Investing money for beginners: a handy guide

Investing can be a great way to grow your capital. If you don’t know how to get started, check out our guide on investing money for beginners to find out what you need to know. 

Investing money for beginners 

What is investing? 

You might be asking yourself “how can I invest my money? What even is investing? Where do I begin?”.  

We know investing can be intimidating if you’re a newcomer, so let’s start with the very basics. 

Investing is the act of buying securities with the hope that their value will grow over time. Securities are a mixture of different assets which includes company shares, commodities, index funds, ETFs, and so on. We’ll cover these later in more detail.  

The ultimate goal of investing is to put together a portfolio of assets that will maximise profits over the long term while mitigating risk. 

Please note, that while investing can make you money, you can also lose capital if investments go wrong. It is risky, so please bear that in mind before you begin your investment journey. Only start if you can afford any potential losses. 

Do you need a lot of money to start investing? 

It’s a popular misconception that you need millions in the bank to be a successful investor. This isn’t true. You can start investing for £500 or under. It’s basically up to you how much capital you commit to building your portfolio. The practice is open to everyone. 

Why is investing worth it?

Whether you want to simply make money or tuck your some away for a retirement nest egg, or grow your capital for another reason, investing can be a smart move – provided you actively keep on top of your investments and manage your risks. 

At present, investing may be able to make you more money than by putting your money in a savings account. In the UK, for example, the current base rate, a benchmark rate used by lenders, is 0.1%. Banks use this to set their interest rates on savings accounts. So, at the current 0.1% rate, your annual return on every £100 would be 10p. 

With market interest rates so low and the average dividend yield on a FTSE 100 stock around the 3% mark, it’s safe to suggest that equities have higher chance of giving better returns on investment (ROI), albeit they also come with the risk of falling value. Stock markets around the world have been on strong upward trends over the last century.  

Let’s look at an example. If you had invested £100 into an S&P 500-tracking mutual fund in 1989, and reinvested the dividends, that would have grown into £1785 over 30 years to 2019. The same amount put into a UK savings account across the same period would have grown into £364. Investing in the tracking fund would have created 390% more profit.  

What can you invest in? 

When looking at investing money for beginners, it’s important to see all the different assets available. Here we’ll look at some of the most common options available to novices and seasoned pros alike.  

Stocks for beginners 

Stocks are probably the most well-known asset class. When buying a company’s shares or stock of a company, you are buying a small part of that company. That means you are now officially a shareholder. You are then entitled to capital appreciation and dividends. 

Dividends are a portion of a company’s profit paid back to investors. They’re basically a reward for keeping faith and capital invested in a business. Because they offer more pay back on top of capital appreciation, i.e. stocks rising in value, dividend stocks are often popular with investors.  

Not every company pays dividends. Sometimes they can’t afford to. Others may prefer to reinvest profits back into the business.   

Stocks for beginners can be intimidating. How do you know which to choose and which to avoid? We advise undertaking careful research when picking stocks and shares to add to your portfolio. Be aware that share prices can go down as well as up. Unexpected events outside your control can affect company performance, and thus their share price. 

Diversification can help lower your risk, but we’ll cover that later. 

Bonds 

Did you know the first ever official government bonds were issued by the Bank of England in 1693 to raise money to fund to the Nine Years War? Bonds have been around for centuries and are essentially loans given by governments or businesses to raise funds. 

Investors who buy bonds get a fixed-interest rate. This is paid either monthly or quarterly for the duration of the loan. Investors receive money back at the end of the loan period, which typically ranges from three months to 20 years. 

Because bonds sit higher in the capital structure than stocks, bondholders get paid first. That usually means bonds are a safer investment than shares. However, because this is still a loan-based investment, there is a risk the issuer, i.e. the company or government, may fail to pay back at the end of the loan period.  

It’s important to look at a bond’s risk status before adding it to your portfolio. These can be found through credit rating companies. A bond with a rating of A or above would be considered a good investment and is likely to offer inflation-beating ROI. 

Commodities 

Commodities are tangible assets. There are plenty of commodities out there, with the most common being crops and agricultural products like soybeans, oil & gas, metals, and gold. Commodities tend to be listed on special exchanges. They can also be very expensive. An oil futures contract, for example, would cover a thousand barrels of oil. With the current oil price of $61 for a barrel of WTI, you’d be paying $61,000 for a futures contract. Not something we’d recommend when discussing investing for beginners. 

Because of the price and complexity involved, novice investors should avoid physically buying commodities. Instead, you can get exposure to them in different ways. You might want to buy stocks of companies involved in commodities production, like Esso or Chevron for oil, for instance. Groups of commodities are also bundled together in some exchange traded funds (ETFs).  

ETFs 

ETFs are made up of a group of assets, such as stocks from companies working in related sectors, commodities, bonds, or a mixture of different asset classes. The assets inside an exchange traded fund help track the performance of the fund’s underlying market as closely as possible.   

By investing in an ETF, you can gain exposure to an entire sector with a single trade, instead of investing in individual stocks. Some contain thousands of assets, whereas others are much smaller and more focussed.   

ETFs are listed on exchanges unlike other funds.  

Exchange traded funds are great for keeping up with trends. For instance, the ARK series of funds group together technological pioneers in various sectors like healthcare, disruptive technologies, fintech, and automation. 

Planning your investment strategy 

An important tip for investing money for beginners is to think carefully about your goals. Instead of asking yourself “how do I invest my money?” ask yourself some of these questions below: 

  • What do you hope to achieve with investing?  
  • Where do your interests lie?  
  • Which assets interest you? 
  • How much are you willing to invest?  
  • How much can you afford to lose? 

It is recommended when investing in the stock market to hold onto assets for at least five years for to benefit from any significant ROI. 

Our Investment Strategy Builder is designed to help put together a tailored portfolio that works for you. If you’re unsure about starting your journey on your own, feel free to reach out to us and start using our Builder. We may be able to help you reach your goals. 

Investment portfolio diversification 

We often say, when picking stocks for beginners, that diversification is a good idea. Many of the most successful portfolios are comprised of lots of different asset classes. 

Portfolio diversification is all about improving risk-adjusted returns, or how much profit you can potentially make versus how much risk you take.  

A diverse portfolio contains open positions across a range of instruments and assets. This way, you’re not overly exposed to a single type of risk. Investors use multi-asset portfolios to balance potential risks, which can help create higher returns in the long run. 

David Swenson, the investor in charge of overseeing Yale University in the US’ investments, is a good example to follow. According to the New York Times, David has managed to get 16.3% annualised ROI on his investments over the past 20 years of managing Yale’s endowment, worth around $20bn. Here’s what his portfolio looks like: 

  • 30% – US stocks 
  • 15% – International stocks from Developed economies 
  • 5% – Emerging markets stocks 
  • 20% – Real estate funds 
  • 15% – Government bonds 
  • 15% – Treasury inflation-protected securities 

No single choice represents an overwhelming section of David’s portfolio. Any underperforming sector’s losses will potentially be covered by the other parts of the portfolio, thus mitigating the risk factor. 

Investing money for beginners: A final word on risk 

We hope this guide to investing for beginners has been helpful, but we have to stress the potential risks once again. Your money can go up, but it can also go down. Diversify your portfolio, monitor your investments, and do everything you can to mitigate risks if you want to be a successful investor.