Basics of investing

A big event has happened, stock markets are volatile and you have heard that it’s a good idea to invest as the markets are low and likely to go up but where do you begin? We share some basics you should understand before you decide what you want to do. The below is not intended to be advice but some things to bear in mind before you start your investment journey.

Different types of investments


1. Funds


a. Passive - This is essentially rules based investing. An index is constructed often based on market capitalisation, investments are then automatically made according to the percentages of company in the index. You have most likely heard of Dow Jones Industrial Average which is an index made up of the largest 30 companies in the US.


During the COVID pandemic for example you probably heard many journalists referencing this index, the idea some believe is that these companies are the back bone of the American economy, if the largest companies start struggling then the remaining companies in a country are likely to struggle and so things are looking bad for the economy.


Some disagree with the notion that an index is a reflection of an economic strength of a country, although this is more generally accepted to be true particularly within the developed markets.


b. Active – this is where the fund manager decides what to invest in, they will often look at a company, think shell for example how has it been performing, what is happening to its profits and then make a decision to invest or disinvest.


The fund manager is “active" in trying to find companies that will generate returns. Often they will benchmark themselves against a passive index and will state they will try to outperform relative to the benchmark.


A good active manager will outperform whereas a bad one will not so there is always some risk. Often a fund manager would commit to outperforming over a 3-5 year cycle so some up and down in your fund may be expected if looking over a quarter for example but what matters for fund investment is long term performance.


2. Stocks


You may have been watching a company like Apple closely, tracking their every move and feel like it is likely to go up in the future. This would be you making an investment in a company or stock as opposed to a fund. If you picked the active fund option then a fund manager would do this for you.


Questions to ask yourself


1. Do you want to pick a company yourself or do you want someone else to do it for you?

2. If you want someone else then do you want to invest in a passive fund or an active fund?




Investment horizon


It is very important to consider how long this investment is for. I am sure everyone has heard of how people are gaining doing spread betting or FX trading. They are probably not telling you about their losses too but one option is intra day trading or spread betting. You can do this on an index or a currency or a stock but the skill here is different. It is about looking at the minute detail of your investment and making decisions on whether it will go up and down.


Alternatively if you want something you are willing to hold for a bit longer then stock may be better for you, for example if you know that Tesla is working on a new car design and as soon as its released it will make a lot of money then you may consider buying the stock and holding onto it until you can realise a profit. However, be aware, it’s not just you but billions of others who are tracking the same stock so there is a concept of the potential return already being ‘priced’ in ie. everyone is anticipating this so its reflected in the value of the company.


Active fund managers would typically aim to outperform by a market cycle which is 3-5 years so if you are willing to leave your money for longer then a fund is probably more suitable. Equally passive funds are also better if you are willing to invest for longer.


The more risk you take, the better your returns could be but also the greater the losses so just remember that with whatever option you take.


Geographic region


If you have chosen to invest in a fund think about the geographic region, do you think UK is where things are bad today but will go up tomorrow or do you think emerging market is the place to be? Ask yourself these questions and then pick the region.




Sectors


Sectors is another area you may think about such do you have a view on technology or energy? Do you want to invest in any of these sectors?


You have decided the broad categories, what next?

Once you have made some of the above decisions you have already narrowed down from hundreds of investment options to what you feel is right for you. Next you can open an account with a provider like for example Fidelity, Interactive broker and start trading. Just make sure you read their offering properly, not all of them offer the option to carry out FX trading as that is more specialist trading platforms.


Look out for costs too, not only are there annual management charges but also trading costs.


Remember investments carry risk and you can lose your money as well as gain. Make sure whatever option you go with is right for both your ability to take risk and your tolerance.


Disclaimer; The above article is not intended to be advice, past performance is not an indication of future performance.