggling business today could get organized and become profitable in the future, you don’t want your first investment experience to be bad because the first impression counts.

If you don’t have the money to buy blue chip stocks, you can talk to your broker about buying cheaper fractional shares of big companies.

#4 Invest more than you can afford to lose

You should always invest only the money that you are willing to risk and hold the money for. There is always a possibility of losing your capital when investing.

Have an emergency fund of cash kept in a savings account. This will be a fallback solution in case something goes wrong. Investing more than you can risk losing will put you under too much pressure and can lead to health problems and a loss can discourage you from investing more and you end up leaving the capital market.

Share.

Comments are closed.