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The Ultimate Beginners Guide to Online Investing

Reading time: 18 minutes

Knowing how to use your money today to earn more for the future could be a daunting task for a beginner, but it is a great way to ensure a financially secure future. Just letting your capital sit idle in your bank account won't help you save much for the long term. You should considering investing in lucrative markets, so that you can increase the rate of returns with high risk optimisation.

The UK, being one of the largest economies in the world, with the second highest GDP in Europe, provides a wide range of investment options. The London Stock Exchange has a market capitalisation of approximately $6 trillion. It is home to stocks from almost 3,000 companies from over 60 countries worldwide. In this article, we take a look at how to invest money, some of the best investment options for you in the UK, and how to go about it. But, before you decide where to invest money, you need to know why you should invest.

Ultimate Guide To Investing

Why Should You Invest Money?

The topic of investing for beginners will typically begin with this question. The simple answer is to build your wealth. Due to inflation, the value of the Pound (GBP) decreases over time. This means that the basket of goods and services you can buy with say, £100, would continue to shrink over time, as inflation increases the prices of commodities. So, you'd want to invest your money, or put it in ventures that offer the potential to earn high rates of return, in order to grow your wealth over time. Looking at it another way, by not investing your money, you're not only foregoing opportunities to potentially increase your financial worth, but you are also effectively reducing what you do have.

There are a number of investment vehicles, such as stocks, bonds, ETFs, Forex, CFDs, commodities and the more recent addition to the list: cryptocurrencies. Most of these options offer the potential to earn a much higher rate of returns compared with a savings account. It's important to remember, however, that they also involve different degrees of risk.

As the name suggests, a savings account is meant to help you save or put away money for a 'rainy day'. Investing, on the other hand, is focused on trying to make your money grow by putting it into a number of investment vehicles (ventures) that you believe will increase in value over time. People invest for all sorts of reasons, like creating wealth for the long term, planning for retirement, meeting financial goals, or simply adding to their disposable income. Some investment products offer tax benefits, which translates to the double benefit of tax saving and capital gains.

How Much Money to Invest?

When considering investing for beginners, how do traders determine the amount of money to invest? This depends on two main factors – your financial goal and your level of risk tolerance. You may want to begin with identifying your financial goals. What would you need money for in the future? It could be to buy a house or a car, to fund your child's college education, to plan holidays abroad, to start or grow a business or a new venture, or perhaps to simply have adequate funds when you retire. Establishing answers to these questions will provide you with an idea of your financial goal.

The next aspect to consider is your risk tolerance, or your ability to take risk. This depends on factors such as your current income, savings, expenses, financial obligations (like paying off a mortgage) and appropriate life and health insurance cover. You may also consider your investment horizon, or the amount of time for which the funds can be put away without you needing them. The power of compounding makes a few percentage points appear massive after long periods of time. So, both extended timelines and higher rates of return could potentially give you the same results. This is what makes investment interesting and suitable for different goals.

When and How Should You Start Investing?

If you have saved enough funds to support you for at least six months, it's probably the right time to consider putting your money to better use. After gaining a strong understanding of your reasons for investing, together with understanding your risk tolerance, you will be better equipped to define your broad investment strategy. Your investment strategy would determine the percentage of funds to be invested in higher risk, higher reward options, such as stocks, commodities and CFDs, and the percentage of funds that exposes you to lower or no market risk, like your savings account, property assets or a trust fund. These options make up your investment portfolio.

It is important to know the amount of energy you're willing to put into this. If you are doing this to earn a second income, whilst also maintaining a stable job, you may prefer longer-term strategies, and therefore, may choose to invest in bonds. In the case that you are investing full time, short-term strategies could be beneficial, such as day trading or scalping. Your risk tolerance is influenced by the time remaining for the realisation of your financial goals. If you have some years to go before you need the funds, you could expose your portfolio to higher-risk, higher-reward investment options.

Younger generations who have decades remaining before they reach their retirement age can probably afford to take more risks. A high-risk, high-return investment strategy will include a stock-heavy portfolio, or even trading in lucrative crypto CFDs. As you grow older, your strategy might turn into a lower-risk, lower-return profile. The currency and commodity markets are highly liquid, and are mostly stable environments for traders between the ages of 30 to 60. This could also be a time when you choose to reduce your stock holdings. Remember, there is no set formula here; it all depends on your current finances, your long-term financial goals, and your risk tolerance. Now, let's look at some of the best ways to invest money in the UK markets.

Where to Invest Money

By now you might be wondering what to invest in. Investors put money in the UK markets through a variety of methods, from direct investment in the London Stock Exchange to easy-to-use ETFs. The list can be huge.

Investing in Stocks and Shares

A stock represents ownership of a publicly listed company. Firms issue stocks to invite investment in their businesses. Stocks represent a claim on the company's earnings and assets. Shares are traded either on formal exchanges or over-the-counter (OTC) marketplaces. There are two ways of potentially earning from stocks. If an investor is able to purchase shares when prices are low and sell when prices have risen, a profit is made.

This is known as capital gain. For this, investors attempt to identify fast-growing companies. Shares of such companies are attractive to both day traders and buy-and-hold investors. The other way to earn is via dividend payouts. When you purchase shares of a company, you're entitled to a share in the profits generated by that company. This is known as a dividend, which can provide a regular stream of income for investors.

The most popularly traded shares belong to dominant leaders within their respective industries. Some of these companies include:

  • The Coca-Cola Company (KO)
  • Wal-Mart Stores (WMT)
  • General Electric Co. (GE)
  • IBM Corp (IBM)
  • McDonald's Corp (MCD)
  • Apple Inc (AAPL)

In the UK, the London Stock Exchange is where public limited companies are traded, along with other instruments, such as derivatives and government bonds. Stock market indices are also popular trading instruments. These indices summarise the performance of certain groups of stocks. For instance, the FTSE 100, which is the most popular index in the London Stock Exchange, is comprised of the top 100 publicly traded companies.

Other indices include:

  • DAX30
  • S&P500
  • CAC40
  • DJI30

Always make sure to choose an Financial Conduct Authority (FCA) regulated broker when you trade with these indices. Traders can either buy shares or take advantage of broad moves in the stock market with CFDs on benchmark indices of the world´s largest financial exchanges.

Invest In Stocks & ETFs

ETFs (Exchange Traded Funds)

One of the best ways to invest money in the UK markets is through ETFs or Exchange-Traded Funds. These are a collection of stocks belonging to a specific industry. ETFs are index-based investments, the performance of which is based on correlating indices. The goal is to mimic the returns of the latter. One can buy and sell units at prevailing prices on a real time basis within market hours. To be successful in trading ETFs, you need to accurately predict the performance of a bunch of companies to make a move.

Some of the best ETFs to invest in for the UK market are:

  • iShares Core DAX UCITS ETF (EXS1)
  • iShares Core FTSE 100 UCITS ETF (ISF)
  • LYXOR EURO STOXX BANKS DR UCITS ETF (BNKE)
  • Xtrackers DAX UCITS ETF (DBXD)

Leveraged ETFs provide you with the opportunity to trade positions up to 5 times your account balance. You can also earn dividends on long positions.

How to Invest Money in Forex

The Foreign Exchange Market (also known as the Forex market or the FX market) is where the trading of currencies takes place. Forex is the most liquid market in the world, with an average daily turnover of approximately $5.3 trillion. The markets are open 24-hours, five days a week, providing an opportunity for many hobbyist traders to participate. The transaction cost is typically low and built into the price for forex investing. This is known as the spread, which is the difference between the buying and selling price.

Unlike in the equity market, in Forex it's possible to profit from both rising and falling prices. This is because when the price of a currency falls in value, it's measured against another currency. This means the latter rises against the former. You can go long on a currency pair that you believe is going to rise in value; and you can go short on a pair that you expect to decline in value.

As a currency trader, you need to stay updated on key factors that determine price movements, such as political and economic stability, monetary policies, currency intervention, and other factors such as natural disasters. For this, you would need to stay abreast of Forex news, you would need to use tools such as the Forex calendar, and you would need access to Forex signals and Forex charts. All these will help you to identify high-performing FX currency pairs. It is also important to note that there are different types of Forex pairs, including 'Forex Majors', 'Forex Minors' and 'Exotic Pairs'.

Among the most liquid currency pairs in the market are:

  • GBPUSD
  • EURUSD

Other important currency pairs include:

  • USDCHF
  • USDJPY

Trade Forex & CFDs

How to Invest Money in Cryptocurrencies

Investing in cryptocurrency can be extremely exciting. Cryptocurrency trading has now become mainstream, especially after the phenomenal growth of this market back in 2017. Given the high volatility within the crypto markets, traders are exposed to a larger number of attractive opportunities to enter and exit trades. Bitcoin remains the leader, and all other cryptos are known as altcoins (or alternatives to Bitcoin). As of September 25, 2018, the cryptocurrency market cap was higher than $206 billion, with Bitcoin's market cap at $110 billion. With greater mainstream adoption of this digital asset class, the value of the crypto market is poised for growth in the coming years.

The most commonly traded crypto pairs are:

  • BTC/USD (Bitcoin vs US dollar)
  • BCH/USD (Bitcoin Cash vs US Dollar)
  • ETH/USD (Ethereum vs US Dollar)
  • LTC/USD (Litecoin vs US Dollar)
  • XRP/USD (Ripple vs US Dollar)

Trading cryptos on online exchanges poses a high security risk. If you wish to trade with virtual assets, it's recommended to invest in crypto CFDs, where you can take positions in both rising and falling markets, without having to own the underlying asset. Admiral Markets offers traders the ability to trade on several different CFDS on cryptocurrencies, some of which are listed above.

Commodities

Commodities include raw materials. These could be: agricultural produce, like grains, corn and cotton; metals like gold, silver, copper and zinc; or energy commodities, such as crude oil, natural gas and propane. They are traded on separate exchanges, and even have specialized exchanges. For instance, the London Metal Exchange carries only metal commodities.

The most commonly traded commodities are:

  • Gold
  • Silver
  • WTI Crude Oil
  • Natural Gas

Commodities are a good asset class for portfolio diversification. This is because returns on commodities typically have a low to negative correlation with the returns of other major asset classes. For instance, when equities and bonds decline in value, the price of commodities rise. Factors affecting the stock and bond markets may not have any impact on commodities. Therefore, a portfolio that includes commodities would typically have fewer volatile returns.

Commodities are also used as inflation protection. Inflation causes the currency to depreciate, resulting in an erosion of the real value of financial assets, such as stocks and bonds. On the other hand, inflation causes a rise in commodity prices. Some commodities, such as gold and silver, are considered a safe-haven investment. Geopolitical uncertainties, natural disasters, and economic crises have a negative impact on most financial assets. During such times, investors flock towards commodities like gold and silver, resulting in a rise in their prices.

Some traders decide to stay away from commodities due to the complexity and volatility of this market. Such traders also have the option of trading with commodity CFDs instead, thereby leveraging all the benefits without actually owning the asset. Commodity CFDs provide higher leverage and offer traders the opportunity to profit from both rising and falling markets.

Bonds

So, what are bonds? Companies, governments, and their agencies issue bonds to raise capital. All bonds have a par value, an interest rate, and a maturity date. The bond is bought at par value from the issuer; and the issuer periodically pays interest to those who invest in these. The bond market is also known as the fixed-income market. The financial instruments are debt instruments, and they are called debt securities.

The main advantage for investors is that bonds offer fixed-income payments. Many government bonds are tax free, meaning that the interest income is exempt from taxes, so one enjoys a double benefit. Bonds are used by investors for portfolio diversification, and to reduce and offset risk. Just like stocks, bonds are highly liquid. Traders can also invest in bond CFDs, as this allows them to leverage small price movements, because of the margins involved. With CFDs, traders do not need to wait for the bond to mature, as trading is based on price fluctuations.

Among the most common types of bond CFDs are:

  • 10-year Germany Bund Futures CFD (Bund)
  • 10-year US Treasury Note Futures CFD (USTNotee)

Online trading platforms like MetaTrader 4 (MT4) and MetaTrader 5 (MT5) have made trading much easier. Their powerful charting capabilities, their huge range of technical indicators and their expert advisors have made it easier for traders to monitor market movements, make trading decisions, and place positions.

Risk Management in Investment

Whether you're investing in stocks and shares, considering trading Forex, or wondering how to invest in Bitcoin CFDs, the need for appropriate risk management to keep losses at a minimum cannot be overemphasized. Remember that the UK markets are 70% service-based, so changes in consumer credit and commodity prices can affect your trades. The UK is one of the oldest and largest financial centres in the world, and still an attractive investment destination.

Here's a look at some different ways to manage risk when investing or trading:

  • Diversify Your Portfolio: This involves purchasing different types of assets, asset classes, and instruments. This is probably the simplest way of reducing risk, as it works by reducing overexposure to one asset or asset class, and protects the overall value of your portfolio. This method also helps to identify assets or asset classes that have negative correlation (like two currency pairs, or stocks and commodities).

You could also include some higher-risk and some lower-risk assets (like stocks and bonds) to diversify your portfolio. Bear in mind that too much diversification can make it too complex for you to keep track of all your investments. Also, profitable trades could be offset completely by a large number of losing trades. So, one needs to find an appropriate balance, and this comes with practise.

  • Follow the Trend: It's often said that the trend is your friend. So, one major risk management technique that traders should consider is to buy assets that are in an uptrend, and then sell them when they have risen too much (crossed their trend line support).
  • Be Consistent: It's best to invest a certain amount of money on a regular basis. This could help you to achieve better returns over time.
  • Be Patient: Avoid pulling out of assets at the slightest dips. There will be some fluctuation in prices, and you may need to wait it out and allow enough time for your strategy to work. Avoid panic selling at all costs.
  • Use a Stop Loss: This is among the most important techniques of risk management when trading. A stop loss order will automatically sell your asset if the price drops below a certain point.

What to Look for When Choosing a Broker

The choice of broker plays a critical role in your investing journey. Here are some tips for choosing the right broker:

  • Always opt for a regulated broker - In the UK, the broker should be authorised by the FCA (Financial Conduct Authority), and should be qualified to hold client money and handle investments under the FCA Client Money and Assets(CASS) rules.
  • Ensure the broker offers a wide array of instruments and assets - This will provide you with ample choices for making better investment decisions.
  • Check the kind of customer support that the broker offers - Since you're new to investing, you may need more assistance initially. You'd want a team that is prompt and professional, yet friendly. The broker you choose should be available via email and phone, and should also offer live chat support too.
  • Browse the broker's website for education resources, and see what they offer - Apart from articles and blogs, does the broker organise webinars and seminars to boost your knowledge? This will not only help you to gain knowledge in terms of investing, but should also give you an idea of the broker's commitment to your long-term success.
  • Find out about broker commission and account fees - Often forex traders only look at spreads when choosing a broker. A lower spread mentioned on a broker's website doesn't necessarily mean you'll always have that spread. Moreover, there could be commission on trades and account withdrawal fees.

How to Choose the Trading / Investment Platform?

Investing, for beginners, means having to consider the platform you choose carefully. The trading platform should:

  • Have a user-friendly interface
  • Offer flexibility with quick response and speed
  • Provide access to markets worldwide
  • Support automated trading and Expert Advisers
  • Have advanced charting capabilities
  • Allow mobile trading
  • Be comparatively low on resources (minimum disruption of your PC)

Now you can get all this and more with the state-of-the-art MetaTrader 4 & MetaTrader 5 Supreme Edition platform. MetaTrader Supreme Edition incorporates risk management, and includes features that can help you to limit your losses. It's a good idea to open a Demo forex account before you start trading in the live markets. You can practise trading here with virtual funds first, before you transition to the live markets.

Forex Demo Trading Account

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.