Investing for beginners
Why are many people intimidated by the thought of investing?
It seems intense, risky, expensive and complicated. You tend to think of fancy graphs, unreadable data and terminology that practically sounds like its own language. It’s a field either for the super-rich who can afford to take a financial leap of faith and land on their feet, or that one high school friend you haven’t seen in years selling you some overnight investment crash course.
The truth is yes, there is a lot more to the world of investment than meets the eye. Finance is a broad field of study, you won’t become an expert overnight and it certainly isn’t a “get rich quick scheme”. That doesn’t mean one needs to be an expert to take their first steps in investing. It’s also true that for a long time, investment had generally been available among the rich, however, times have changed. As technology continues to develop, access to affordable investment options as well as fundamental knowledge in how to get started in investing have never been easier.
For those tired of being on the periphery, here’s a short beginner’s guide to investing; what it is, its categories, and how you can get started on your investment journey affordably.
So… what is investing?
In a nutshell, an investment is any kind of asset purchased with the expectation of it generating wealth in the future. Thus, the act of investing is putting forward a resource (material or otherwise) towards said asset. As an example of how investing works, let’s say you bought a pair of shoes, not just any shoes but some rare, highly collectable shoes. Maybe they were signed by an athlete or are out of production. Either way, you bought them with the expectation that their value will increase over time, and you could then sell them at a higher price than what you bought them for. Those shoes are no longer an accessory but an investment. The same principle could be applied to a house you don’t intend to live in whether you sell it or rent it out, that house becomes a wealth-generating asset. That’s the gist of how investing works.
Investing doesn’t always entail a financial component, for instance, the time you spend building up your business is time invested with the hope of a greater return. The governing principle generally remains the same. Assets that demand greater investment also offer greater returns, however, they also involve greater risk.
Investing is not quite the same as trading, though the two are often conflated with one another. Trading (in assets such as stocks) involves a more frequent exchange in assets, whereas with investing, the returns are not seen immediately- you’re putting your money away for a longer period of time. In short, investing usually entails a long-term payoff whereas trading occurs in a shorter time frame.
Why is investing so important?
Of the host of reasons why investing is important on a personal and societal level, one word springs to mind: inflation.
Inflation refers to the depreciation in a currency’s value over time, which decreases its buying power and leads to increased prices of goods and commodities. These days you’ll hear plenty about how expensive everything is. The housing market has become increasingly inaccessible to young people, and basic income doesn’t seem to reflect the rise in day-to-day living costs. These issues can be exacerbated by a variety of economic conditions; recession, rise in unemployment etc. As such there’s no guarantee that a currency’s value will hold.
“Big deal”, you might think. “So I’ll just save my money for a rainy day, why not”?
Of course, saving has its merits and is something that should be practised by all. It’s true that saving does not bring the element of risk that investing would, however, it wouldn’t offer the same opportunity for growth either. Whilst saving excludes the possibility of incurring a loss, it means your money is stagnant, not accumulating more wealth. At the same time, it also does nothing to circumvent the problem of inflation, and so that money would still depreciate over time.
Conventional ISAs (Independent Savings Accounts) would generate wealth through interest, however, this would prove problematic for demographics such as the Muslim customer, whose religion prohibits the practice of usury.
Investing your money prevents stagnation. By keeping it in circulation and compounding wealth, not only do you generate wealth, but that wealth you generate is reinvested and increases your returns. Why let your money gather dust when you can apply it productively and generate a profit?
Investing isn’t all about personal gain either, it can actually stimulate an economy. The more wealth people accumulate, the more likely they are to spend it. This ensures more money is in circulation, it increases trade in a given currency thus strengthening it and benefitting the wider economy.
Before you get started…
You might be eager to get into the meat and potatoes of it all, but before looking into investment options, there’s a few things that need to be considered:
What are your financial goals?
Whether it’s saving up for a new house, retirement, pilgrimage, your kid’s education etc. knowing what you hope to achieve will help shape your investment decisions.
How much are you able to commit?
Like setting your goals, figuring out how much you can commit will also help shape your decisions. Set a personal investment budget, mapping out your expenses and calculating your disposable income. In addition, ask yourself how much money you can afford to set aside without the expectation of seeing it for a number of years. This is the long game. Remember that investment isn’t the same as saving, and will require some commitment and patience. By asking yourself these questions you’ll get a better picture of what options you have and what assets your budget will feasibly allow you to invest in.
What’s your risk tolerance?
How much are you prepared to risk? It might sound scary, and in fact the opposite of why you’re investing, but whilst looking for opportunities to make the most profit, remind yourself that you may lose some in the process. Manage your own expectations, consider the risk factor of each investment and decide how much you are willing to tolerate even if it means forgoing what seems like the more profitable option at times.
What’s your current financial status?
This goes hand-in-hand with the point on budgeting and commitment, and could be the difference between you taking and not taking that first step. Do you have any outstanding debts and crucial expenses? If so, then make sure they’re settled. Don’t complicate your situation with other ventures. Make sure your house is in order before you get started on your journey.
Types of Investments for Beginners
Stock might be the first kind of asset that comes to mind when people think of investing. Stock represents a fraction of ownership in a company. People purchase stock with the hope that the given company’s value increases, meaning that they could potentially sell that same stock at a higher price (think “shoes” again).
There are undoubtedly plenty of benefits to investing in stock. It can prove to be incredibly lucrative and relative to other investments the payoff time frame can be shorter at times. For first time investors, however, directly trading in stock may not be the best starting place. Investing and trading in individual stocks can carry a degree of risk which could be difficult to judge for those unfamiliar with the market.
Funds may prove a safer option for first time investors. A fund is effectively a collection of investments. Purchasing a share of a fund effectively means your one investment is split among the assets encompassed by that fund. It hits multiple birds with one stone and reduces the risk factor by spreading the investment across a number of products. There’s a wide variety of funds available which take many different forms and structures. Mutual Funds are managed by financial experts who drive the investment decisions of the fund. Index Funds and ETFs (Exchange-traded funds) exclude the manager and instead track market indexes; catalogues of investments that represent part of the market.
Robo-advisors may be one of the biggest leaps in Financial Technology and offer arguably the most straight-forward avenue for budding investors. As with some of the funds mentioned, robo-advisors operate without a manager. Instead they manage investments through computer algorithms and take on most of the work on behalf of the investor. Aside from the convenience they offer customers, due to the reduced need for labour, they are also far more affordable, excluding many fees which may arise with other investment services. Most conventional investing options charge for professional services and also have a minimum required investment to access those services. Both of these hurdles are drastically reduced with robo-advisors with many charging less than 1% per annum and allowing customers to invest for under £100. This opens the doors for people from lower income backgrounds who would otherwise be excluded from conventional investment opportunities.
Why Wahed is a great starting point
The investment scene is changing in a big way with the emergence and rapid development of Fintech. Wahed has been a significant part of that change. Since launching in 2015 through to today, our flagship robo-advisor has been tried, tested and improved. In fact, it was the first robo-advisor of its kind, centred on halal finance and providing ethically sound investment solutions for the average customer. Over the past 6 years, we’ve accrued a customer base of over 200,000 investors worldwide across all entities, and that number keeps growing.
Our app streamlines and simplifies the process of setting up an investment account, walking you through the process in an easy-to-follow way. The app takes into account your goals, commitment and risk tolerance in order to tailor your portfolio to your aims and preferences. Through our app, you can open an account in minutes with a minimum of just £50 (UK)/ $100 (US)/ RM100 (Malaysia) and keep track of your progress.
Our technology allows us to charge a fraction of conventional prices, with a flat rate of £2.99 for accounts under £10,000 and an annual fee of only 0.49% for accounts above £10,000. For our US and Malaysian readers, that’s 0.79% for accounts up to $99,999 or RM49,999.
We understand that while investing for the long-term is best, life happens and you may need to see your returns sooner than later. With our No Lock-In policy, you can make a deposit or withdrawal request at any time.
Simple, affordable and overseen by an experienced investment committee, *Wahed is an ideal investment app for beginners.
Don’t put all your eggs in one basket– It might sound cliche, but it’s not without its merit! It’s why funds make for great investments. Don’t put all your weight behind a single investment. When you hear experts say things like “diversify your portfolio”, this is what they mean. Spread your investment across a range of assets, not only does it reduce risk but it opens new avenues for potential profit.
Take small steps– especially if you don’t have a lot of disposable income to begin with. Don’t be discouraged by costly services. See what’s in your ballpark and invest little by little. Look to low-minimum services and set up small quarterly transfers. This is where change saving apps come in handy.
Keep an emergency fund– As much as we’ve talked about investment here, saving is still important. Things can go south real quick, personal circumstances (health, work, other emergencies…) can flip in an instant and priorities change. Make sure you have some cash to readily dip into when needed.
Educate yourself– No matter how easy it is these days to delegate the whole investment process to someone else, and no matter how convenient these new technologies make things, it’s important to make sure you know what you’re getting into. What do reasonable fees look like? Are you picking the best and most reliable services? What’s the most effective way to budget and save for your investment? Investing in your financial literacy is just as valuable as investing in any material asset.
*As with any investment, a Wahed Invest Ltd investment puts your money at risk, as the value of your investment can go down as well as up. If you are unsure about whether investing is right for you, please seek expert financial advice.