The 6 Steps to Making your First Investment as a Novice

This post is written by Simon from the UK. Simon writes for Financial Expert.

Few arenas are as daunting for novices as the stock market. If you’ve watched plenty of movies, you might know the stock market as a ruthless place where fortunes are made and lost in a frenzy of adrenaline and machismo.

This might be how 1% of people experience investing, but that Hollywood image of Wall Street couldn’t be more misleading if it tried!

Recent decades have ushered in the great democratization of investing. It is no longer for just the rich, the ‘in-the-know’ and the well-connected.

Advances in technology have meant that investing is accessible to students, grandparents and just about anybody with an internet connection.

Away from the desks of screaming traders; savers and retirees quietly invest in a sensible range of investments and receive a rewarding growth in return.

When you invest in the stock market, you accept the risk that you may lose some of your money. Therefore it is still necessary that you educate yourself and understand the right steps to take before depositing that first dollar in an investment account.

Step 1: Understand your risk appetite

Investing isn’t for everyone. Some people just aren’t cut-out for the uncertainty and stress that comes along with a fluctuating stock price.

Investing beyond your personal tolerance simply isn’t worth it. Is a sweeter return on your investments worthwhile if the sacrifice is lost sleep? Let’s not lose sight of the fact that investments are a tool to improve, not reduce, our quality of life.

Do: Accept the risk of short term losses and resign yourself to the fact that it’s more a case of when, and not if they will occur.

Don’t: Invest on the grounds that you expect to be able to avoid losses, due to good timing or the careful selection of investments.

Step 2: Match your investments to your time horizon

Higher risk investments like stocks are risky because they are unpredictable. While a statistician can tell you that the ‘average historical return’ from stocks is between 8% – 10% per year, this isn’t a short term guarantee. The annual return on stocks could be 20 percentage points above or below that average!

It is only over longer periods of time that these scattered returns begin to converge towards that neat 8% figure.

This is why financial advisers would only recommend stocks to a client if they were able to invest for 5+ years. You should follow this rule too. Over any shorter period, the chance of disappointment becomes quite possible.

Step 3: Design an asset allocation

Before you can begin researching investment options, an earlier choice must be made: how will you allocate your money to different asset classes?

Examples of asset classes include; stocks, property, bonds and cash.

The prices of different asset classes react in different ways to the same headlines. This is because their valuation is driven by different factors.

This makes it useful to combine multiple asset classes in your portfolio and let these ups and downs partially cancel out. This is known as practising ‘asset allocation’, and it helps to generate a smoother return.

If you put too much into safer investments like cash & bonds, your portfolio returns will be reduced. But allocate too much to stocks, and your account value might become too volatile.

Asset allocation is about creating the right trade-off between risk and return that works for you. There are many ‘model portfolios’ online to give you ideas.

Step 4: Pick individual investments

As a novice, you may lack the knowledge or patience to spend time picking individual company stocks and bonds.

The need to diversify across at least 20+ assets to spread your risk means that this individual investment approach can be time-consuming and costly.

This is why many amateur investors use mutual funds/unit trusts instead. When you invest in a fund or trust, you allow the manager to use your money to buy a whole basket of assets in accordance with the investing style of that fund.

Examples of funds include an S&P 500 Equities fund, which invests in every member of the S&P 500 index of US corporations. Funds exist for just about every class of asset, including bonds, property and even commodities like gold.

This is ideal for the investor, who now only needs to make a few purchases rather than 20+. It enables a relatively ‘hands-off’ investing experience.

Step 5: Choose a stockbroker

To get access to your investments you’ll need to become a client of an investing platform.

Investing platforms go by many names, but offer a similar experience:

• Stockbroker
• Share dealing service
• Investment account
• Fund supermarket

The key thing to look out for is whether the account restricts purchases to funds, or whether it allows direct purchases of stocks and bonds too.

Beyond this functionality, the major point that separates the large providers is their fee structure. This is probably what you will use to pick your favourite.

Investing platforms typically charge a quarterly or annual ‘account fee’, plus a fixed fee per trade. Naturally, the less money you pay to your stockbroker, the more cash you will be able to put to work in generating returns.

Step 6: Place your first trade

So, let’s assume that you have decided that you have the right temperament and time period to flourish as an investor.

You’ve drawn up a plan on how you’ll split your money across two or three asset classes. You’ve picked a fund for each, and have found a trusty stockbroker to act as your partner in crime.

The only thing left to do is placing your first trade! This is actually quite an exciting thing to do and there are very few things you need to know.

Your broker will only ask you for the following information:

1) Investment name

You can also search by the unique ticker symbol which each company is assigned. This is usually 2-4 characters. For example, the ticker symbol for Coca Cola is KO.

Sometimes funds issue two types of units – ones that pay dividends and ones that automatically reinvest them. Less commonly, companies themselves can also have multiple ‘classes of stocks’ with different rights attached.

For this reason, it’s usually safer to use a ticker symbol to select your investment to ensure that you’re investing in precisely what you wanted.

2) Number of stocks/units OR amount you want to spend

Brokers allow you to specify the quantity of stocks/units you want to purchase, or how much you want to spend.

It’s advisable to always input your investment as a dollar amount. This way, you let the broker do the math as to how many stocks or units this equates to.

After inputting the information, a stockbroker will produce a final quote that is valid for only a moment (such as 30 seconds). This shows you how much you’ll pay and what you’ll receive in return. Double-check this information then confirm the trade.

After approximately 3 days, the trade will have fully cleared and settled, and the investments will appear in your account.

Congratulations, you are now an investor!

For more information: The author also writes for Financial-Expert.co.uk. Financial Expert is a blog which crams its posts into three free investing courses. Navigate through them to master the art of investing in stocks & shares.