📚 Beginner's Guide to Investing: How to Start Investing with Live Examples
Investing is a crucial aspect of financial planning that everyone should consider. In this beginner's guide, we will go through the basics of investing, including the importance of investing, the types of income sources, the significance of cutting down on high-interest debt, and creating an emergency fund. We will also discuss the technical aspects of investing, such as stocks, shares, and how to make a profit. By the end of this guide, you will have enough knowledge to make your first investment.
💰 The Importance of Investing
With the current times, a single source of income is never going to be enough. After paying bills, we are left with only a small percentage of our income. Therefore, it is essential to look for other places to make income. There are seven types of income sources: earned income, profit income, interest income, rental income, capital gains income, dividend income, and royalty income. Investing holds two types of income sources: capital gains and dividends, which is why most people choose it.
💳 Cutting Down on High-Interest Debt
Before going to battle, it is important to cut down on things that can bring you down, such as high-interest debt. While also having a backup plan in case anything goes wrong, as investing is risky. Removing your debt is so important. Let's say you have a debt of £3,000, and every month, it increases by 6%. If you keep adding that into your investment portfolio for a year and assuming you get a 10% return annually, at the end of the year, your investment portfolio will be worth £4,620, which is an increase of £420. However, this would be your debt by the end of the year, £6,365.9, which is an increase of £3,365. This is why it is best to pay off your debt first, as the returns are far less than what you have to pay in debt.
💸 Creating an Emergency Fund
After clearing all the debt, it's important to start creating an emergency fund. An emergency fund is simply having some money around just in case an emergency arises, and you need money immediately. It is recommended you have at least 6 months or a year's worth of living expenses cash ready to use just in case you lose your job or a medical emergency arises.
📈 Understanding the Basics of Investing
Now that we have covered off the basic requirements you need before investing, it is time to understand the basics of investing. What are stocks, shares, and how to make a profit while also showing you a live demonstration?
📊 What are Stocks?
Stocks are simply a way for a business to raise money. Let's say I own a food business, and I'm making enough money, and I'm looking to expand, but I don't have enough money to really expand. As a business, what I can do is take out a loan, which will mean I would have to pay back the money plus high interest, not a wise option as I would be paying back more than what I took. Or I can choose to go public and announce an IPO (initial public offering), where I would break up my company into shares and sell the shares to the public. Anyone that wants to buy the shares will own a part of the company, but as a business, I will take the money to grow. An example of this would be General Motors after the financial crisis in 2008. They filed a government-approved bankruptcy in 2009 but managed to raise over $15.8 billion in 2010 through the IPO.
💹 How to Make a Profit
Let's say with my food business, I decided to offer 10,000 shares valued at £10 per share, and you bought 50 shares. You have to give me £500 in exchange for the 50 shares, which are said to be valued at £500. Now I can use that money to expand and grow, whereas you will hold those shares of the company, and depending on how well I perform, the value of the shares will increase. As other investors looking to invest would be paying you more money for those 50 shares you have. This is how the stock market works. People bid on the value of stocks depending on how well a business is performing. However, let's say my business is doing bad, then the value of your 50 shares would go down, so you would lose out on some money.
📈 Where to Buy Stocks
What you will need is a broker, just like our sponsor for today's video, XTB, a trusted and regulated platform that allows you to trade stocks. They're an award-winning company with a very user-friendly and advanced trading platform, so anyone can start, whether you're a pro or not. For example, let's say you want to buy some Apple stocks. All you will need to do is create an account on XTB's platform. Now you simply need to go ahead and find the stock that you want to buy. You can either search it by countries, or you can type it in the search bar. Then simply click the buy button, and you'll have bought yourself a stock. It's as simple as that. What's super cool is that XTB is offering zero commission trades on stocks, meaning that you won't be charged fees by XTB when making stock trades.
💰 How to Make Money
As mentioned in the start, you can make money from two things: capital gains and through dividend funds. Capital gains are simply any profit you make off when selling your stocks. For example, let's say you have a stock of Tesla, which you bought for £500. Now the stock price has gone up to £700, and you decided to sell the stock. You just made yourself £200 profit because 700 - 500 = 200. Another way to make money is through dividend funds. Let's say Tesla had a great year, and they made a lot of money. They can be kind enough to pay all their shareholders extra money for being loyal to the company. Apple is a well-known company that often gives dividends to their shareholders, as well as Coca-Cola and many other companies.
📊 What Should I Invest In?
Investing is a competitive market, and no one really knows when the stock will go up or down. It is all to do with experience. Moreover, when you make a profit, someone else on the other side is also losing money. When you sell a losing stock, someone else has to buy that stock. So if the price keeps going down, the person has essentially lost money. But the way I like to invest is to look into companies that I use on a daily basis and see a future in. For example, I have this Apple iPhone, and I do believe that this company will keep growing because as new iPhones or any new Apple products come out, Apple users buy them just because of how great of an ecosystem of products Apple has created and how interlinked each and every product Apple creates is. But I am not a trading expert, and this is just my way of investing long-term. So the best thing to do would be to learn from a platform like XTB, who provides you with comprehensive educational resources and one-to-one mentoring to help you improve your skills. Not to mention, they also provide you with the best market analysis tools to help you learn more about the companies you want to invest in.
📈 Investing in Index Funds
If you don't want to take the hassle of going into super detail of learning about what to invest in, then you can choose to simply invest in a basket of stocks called index funds, which are far safer than trading into individual stocks. If a stock fails, you're more likely to lose all your money. But in an index fund, when one individual stock fails, you have other companies to cover up the losses. My top favorite index funds are the S&P 500 that holds America's top 500 companies and Footsy 100, which holds the top 100 companies of the UK.
📝 Conclusion
To conclude, investing is a long-term game, and you won't see much result in the short term. Therefore, it is crucial that you remember to learn throughout the years from your experience, as that's the only way you would learn. Eventually, you would have built the life that you wanted to. First, understand where you stand before investing. Second, research on companies you want to invest in. Finally, set up a trading account so you can start trading. But most importantly, remember that investing is a long-term game.
🌟 Highlights
- Investing holds two types of income sources: capital gains and dividends.
- Removing your debt is so important before investing.
- An emergency fund is simply having some money around just in case an emergency arises.
- Stocks are simply a way for a business to raise money.
- XTB is offering zero commission trades on stocks.
- You can make money from two things: capital gains and through dividend funds.
- Investing is a competitive market, and no one really knows when the stock will go up or down.
- Index funds are far safer than trading into individual stocks.
- Investing is a long-term game.
❓ FAQ
Q: What is the importance of investing?
A: Investing is crucial for financial planning, as a single source of income is never going to be enough.
Q: What are the types of income sources?
A: There are seven types of income sources: earned income, profit income, interest income, rental income, capital gains income, dividend income, and royalty income.
Q: What is an emergency fund?
A: An emergency fund is simply having some money around just in case an emergency arises.
Q: What are stocks?
A: Stocks are simply a way for a business to raise money.
Q: What is XTB?
A: XTB is a trusted and regulated platform that allows you to trade stocks.
Q: How can you make money through investing?
A: You can make money from two things: capital gains and through dividend funds.
Q: What should I invest in?
A: Investing is a competitive market, and no one really knows when the stock will go up or down. It is all to do with experience.
Q: What are index funds?
A: Index funds are a basket of stocks that are far safer than trading into individual stocks.
Resources:
- XTB: https://www.xtb.com/
