A guide for beginners on How to Start Investing, we cover topics such as what is investing, investing for beginners with little money, What are shares and investing vs trading. We seek to answer the questions you have about getting started in investing for beginners and welcome you to the Prophet Community.
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What is Investing for Beginners?
Investing is simply the practice of forgoing short-term benefits namely liquidity or cash flow in the hope of achieving better financial gains in the future.
This is usually by taking on risk or losing liquidity or both. Investing is really delaying the gratification of the present to have additional in the future. Investing could be buying a quality share or investment property and holding for a long period.
Investing put simply could be coined by the phrase “You can have 1 dollar now, or wait a little while and you will get 2 dollars in the future”
What are Shares (Investing for Beginners)?
Shares represent part ownership in a company. Shares, stocks, equities all refer to the same thing.
Shareholders as part owners of a company have ownership in the company’s assets and earnings and can have a vote in the direction of the company.
Shares are limited liability meaning the maximum amount that normal shareholders can lose is the amount of their investment, creditors can’t come after shareholders in the event of bankruptcy.
Investing VS Trading?
Trading is a more short-term activity. It shares the same principle of investing is “buy low sell high” but does so on a more aggressive short-term basis. It is usually considered a riskier practice.
Trading involves constantly jumping in and out of positions trying to make money. It involved little if any consideration for the actual underlying company. Since the trade durations are short it mostly involves trading on momentum or investor sediment rather than actual company developments. Due to this, there is increased risk and it is very easy to lose money.
It is highly publicized that the majority of traders fail. With an estimated 96 per cent losing money. This is why our focus is on investing for the long run.
- Longer Term Time Horizon
- Typically Holding >1-year
- Buying Shares in a company as a part “owner” in the business, focus on fundamentals and fundamental analysis
- Focus on buying great businesses for less than they will be worth in the future
- Typically un-leveraged where losses cannot exceed deposits
- Typically a Shorter Time Horizon than investing
- Focus on Technical Analysis rather than fundamentals
- Aim to Buy at a Low Price and Sell High
- Typically a leveraged product, where losses might exceed capital
When should I start Investing?
This is one of the most common questions and one which is highly subjective. You can start investing for as little as one dollar with apps such as RAIZ.
Shares and equity products are usually purchased through a broker with a typical minimum limit of $500. So, investing doesn’t necessarily require large amounts of cash to get started. However, investing can be a risky practice so as a rule, you should be in a position that losing all your invested cash doesn’t have a large impact on your financial situation.
You should have enough cash to cover any expenses and unforeseen events that will come up during that year. Investing is for the long term and to achieve a compounding effect typically the longer the investing horizon the better the compounding effect.
Micro-Investing platforms such RAIZ have very low fees. This makes any amount of cash a feasible place to start. Brokers charge a fee usually in the range of $10-20 for trades up to $5000.
How To Start Investing eBook
Our ultimate Investing eBook starts at the very beginning. This is no ordinary Investing books pdf. We don’t miss a single step as we navigate you through your investing journey. We walk you through everything we’ve learnt so you don’t make the same mistakes we did.
The Gateway to Investing our prize eBook is not only the Beginners Guide to Investing. It is the bible of Australian Investing. We break down everything there is to know in the difficult world of investing.
What We Like to Invest in?
There are a lot of classes and subclasses and abbreviations and schemes you can invest in.
Prophet keeps it simple. We consider three main groups: Equity, Cash, and Other.
Equity has a large group of components but simply put, involves investing in companies in exchange for ‘equity’.
Cash is any money market account, these are generally low risk, high liquidity, but low returns- think a savings account or term deposit.
Other is any other investment classes (property, bonds, etc.).
Here at Prophet, our focus is equities. This graph shows why:
We see since 1988 Australian equities have returned 9.1% per year. Cash at just 6.1% and property at 8.5%. Property Vs Equities from BetaShares will help here.
So, equity has offered similar returns to property and even outperformed property in recent times. Equity is also a more easily achievable and more liquid investment than property.
The red area represents CPI or inflation, this means that on average we must achieve at least 2.8% to beat inflation and maintain or grow the value of our money. So, ask yourself how much your savings account earns you.
This means that whilst CPI is at 2.8% and banks are only paying a top of 0.99% at the moment on term deposits you are actually going backwards with your money held in savings or cash compared to CPI. For example, if you save $1 and a chocolate bar is $1 today in a year you could expect that same bar to cost you $1.028, while you’ve only saved $1.0099. You start to see the large effect this has as the numbers get larger.
What is Investing and Diversification
Investors should be familiar with the term diversification. Diversification is simply reducing our risk by spreading out our investments – not putting all our eggs in one basket. This could be across different shares or across asset classes.
Diversification should be strongly considered in line with the investor’s needs. Younger investors can often afford more risk and can afford to ride the ups and downs of the stock market. As such they may seek to be heavily weighted towards equities rather than cash.
There’s no strict formula for the best method. On an individual basis, we should consider what percentage of our net worth is in each asset class and consider if we have enough free liquid cash for unexpected expenses, and if we are deploying enough capital to take advantage of higher returns and beat inflation.
How to Start Investing with Little Money
This means the smaller the amount you invest the more that investment must increase before breaking even. So, it’s very much about taking this into consideration and finding a trade-off that suits your needs and situation.
Check out an article we wrote on the topic Here. How to Get Started Investing with Little Money
In the next episode, we will get started on how we choose what equities we like to invest in.
Please remember to always consult a financial advisor before making any investment decisions. The above is simply a recollection of how we got started investing and the decisions we made at the time to document our progress.