A guide to student Investing
Max Joyston presents a investment guide for students new to investing.
Investing is putting money into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit. This guide will demonstrate how to get started (even with as little as £1) and show the importance of investing at a young age along with looking at potential risks involved.
A share or stock is an ownership certificate of a company. When buying a share, you buy a portion of a company. You make money from investing either when the share increases in value or when it pays dividends. Stock markets are where investors come together to buy and sell shares – done in electronic marketplaces.
What could I achieve with investing?
The average stock market return – money made or lost on an investment over some period of time – is 10% a year but it varies by the year and by the companies you invest in. Interest compounds on itself so the mega- earners from the stock market have tended to leave their money over a long period of time. Let us have a look at the power of compound interest (interest on interest) and its effect on savings:
If you invest £5,000 aged 22 with a market return of 10% (the stock market average), by age 65 (UK retirement age) you would have made £301,200. If you make better stock choices than the market average, a potentially feasible return on the market could be 20% annually (Warren Buffet-a leading investor- has managed to achieve this), that same £5,000 investment could be worth £12,698,826 by retirement age. Many leave this money in savings accounts which now on average pay out a measly 0.06% interest per year. Investor tycoon Robert G Allen encourages switching money from your savings to investment account. He states: ‘How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case’
What are the risks involved?
It is important to understand the risks involved when investing and that past performance is no indicator of future success. Many see investing in stocks as a gamble – you can win big but also loose just as badly. Typically, higher-risk investments tend to have the potential of returning greater returns in comparison to lower risk investments with lower returns. Before starting to invest it is important to ask yourself ‘how willing am I to take risk?’ and ‘can I afford to lose some of this money?’ If the answer is no to the latter, you should be looking at safer, lower return investment ideas.
Before starting to invest it is important to ask yourself ‘how willing am I to take risk?’ and ‘can I afford to lose some of this money?’
Other ways to diminish risk would be to diversify your investments – a strategy that mixes a wide variety of investments across countries, industries or investment types. This could involve investing in Apple (a US technology sector leader) but also in Boohoo (a UK clothing retailer) or gold. A drop in the share price of Apple would not necessarily relate to a drop in Boohoo shares or global gold prices.
As a general rule of thumb, it’s important to invest for at least 5 years to give you time to ride out any short-term bumps along the way. Shares have gone up over time so as long as that trend continues (far from being guaranteed) you should hopefully be making profit.
Which platform should I use?
To invest you need a stockbroker platform. I recommend commission-free brokers (such as Trading 212, eToro or Plus500). I use Trading 212 as it has a very easy-to-use mobile app. I’d recommend opening up an ISA account – a way of investing where you can put in up to £20,000 a year in stocks where you won’t be subjected to paying capital gains or dividends tax on your earnings. Trading 212 also boasts fraction investing where you can buy tiny fractions of shares in the largest companies for as little as £1.