How to Start Investing: 5 Easy Steps for New Investors

Starting your investing journey can be daunting since it is associated with investment bankers, hedge funds and other Wall Street professionals. But it is much easier than you may think. 

Here are five steps for starting your investing journey.

Build Up An Emergency Fund

“Why build an emergency fund if I’ll be investing my money?” Great question. The simple answer is that life happens.

Investing involves putting the money you’ve worked for to work for you, so, understandably, you want to invest as much of it as possible. However, building up an emergency fund can help you deal with the uncertainties of life and help you make more money in the stock market. 

Emergency funds guard against making ‘rash’ investment decisions when unfortunate life events occur. Having money set aside for unexpected expenses and untimely occurrences allows you to deal with them accordingly. If you put money into investments without an emergency fund and the market starts to decline, you may have to sell your shares at a loss to cover the surprise expenses.

Having an emergency fund can also help improve your investment returns over time. The longer your money is in the market, the more you make because of the powerful effects of compounding. Selling investments to cover unexpected expenses lessens the time your money can grow, hence the need for an emergency fund – it allows your invested funds to stay in the market, continuing to grow and compound.

Time in the market beats timing the market.

Kenneth Fisher

The size of your emergency fund is subjective and based on your financial situation and the peace of mind you would like. Most banks have an online emergency fund calculator feature, or you can speak with a financial professional to find an emergency fund amount that suits you.

Create An Investing Plan

While building your emergency fund, you can create and revise your investing plan. 

An investing plan helps you identify your short, medium and long-term goals and breaks down how to achieve them. It motivates you to continue working towards your goals and stay within the boundaries you’ve set yourself.

Your investing plan can include questions (with their corresponding answers) like:

• What are my investing goals? – What am I trying to achieve by investing? Do I want to build generational wealth? Do I want to have an alternative income source? Am I investing for retirement?
• What is my investing strategy? – What kind of investments (stocks, bonds, ETFs, etc.) do I want to own? Do I want to manage my investments actively or passively? Do I want professional help or invest on my own?
• What is my perspective on risk? – Am I a low-risk or high-risk individual? Am I satisfied with matching the market’s return, or can I stomach the possibility of higher losses for higher potential returns?
• What is my investing time horizon? – How long do I want to invest? How long do I want to own this investment? Knowing your investing time horizon can influence the degree of risk you are willing to take on.
• What is my Circle of Competence? – What companies/sectors/industries do I understand deeply enough to invest in?

These are some general things to consider when creating an investing plan, but you can personalise and tailor it to your needs.

Research Businesses To Own

Researching the investments you wish to own is the most important thing to do throughout your investing journey.

Understanding how a company makes money, its growth potential and associated risks can help determine if it is investment-worthy. Reading a company’s annual report and analysing its financial statements are the best ways to find these out.

If you don’t quite understand financial statements, don’t want to dedicate hours to researching companies and would like to adopt a passive investing approach, you may consider dollar cost averaging – investing the same amount at regular intervals – into low-cost exchange-traded funds (ETFs). The company research is already done for you, and you get to own pieces of several companies. Although most of the research is done, individual research is still necessary. Researching elements such as the fund’s dividend policy and expense ratio is essential, as they can affect your investment returns. The higher the dividend yield and lower the expense ratio, the better.

Furthermore, defining and staying within the boundaries of your circle of competence is vital to your investing success. If you have experience with pharmaceuticals and understand the process of getting new medicine to market, your circle of competence would most likely revolve around the pharmaceutical industry. So, if you have an edge in the pharmaceutical industry, stick to it. Don’t fiddle around in the oil industry.

Investing failure comes when you willingly step beyond the boundaries of your circle of competence. 

Stick to what you know.

Open An Investment Account

The next step is to open an investment account.

Investment accounts allow investors to buy and sell asset securities such as stocks and ETFs. Thanks to the internet, online investment apps have become a norm, and thanks to innovation and business competition, many of them are free.

Opening an investment account may be the easiest step in your investing journey. The difficulty comes with the choice. Which investment app/company you choose to invest with can be influenced by:

• Costs – Is it free to trade on the app? If not, do I pay a flat monthly fee or a percentage of my investment portfolio? Do I pay transaction fees for each trade I make? Are there any management fees associated with my account?
• Safety – Is the company regulated by the Financial Conduct Authority (FCA)? Will my investments be protected by the Financial Services Compensation Scheme (FSCS)?
• Additional Accounts – Does the company offer a self-invested personal pension (SIPP) and a tax-free investment individual savings account (ISA) alongside their general investment account? 
• Usability & Customer Service – How easy is the app to use? How good is the customer support?
• Extras – Does the company pay interest on the uninvested cash in my account? Can I hold and invest using different currencies?

Your choice of investment app boils down to personal preferences. You can always open and transfer your investments to another investment account if it suits you better. 

Buy Your First Shares

After completing the previous steps, the only thing left is to buy your first shares.

Summary

Starting your investing journey may seem intimidating initially, but by taking simple steps, you can set yourself up for long-term success. 

Establishing an emergency fund protects you from life’s uncertainties. An investing plan keeps you on track with your financial goals, and thorough research permits informed decision-making. Once you’ve opened an investment account that fits your needs, purchasing your first shares marks the beginning of your journey. 

With patience, discipline and continuous learning, you’ll be well on your way to growing your wealth.

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