How to Start Investing? A Beginner’s Guide to the Capital Markets
Did you know that the stock market’s average annual return is 7%? Compare that to the low interest rates of savings accounts these days, which can go as low as 0.75%, and I think you will agree with me that you should at least consider investing.
There are generally three ways of getting started with investing in the stock market, each with its own advantages and disadvantages
Option 1: Pick Individual Stocks Yourself
There are quite a few ways to do this:
- Day trading: Buying and selling stocks within the same day to take advantage of small price movements. This requires discipline and a well-defined strategy for when to close positions.
- Swing trading: Finding patterns in the movement of stocks to identify price movements and then investing in those stocks for a period lasting anywhere from a few weeks to a few months.
- Value investing: Investing in companies whose price is disconnected from their real value. However, for that to work, you will need to study companies that have notalready been analysed by professionals who do that all day.
- Investing in companies with growing dividends: This one is mostly for people who like dividends – a cash reward which a company pays you for owning its shares.
- Algorithm-based investing: This is a strategy based on following a set of rules that you can find, for example, in financial academic publications.
The pros of picking stocks are that you feel more in control of how you invest your money. However, the cons are that you cannot mix a lot of different stocks in your portfolio and you will need to devote a lot of time to studying the markets.
Option 2: Buy an ETF That Tracks an Index
Instead of buying individual stocks, you can buy what is called an ETF. An ETF is a collection of securities, like stocks, that is centred around a certain theme. As an example, the SPY ETF tracks 500 of the largest US companies. In practice, what this means is that if you invest in the SPY, your performance would be a combination of the performance of those 500 companies.
The advantage of investing in ETFs is that they are diversified: you have a lot of different stocks, low costs, and you don’t need to be a financial expert. You could choose one or a few and just put money in them every month without worrying too much.
The cons are that it is a passive investment. It feels a little boring and, moreover, you do not have the great volatility that you sometimes get from individual stocks. Plus, you might end up investing in companies that you do not necessarily want in your portfolio.
Option 3: Delegate Investing to a Financial Advisor/Trader
Outside of eToro, you would pay a financial advisor to handle your investments. Here on eToro, you can copy a Popular Investor.
The advantage is that you can get the performance of an expert without having to know anything about the market.
The disadvantage of copying a trader is that you might not understand some of the decisions they make and feel stressed, increasing the risk that you might close your copy at a loss out of fear.
Investing in ETFs is a safe long-term bet, but it can get a little boring. It is a decent option if you like stability and don’t want to exert too much effort.
Individual stock picking is more exciting, but also more risky and requires a greater investment of time.
Copying a Popular Investor has the potential for high returns, but could also lead to losses, and in any case, you don’t have control of the trading and investment actions.
All you have to do is figure out which strategy is most suitable for you and invest your money accordingly.
Javier Martínez is a Popular Investor on eToro. Residing in France, he has a Master’s Degree in Computer Science & Business Management from the Paris Dauphine University.
How to Start Investing? A Beginner’s Guide to the Capital Markets from eToro.