Common Investing Questions

If you are new to investing in stocks then it might look somewhat overwhelming to begin with. But once you are familiar with a few of the basic principles of investing then it needn’t be too scary. Setting realistic expectations and taking time to research stocks that interest you are key factors when starting out. Below are some common questions about investing in stocks that are often asked by newcomers

Do I need to be a maths expert to start investing in the stock market?

You don’t need to be a maths expert, but an understanding of profit and loss, and some common sense, will stand you in good stead. Using the services of a trusted financial advisor will help steer you through the more complex aspects of investing. Numbers in the market can get complex, and in the early stages it helps if the financials are tracked by trained professionals. Having said that, many online accounts offer useful tools for keeping track of your investments and their returns/losses.

Can I use my existing bank account? Or will I have to do a mountain of paperwork to start a new one?

You will need a trading account, but you’ll be pleased to know that this is a fairly simple process nowadays and there won’t be mountains of paperwork involved. With online brokerage accounts your transactions will be in electronic form and almost all accounts will notify you of any transactions and keep you up-to-date with results and financials.

You can even start an account from your phone using the online banking app of your current bank or set up an account with another online broker. The process is usually quick and intuitive and designed to be easy to understand.

What are the various categories of companies to invest in?

Companies are categorised under large-cap companies, mid-cap companies and small-cap companies.

Large-cap companies are nationally recognised, established businesses dealing in high-quality and widely recognised products or services. They are also called blue-chip companies. In the UK these include the likes of Astrazeneca, Unilever, Rio Tinto and GlaxoSmithKline (to name but a few). These reside in the index of the largest UK companies - The FTSE 100. When investing in the stock market, it’s safest to start with long-established, stable companies with good reputations for financial management, and a skilled and experienced management team. Large-cap companies generally don’t experience dramatic rises in their share price, but neither do they experience dramatic falls. Large-caps are not as volatile and are therefore popular with investors looking for more stable places to invest their money.

Mid-cap companies have a market capitalisation that is too small for it to be a blue chip (or large cap), but which is bigger than a small cap. These include companies such as Domino's Pizza, Marks & Spencer, National Express, Dunelm and Pets at Home. There are no strict rules for identifying a company as a mid-cap. In the UK companies in the FTSE 250 index are considered mid-cap.

Small-cap companies are generally start-ups or companies that have yet to break into profit, often relying on investors who are more risk-tolerant and open to speculating on the companies’ future success. The risks with small-caps can be considerably higher and not all survive their early years. Small-caps may also return to their investors to raise additional funds for development. However, when a small-cap becomes successful, those who have invested early may enjoy considerable returns. It is advised that novice investors think very carefully before investing in a small-cap company and undertaking significant research into the financials and management team is advised.

How should I approach the risks?

Investing in the stock market is a risk you should take only if you have the fortitude to see your savings depreciate occasionally. The markets do fluctuate and volatility comes with the territory from time to time. Knowing whether or not to sell in these times is a difficult choice. Understanding why a stock’s price has fallen will help you decide – has the stock fallen due to a temporary blip in the market and it will recover in time, or is its fall down to something fundamentally wrong with a company or the industry in which it operates? Most experts will say that if you hold a stock for the long term (over 5 years +) you can expect the price will fluctuate, but good companies will weather the storms and you should eventually profit despite occasional market lapses.

The higher the returns you are after, the greater the risks that must be taken and many people fall foul of expecting huge returns in a short amount of time. Long-term investments of more than five years are generally safer. It is wise to cushion your losses by diversifying your investments over a range of investing areas. These can include investing in both growth and income stocks, investing in an array of sectors to protect yourself if one sector should suffer. There are also mutual funds, bonds, cryptocurrencies and so on. Build your financial portfolio by investing your money across multiple places. Whatever sum you have, divide it into parts and save.

These are all things to bear in mind, but one of the biggest risks in investing is not investing at all. While this sounds counter-intuitive, not investing your money is making you poorer and that’s a huge risk. Why? Because of inflation. Our money needs to grow at a rate at, or above, inflation in order for us not to see it depreciate in real world value. Many companies offer dividends that out-pace inflation of the interest in a savings account. This is why investing in the stock market is a popular, as it is a means to benefit from real financial growth.

Should I track stock movements daily?

The two types of investing in stock markets are intraday trading and long-term investing. Intraday trading, in effect, is gambling, albeit a considered gamble. You invest money in the morning, and you find out if you made profit or loss at the end of the day. In these cases, if you’re a novice, switching on news channels or checking financial website in the morning when the market opens helps. They make daily predictions and simplify the trends.

With long-term investments, it’s best to not track your stocks daily, but do keep an eye on them and check once every few weeks to avoid panic buying and selling.

Should I take a loan to invest?

If you need to take a loan then it’s best to avoid investing in high-risk markets. There is no guarantee of any returns in the market. An investor should always hope for the best but be prepared for the worst. Unforeseen events can affect the share market; the pandemic is good example of this.

Loans can be expensive, and you might find yourself paying a higher rate of interest than you are earning from your investments; if I take a loan that charges you 10% interest, but you’re earning 8% on your investment, you’re actually losing money.

So smart investors only use money that they can afford to lose and don’t over-stretch themselves financially or invest all of their life savings. Remember, you can make considerable sums of money by investing in the stock market, but you can also lose a lot of money if you invest unwisely.

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