Investing in the stock market used to have a much higher barrier to entry than it has today. It’s impressive to see how much the markets have been democratized over such a short period.
Investors big and small can now trade assets in real-time with very little starting capital and with nothing but a laptop, tablet, or any handheld device with an internet connection. There are now more financial products than ever and it can be difficult for beginners to know which option would be the best for them based on costs, risks, and learning curve. Let’s take a look at some of the best investment options for those getting started and some of the pros and cons of each.
The Forex Market
We will start with the forex market since this is the market most people associate with beginner traders. And there are many reasons for that.
For one, no one has to explain how money works to the average layperson. Compare this with things like options that even some advanced traders still can’t fully understand. Understanding how people make money on trading forex is easy to explain as well, so this makes the asset more accessible to most.
Then there’s the fact that virtually anyone can start trading, even if it’s with a few pounds and a PayPal account. Forex is also the most liquid market on the planet, meaning that you can get in and out of positions quickly and will have no trouble finding buyers no matter the time of the day. Forex is always open and you don’t have to wait for the markets to open or close like the stock market.
Then there’s the controversial topic of leverage. Leverage is when you are allowed to control a much larger position than what you actually put in. This is done by allowing you to borrow from your broker. The limit for leverage in the UK is 30:1 for major currency pairs. Meaning that you can only control up to 30 times what you put it. However, there are brokers out there that will offer ratios as high as 200:1, though these are not allowed to operate in the country.
While leverage can be a great way to maximize a small position, it also comes with a fair share of risk. Mismanaging leverage is probably one of the most common reasons beginners end up burning themselves.
Other things might not make forex the best option for beginners. First, the market is not centralized and therefore not as tightly regulated like the stock market. That means that choosing the right broker is very important as you may lose control of your money once you’ve handed over a trade. Also, choosing the wrong broker could mean that you may have little to no recourse against them in case something goes wrong.
Forex is also much more complex than many imagine, and you can think twice about trading the news and current events. Trying to catch a trend on a market like forex is much more difficult than one with strict opening and closing times, so be prepared to do quite a bit of learning before you can start moving confidently.
ETFs have been greatly increasing in popularity and are one of the most interesting financial instruments you can find. While they can be great for anyone, they’re an especially great option for beginners for many reasons. But what are ETFs, exactly?
ETFs, which stands for exchange traded funds, work like a basket of different assets that you can trade as you would stocks. That’s what differentiates them from mutual funds. ETFs can have all sorts of things in them from regular stocks to bonds to commodities like gold. They can also be used to track entire sectors.
However, they should not be mistaken with index funds. Unlike index funds, ETFs do not have to cover an entire market. While ETFs and index funds have lots in common, they also have some fundamental differences that might make one a better option than the other for certain investors.
This is why we suggest you check out this post on ETF vs index funds by WealthSimple. It gives you a detailed introduction to what ETFs are and how they compare with index and mutual funds. They also give you a few pointers to help you pick the right one between the two and which one would be the best based on your profile and investing style.
One of the biggest differences between index funds and ETFs is that index funds will buy you a tiny fraction of every stock in one of the major indices, like the FTSE or the UK 100, while ETFs can either be a mixed bag of assets or made to reflect a certain industry or even countries. It’s that flexibility coupled with not having to study every single stock that makes ETFs such a popular choice. But they’re not perfect.
For one, you might only be limited to big-cap companies depending on the market. This means that you’re missing out on opportunities for growth for smaller and mid-cap stocks. There’s also less potential for dividends. High volatility also means that they’re not the best option if you were thinking of going in for the long haul.
Target Date Mutual Funds
Target date mutual funds are a great option for people who want to invest as passively as they can. These are like proto-robo advisors and are still very popular today.
How they work is simple. Mutual funds are a collection of investments usually consisting of a mix of stocks and bonds. Target date mutual funds are made with retirement in mind. Target date funds will be set for a specific year, and investments will be made as you get closer to the expiry date.
Since this is made with retirement in mind, your assets will slowly be shifted from stocks to bonds as most will need security as they grow older. More of your investment will be in stocks in the first years as this will allow you to make greater returns.
You should also know that the content of funds can vary. Some will have more domestic equity than others, for instance, while some will have a larger proportion of foreign bonds.
This is still, however, a great option if all you want is to get some reasonable appreciation with minimal risk. But you need to be careful who you deal with as target date funds are a collection of portfolios that are all controlled by one fund company. This means that if it defaults, your whole assets will be in the hands of that group.
Stocks through Investment Apps and Robo Advisor
You then have your traditional stocks that can now be traded by everyone no matter what experience they have through various means. One of the most popular is using a robo advisor.
If you don’t know what a robo advisor is, these are bots that will use algorithms to manage your portfolio for you. You can choose to have as much control as you want over the decision that it makes, or you can let it run virtually on autopilot. Robo advisors are great because they don’t require that you know the stock market in depth. They also have a low cost, which reduces commissions.
This is a great option for someone who has limited capital to invest and wants to let someone else do the work. While you shouldn’t let the robo advisor do everything, you can still manage it from afar and make good returns.
Not only that, but a robo advisor can be used as a learning tool too. For instance, you can check out what kind of portfolio it creates for you and analyse the choices.
Investment apps are another great option. You have apps like Moneybox and Acorn that allow you to save money on your everyday expenses that you can reinvest in things like exchange traded funds. These services will also act as a robo advisor and allow you to make automated investment decisions based on your criteria and input. This is a good option for those who would like to invest with very little capital and experience. This is also a great tool to start learning about the stock market and investing without taking too much risk.
But, like any option, robo advisors aren’t perfect. For one, the savings they allow you to make are sometimes a bit exaggerated when considering the many real-life advisors that will charge you on a per-service base. Robo advisors also won’t be there to take you by the hand and walk you off the ledge in case the markets suddenly crash.
So, if you still didn’t know which investment option would be the best for you as a beginner, we hope we were able to help. Take your time and learn as much as you can before you spend a single penny of your hard-earned money.