Investing in the stock market can appear daunting to a beginner, but equities beat cash and bonds over most medium and long-term periods.
What to be aware of before investing
There are several things that investors should be aware of before committing money to the stock market.
“As a starting point, you need to decide what you want to achieve, how long you are planning to invest for and how much risk you are prepared to take,” says Patrick Connolly, certified financial planner at Chase de Vere, “as this will help you decide which investments are appropriate.”
Tales of other people's huge gains can be tempting, but the market won't always go in your favour and you must be prepared to see your investment drop as well as rise.
“You must understand your tolerance to risk rather than appetite for reward. Risk and reward go hand-in-hand, and any investor must consider the potential downsides before investing,” says Chadborn.
“Second, investors must understand the structure of the investment: look at the fund factsheet rather than the glossy marketing material,” he comments. “The factsheet will tell it warts and all, rather than what the company wants you to see.”
The costs involved in buying funds, trusts, shares or ETFs can vary hugely, and higher fees can easily eat away at future returns. To ensure value for money, Chadborn highlights the importance of comparing charges on different products.
“By buying directly from a fund supermarket, you'll benefit from reduced initial charges on funds, compared with a big retail outlet like a bank.”
That said, discount supermarkets and execution-only brokers don't offer advice, so for a novice investor, it may be better to seek independent advice from a financial adviser before making any investment decisions.
Without the help of a crystal ball, timing the market is impossible. Instead, look to invest regular premiums on a monthly basis rather than a depositing a lump sum into a fund.
By drip-feeding money in, it's possible to negate the risk of market timing - if the market falls, the regular premium will simply buy shares at a cheaper price the following month.
“Don't get swayed by investments just because they are at the top of the performance tables,” warns Connolly. “Strong recent performance should be seen as a warning sign, as the investment gains have already been made, rather than as an opportunity to buy.”
The final key point is that investments should be held for at least five years to smooth out any bumps in the market, but that doesn't mean once they're bought they can be left unchecked.
Connolly concurs: “Review investments every six months to ensure they are performing in line with expectations. If they aren't, try and understand why and then look to make changes if appropriate.”
We make every effort to ensure our beginner's guides are kept up-to-date. However, in the constantly shifting environment of investment and financial services, occasions may arise where elements of a guide become out-of-date. Please double-check the facts before taking any important financial decisions. This article was published in April 2015, but has been subsequently updated.