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Investing for beginners

Share price of a company can rise and fall

  • The price is initially set by the firm offering shares.
  • Its price on any given day can be determined by poor financial results, the economic health and so-called 'sentiment', ie, if City buyers think a firm will struggle, its price can fall. 
  • Shares are listed on an 'index'.

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Investing for beginners

Investing for beginners

https://www.moneysavingexpert.com/savings/investment-beginners/

moneysavingexpert.com

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Key Ideas

Investment explained

An investment is a gamble: instead of the security of guaranteed returns, you're taking a risk with your money. 

You can invest in Shares, Bonds, Funds, Government bonds (gilts), UK property market or even Farmland, Vintage cars, Wine, Fledgling technology, firms or art.

For most, investing means putting money in the stock market.

How stock markets work

  • A stock market is simply a place where buyers and sellers meet to sell shares.
  • A share is a divided-up unit of the value of a company.
  • Shares exist to boost profits of firms to turn a business into a financial success.
  • Enter a stock market: in return for your cash, a business offers you a share in its future – so you essentially own a tiny slice of that company and become a 'shareholder'.
  • This slice of the company you own can then be traded with anyone who wants to buy it.

Share price of a company can rise and fall

  • The price is initially set by the firm offering shares.
  • Its price on any given day can be determined by poor financial results, the economic health and so-called 'sentiment', ie, if City buyers think a firm will struggle, its price can fall. 
  • Shares are listed on an 'index'.

5 golden rules of investing

  1. The greater return you want, the more risk you'll usually have to accept.
  2. Diversify as much as you can to lower your risk exposure, ie, invest in different companies, industries and regions.
  3. If you're saving over the short term, it's wise not to take too much of a risk. It's recommended you invest for at least five years. 
  4. Review your portfolio. A share might be a dud or you might not be willing to take as many risks as you did before.
  5. Don't panic. Investments can go down as well as up. Don't be tempted to sell or buy shares just because everyone else is.

Investment as a good fit

  • Ask yourself WHY you're looking to invest.
  • It is better to try and sort out your personal debts first before you take the risk of making them worse.
  • You don't need a load of cash to be able to invest in the stock market. You can 'drip-feed' in small sums on a regular basis.
  • As a rule of thumb, you should never invest more than you can afford to lose.

How to invest

  • You can buy shares or funds from different providers.
  • The cheapest offers you'll want to do it through is a website, often called a platform.
  • It's a two-stage process. First you need to pick which platform to buy your shares or funds from, then you need to decide what investments to buy.
  • As a rule, you'll be charged for using the platform and buying the investment. 

2 ways you make money from investing

One is when the shares increase in value (and you profit when you sell), the other is when they pay dividends.

Dividends are a bit like interest on a savings account. If a company makes a profit, it gives some of it back to you.

A fund explained

  • A fund is simply another way to buy shares. 
  • Instead of you buying a slice of a company directly, you give your cash to a specialist manager who pools it with money from other investors (like you) to go and buy a job lot of shares in a stock market.
  • Each fund is made up of 'units', so if you want to invest you'll need to buy units.
  • The value of each unit will rise or fall depending on demand in the market for the fund.

  • Funds can invest in almost anything – countries, energy, gold, oil, even debt.

  • All funds have a theme – anything from geography (European, Japanese, emerging markets), industry (green companies, utility firms, industrial businesses), types of investment (shares, corporate bonds, gilts), to the size of the company.

  • An FTSE 100 tracker fund invests in the UK's 100 biggest companies and therefore is much more mainstream.

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Investing defined

Investing is about laying out cash or assets now, in the hope of more cash or assets returning to you tomorrow, or next year, or next decade.

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Productive assets explained
  • Productive assets are investments that internally throw off surplus money from some sort of activity. 
  • Each type of productive asset has its own pros and cons, unique quirks, legal traditions, tax rules, and other relevant details.
  • The three most common kinds of investments from productive assets are stocks, bonds, and real estate.
Investing in Stocks
  • It means investing in common stock, which is another way to describe business ownership or business equity.
  • When you own equity (the value of the shares issued by a company) in a business, you are entitled to a share of the profit or losses generated by that company's operating activity.
  • Equities are the most rewarding asset class for investors seeking to build wealth over time without using large amounts of leverage.

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Investing

... is the trading of your money today for a lot more money in the future. It is a high yield over the long term.

What happens to your money

Banks don’t like to give away their money. That mindset is reflected in the interest rates of checking and savings accounts of 0,5% and 0.9% avg. annual interest respectively.

When you deposit your money in the bank, the bank turns around and invests that money at 7% a year or more. After they collect their profit, they give a tiny shaving of it to you.

Portfolio and Diversification
  • Your portfolio reflects your long-term wealth building investment strategy – not the short term. It includes everything you own. Your retirement accounts, your investment accounts, even your home are types of investments.
  • Diversification is a way to describe owning multiple types of investment assets. Diversification is smart because you both protect yourself from failure and position yourself to take advantage of multiple robust methods for building wealth.

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Common investment questions
Common investment questions

Two of the most common investment questions are "what do you invest in " and "what are the best investing strategies"?

The best investing strategies are...

Shady investment advice

Bad investing advice can come from many quarters, such as wealth expos or financial advisors. If anyone promises you any type of return over 12%, 99% of the time, they are probably playing you.

There are great financial advisors out there, but many people who sell investment products just want your money. However, it's not that hard to invest for yourself.

How to avoid bad investment advice
  1. Never buy a financial or investing product from someone you just met.
  2. Getting returns over 12% per year is ridiculously hard. If it sounds too good to be true, it is.
  3. If you don't understand it, don't invest in it.
  4. If one of your friends recommends an investment that's making them a lot of money, they are probably suckers too. If you see the "results not typical" on any marketing materials, move on.
  5. There are no "secrets of the super-wealthy" that anyone will sell you for $500 or that you can take advantage of unless you have hundreds of thousands of dollars.

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6 ideal investments for beginners
6 ideal investments for beginners
  1. If you have a 401(k) or another retirement plan at work, it’s very likely the first place you should put your money— especially if your company matches a portion of your contributions.
The Golden Rules of Personal Finance
  • Spend less money than you earn
  • Always plan for the future: you should always look forward beyond the current month
  • Make your mon...
Four Steps To Building Wealth
Four Steps To Building Wealth
  1. Don’t Be a Consumerist: keep your expenses as low as possible without sacrificing the quality of life. Spend money on things that yield lasting benefits.
  2. Have An Emergency Fu...
Benjamin Graham - Warren Buffett’s mentor
Benjamin Graham - Warren Buffett’s mentor

“Money isn’t making that much difference in how you and I live. We’re both going down to the cafeteria for lunch and working every day and having a good time. So don’t worry about money, because it won’t make much difference in how you live.”

Financial planning

 ...is the process which provides you a framework for achieving your life goals in a systematic and planned way by avoiding shocks and surprises.

Try making a budget
  • Create a full inventory of expenses in front of you: Categorize them into fixed and variable; urgent and non-urgent; necessities and luxury; avoidable and unavoidable.
  • You can create a hierarchy of needs and decide which one’s to address first. It’s all about prioritizing. 
  • Accept that you have limited resources and unlimited wants. But you have to manage your resources. The sooner you accept this fact, the better you can control your impulses towards avoidable expenditures.
Maintain a personal balance sheet

It’s a statement wherein you can jot down your assets and liabilities.

  • Pull together your bank statements and other proofs of the liabilities
  • List down your assets like the bank balance, all investments, home value, and value of other assets.
  • Take a sum of all the assets to arrive at the total value of your assets.
  • List down your liabilities the (car loan, home loan, credit card balances etc.)
  • The sum of all the liabilities will show the value of the money you owe.
  • When you subtract the value of liabilities from assets, you get your Net Worth.

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Understanding personal finance

It is possible to make a budget work while still saving enough to retire. It starts with learning to change your habits so you can put money aside.

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Knowledge is power

When it comes to money, people will do whatever they can to get hold of your money, regardless of how it will affect you.

Don't rush into any sort of decision making. Always consult a second source.

Automate anything you can

Assuming you have enough to cover the bills and aren't pulling an overdraft fee, start by automating your retirement savings. You know you need an emergency fund, so automate. Do the same with increasing your 401(k) contributions each year, or paying off your credit card debt. 

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Warren Buffett

"Do not save what is left after spending; instead spend what is left after saving."

Warren Buffett
From consumer to investor

A consumer spends money and follows trends while an investor puts capital to work and takes advantage of trends.

Chronic consumers often go broke, and persistent investors often get rich.

Discover if you’re a consumer
  • You feel the need to reward yourself after a hard day of work by buying new clothes/accessories or eating out.
  • Lifestyle creep controls your expenses. When your income increases, you buy a new car or a more expensive house.
  • You reserve your credit card for unexpected expenses instead of using an emergency fund.
  • You rationalize using a credit card to buy things you might not purchase with a debit card.
  • When something is on sale, you feel the urge to buy it, even if you wouldn't have otherwise bought it.
  • You follow social trends.
  • You don't think you have money to invest or the time for it.

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