1. Why should I invest?
The easy answer to that question is: so that you can make your money work for you. Investing money allows you to ‘grow’ your money without having to go out and work a double shift for it.
There are, broadly speaking, two types of investor:
Type A: Those who want to buy and sell quickly in order to make more money in a short frame of time. High risk, high reward.
Type B: Those who are investing for the long term. Usually this is someone who is investing in order to get the benefits later on for their pension and twilight years.
You need to decide which type of investor you’re going to be, and what the reason is you have for investing before you even think about starting up an account.
2. How much should I invest?
Again, this question has a simple initial answer: no more than you can afford to lose.
This comes back to what kind of investor you are. Remember that if you decide you want to be investor ‘A’ (quick buy, quick sell), then you need to remember that you will be paying out large amounts in trading fees. These will eat into your profits, so you may find you need to initially spend a little more in order to account for them. Keep this in mind when deciding how much money you can afford to plough into this venture.
If you’re Type B, the long term investor, then you won’t be as slammed by trading fees, but you should still keep in mind that investment is not 100% guaranteed, and you can lose all your money overnight. Keep an eye on your investments but don’t plough everything you have into them because you could easily be left with nothing.
3. Which is safer, bonds or stocks?
As detailed in our post investing: the basics, bonds and stocks are different investment options.
Whereas a stock is a share issued by a corporation, a bond is essentially a loan. Instead of, as with stocks, buying a share of a company, you are instead agreeing to loan the company money.
For this reason, bonds are traditionally seen as the ‘safer’ investment option. The money you make on a bond is essentially the company paying you interest on your loans, just as you have to pay on your own credit card or bank loans. They are not the same as stocks, which rise in proportion to the value of the company on the stock market. For this reason they are more steady and reliable than stocks, but lack the ‘high risk, high reward’ element.
4. Should I choose my own stocks?
This is really down to you. With the golden age of the Internet you can do a lot of thorough research and make your own informed decisions. If there are stocks you really feel passionately about buying, then by all means invest. However, don’t expect to ‘beat the market’ in this way.
It is worth noting though, that the job of a stockbroker exists purely because they are the go do experts on all things stock. You wouldn’t perform your own surgery; you’d look for an expert surgeon. The same goes for buying stocks. Why risk buying your own in a market you don’t fully understand, when there are experts you can seek advice from.