Understanding why
Types of investing
It’s all well and good saying ‘I want to invest’ but there are an awful lot of types of investments out there, so let’s break down the top ones that you may want to consider.
ETFs
An ETF is an Exchange Traded Fund which is basically like buying a group of stocks in one go. For example, you can buy an ETF for the S&P 500, which is made up of the USA’s top 500 companies with as little as £1 using online platforms such as Trading212.
This allows you to gain a broad exposure to the stock market whilst reducing the risk. The risk is lower because if you invested into the whole S&P 500, this might fall in value during a recession but there is no way that the top 500 companies in the US can become worthless!
There is a whole range of ETFs that you can buy into, from specific stock markets (S&P 500) to specific industries (Clean Energy).
They are a great way to invest without having to do research into individual stocks and companies and actually have astounding returns on your investment. Per this article, 85% of actively managed investment funds under-performed the S&P 500 over the last 10 years meaning if you had bought an S&P 500 ETF you would have beaten the experts.
Investing in Individual Stocks
This is probably what you think of when you hear about investing. There are two types of company; a private company which is owned by the managers (usually) and a public company which is floated on a stock exchange.
If it is a public company, anyone who has access to the stock market can buy a share in that company and become a part-owner. This is what the majority of investors tend to do.
However, this is more risky than investing in ETFs because you will have more money in particular companies rather than being diversified.
When you are looking to invest in individual stocks you should treat it as if you are buying the whole company. You need to research the company fully and understand why you want to invest in them, you should never just buy a stock because someone else told you about it.
For my largest individual stock positions I have put in days of research and understand every inch of the company to ensure that I am happy with what they are doing.
How to start
Great resources:
Investopedia - great for understanding terms
Morningstar - great for researching stocks
Seekingalpha - great for researching investing