I want to share with you my Top 5 tips to getting started investing in stocks and shares safely and successfully.
Have you been thinking about investing in the stock market and trying to put your capital to work? Are you struggling to pull the trigger?
Many beginners don’t ever get started because of fear. The fear of not knowing what you are doing and losing your money.
It’s actually a very valid concern.
Many beginners make terrible decisions when they start investing and they go on to lose everything they put in. So I wanted to create a useful blog article and share my top 5 tips to getting started investing in UK stocks. Let’s go.
Tip #1 – Only Invest Surplus Income
This first one may seem obvious to you, but many beginners who join my analysis subscription service make the tragic mistake of investing money they actually need. They’re so desperate to become an investor, they don’t stop to think if they are yet in a position to invest in the first place.
I have had a number of members come to me to explain they have had to make a big withdrawal from their portfolio as they found they actually needed the money for something.
Withdrawals cripple your long-term investment strategy.
You should only be investing capital you won’t need in the short term. Firstly, because you don’t need the stress of putting money at risk that you’re going to need later to pay next month’s mortgage. Secondly, because money makes money. A 25% return on £1000 produces £250. The next year that 25% on £1250 produces £312. A 25% return on £1562 produces £391. Eventually a 25% return on £60,000 produces £15,000.
Again, basic maths and perhaps obvious to you. But the more you withdraw, the slower your portfolio will grow.
If you find yourself putting money into savings every month, and you do so consistently, then that’s the sort of level you want to be at before investing. With inflation up at 8% (or whatever it may be today at time of reading) your savings are losing their spending power at 8% a year. So if you have £10,000 saved, you need to make 8% return a year just so that it keeps its current spending power.
If you struggle to save money, or have nothing left at the end of the month, you should not be investing in stocks. Instead, you should be investing in yourself. My book on Making More Money would be a very solid £9.99 investment in yourself right there as it will teach you how to increase your income and start improving your financial situation.
Tip #2 – Open a Stocks & Shares ISA
There are many ways to purchase stocks. One of my favourite ways, especially when starting out, is through a stocks and shares ISA.
They are tax-free. Well, that’s not strictly true.
Any profit you make from the first £20,000 you invest is tax-free. Which is great. But what’s better is that the £20,000 allowance you get refreshes every tax year. So unless you are investing over an additional £1700 a month into your portfolio you will never be paying any tax on anything you make.
But that’s not everything.
You see, that £20,000 limit in Year 1? Any profit from that is tax free. Even the profit you make from it in Years 2 and 3 and so on. So £10,000 invested in year one, making 20% annual average return a year would grow into £188,000 over 20 years. And that £178,000 growth would all be tax-free gains. If you invested £3000 in Year 2, that would be £49,000 in 19 years on top. Again, tax-free.
Why a ‘Stocks & Shares’ ISA? Well, this type of ISA allows you to select the exact shares you buy and how much of them. You build your own portfolio. So instead of tracking the FTSE 100, or buying a ‘fund’ that some money manager is running and deciding, you get 100% control over what you are investing in. Which when armed with the right information becomes very powerful.
If you want any help on trying to find the right Stocks & Shares ISA provider, you can click on my article here where I take a look at the best Stocks and Shares ISA providers here in the UK.
Tip #3 – Know What You Are Buying
This one is huge.
Basically, if you don’t know what you are buying, expect to fail. Knowing you investment is key to success and is a whole article on its own.
But in a nutshell, most beginners when starting out don’t know which stocks to buy. So, they do the same thing everyone else does. They buy companies they’ve heard of, or like the product and service of.
This is a terrible investment strategy.
If a friend of yours asked you to become a part owner of a take away business would you ask to see the books and understand if the investment made sense to you, or would you blindly invest on the hope it all worked out? It would be a huge risk to do the latter.
Yet this is exactly what many beginner investors do. They invest in companies based on the brand name. Or the fact they liked the product they produced. Yet if they carried out research they might discover that these companies are losing money and continually borrowing debt to keep the business alive.
Beginners flock to stocks like Tesco, BP, Royal Mail, Centrica, and BT. British staple businesses. But these are poor investments. These companies make less than 2% profit margin a year, that’s if they make profits at all. They can’t afford to grow. And for that reason their share price sits flat. Take a look at Tesco. 20 years ago their share price sat at £2.50 a share. Today? About £2.50 a share.
And what happens when you buy some random stock, and it starts to fall in price? What if you buy at £10, but it falls to £8? What do you do? Do you hold on, or sell it for 20% less than you bought it? That’s a fast way to not making any money investing. Let’s say you stick. What if it falls to £7. Then to £5? Do you sell now? At 50% discount? Why not sell at £8 then??
When you don’t have a reason to own an investment, you shouldn’t own the investment.
Only buy what you know.
That way you’ll always know what to do.
If that £10 stock falls to £5 but you know without a shadow of a doubt that they are making 30% profit a year, are expanding into Europe over the next 5 years, had seen 200% increase in revenue from their German pilot scheme, and they have no debt whatsoever to worry about, you’ll know the right thing to do.
Knowing your investment is crucial.
Tip #4 – Don’t Follow The Crowd
Listen, there’s some good school of thought in every day life that it’s sometimes good to stick with the crowd. It keeps you safe. Safety in numbers, right?
But when it comes to investing money, you have to treat everyone else as a moron.
It’s harsh but true. Beginners love making out that they know what they are doing. It’s predominantly a male industry, and this means ego’s flying about everywhere. Which is fine, but you need to see it for what it is.
It’s the blind leading the blind.
Guys who have bought a bit of this and that, and are only 1-2 years into the journey, and yet they are all over Facebook leaving comments on which stocks you should be buying. Half of them don’t even own the stocks they say you should buy. Others are so married to their stocks (often for the wrong reasons) that they feel the need to push it onto others.
There are many reasons not to follow other people.
They may have a different strategy to you for starters.
When the pandemic broke out in 2020 investing facebook groups went mad. People were posting how we’d never seen a crash like this before. That “this time it was different”. Investors were selling their stock they’d spent years accumulating for 40% discounts. Literally sealing in their own failure in doing so.
I, however, left those groups, and went and did what I knew was right. I bought more. In fact, in March 2020, at the height of the panic, I bought £11,600 worth of stock. But not just in any company. I bought stock in the companies I knew were doing wonderfully well and would continue to do wonderfully well. Those stocks were up +20% by the end of the year. I didn’t sell anything. And the stocks I already owned were fully back to their pre-crash price within 6 months anyway.
If you want to do well, stay away from the crowd. Don’t even read their worthless opinions. Even stock pick newsletters and analysts get it wrong. I have reams of emails from various analysts telling me which great stocks to buy. Some of those stocks are already out of business. And these are the so-called professionals!
To do well investing, you need to either do the research yourself, or follow someone you trust with a real track record of success in handpicking great solid stocks. But the crowd will lead you astray. Don’t get your investing advice from people who don’t make any money from investing. Unless they are a contra-indicator for ‘what not to do’.
Tip #5 – Focus on facts
Finally, my last tip is to avoid prediction.
Listen, all investing is speculation to a degree. You are buying shares in a company in the hope and expectation that the company do well and their share price rises in accordance to their success.
That is speculation. It’s a prediction of sorts.
However, most beginners go too far and begin to predict the success of a business before any evidence has been shown.
They’ll invest in an alternative energy business. When I ask them why, they’ll give me some optimistic opinion about how this energy is going to be the future.
Fine, they may well be right. But the odds will suggest they are wrong.
In fact, out of 957 stocks I’ve personally analysed for my members, only a handful have met the grade. Of that handful, only a small number are priced at a level that makes sense to buy at today.
The other stocks I’ve analysed, worthless. Don’t buy them.
Yet a complete beginner will argue with me that this new alternative energy stock will be huge one day. Let’s forget the fact that they are losing hundreds of millions in losses every year, and have huge debts they have no way of paying back, and their entire success rests upon a significant turnaround.
Show me a company making a 30% profit NOW, and I’m interested. Companies that ‘might’ make a profit one day……everyone else can have those. I don’t want them.
Don’t be a beginner investor who jumps on a stock at 43p a share just because you want to be first. It’s driven by greed first of all, not good solid analysis. There’s a reason it’s at 43p, and that reason isn’t good. For every story you hear of a stock rising from 43p to £40, there were 1000 other stocks that went the other way and don’t exist anymore.
You can go play those odds if you want. But expect to lose.
Instead, focus on fact. Not predictions.
Is the company making a profit? Have they been doing so for a long time? Does it seem likely that this will continue? Why? Have you done the sums? What growth strategy are they employing to achieve that future profit?
If the reason you are buying a stock is because they might be profitable one day…..you’re in for a world of pain.
I’ll take a company who are already making 20% profit a year and happily pay £20 for it. I’ll ride it up to £40-£50 over the next few years, whilst the beginners are nursing losses as their 43p stock fell to 5p and trading in the stock has now been suspended.
So there you have it.
My Top 5 tips to getting started.
Follow those tips and you’ll immediately be head and shoulders ahead of most beginners out there.
Got any questions? Looking to get started but need a helping hand?
If you are just getting started and need any free assistance, why not drop me a quick email?