Learn from others to prevent your own mistakes
The great advantage for the young investor is that they own the greatest asset. Time. Time allows you to make mistakes and get back on your feet again. It gives you options on what your investing strategy could be, and it gives you the gift of compounding. There is no doubt you will make many mistakes through your lifetime, however, if you can learn and act upon these mistakes it can stand you in good stead.
I will try to share some things I have learnt from my own experiences as a young investor, however some of these guidelines could be applied to investors of all ages.Get experience before risking your own capital
There are plenty of brokers that let you invest fake money into shares. This should be your starting point. It will give you an idea of certain qualities of the stock market such as volatility, the need for diversification and reasonable expectations for returns.How much money should I have before I start investing?
This entirely depends on your goals and whether or not you want to be active or passive in your investing. When I started off with £2,000 ($3140) as an active investor, I quickly found out that it was hard to diversify my holdings and be cost effective. The trading and forex charges were too high a percentage of the net value of the holding. This made making realisable gains harder to achieve. I would advise at least £5000 ($7852) as a starting point if you want to be an active investor.
However, this does not mean you cannot invest effectively with a small amount. Investors with small amounts of money can buy certain index funds that can be very cost effective and provide diversification. Index funds are an accumulation of many companies into one product. Ones I would recommend are the S&P500 Index and the FSTE100 Index. Both of these can be bought with low management fees.Make use of legal tax-free structures
In the UK, investors can invest up to £15,240 (as of 2015) tax free EVERY YEAR in shares. This means that you will not pay income from dividends or capital gains tax on selling your shares. It is vital that you make use of these products before investing any money into a regular share dealing account. This will save you an incredible amount of money over the long term, especially if you start young!
If you are resident in the US there are similar products such as Roth IRAs.Where do I get my information?
There are plenty of sources to get information on investing and the fundamentals of certain company shares. This could be from the business section of a financial related newspaper, or from the Internet.
It is important to check multiple sources when looking for information, as some sites might provide out of date and therefore misleading information. From my experience, I have noticed that certain credible websites could still give misleading information. For example, if you search many UK companies on Yahoo Finance, often you will not be given the correct information. I have found it is best to use UK sites for UK shares and US sites for US shares.
Another place to get valuable information is company annual reports. These will explain what the company does, its goals and its financials. These are invaluable.Pitfalls of a rookie investorLeverage
One of my first mistakes was using leverage. In its most basic form, leverage is 'borrowing' money in order to purchase a bigger, or more, of a security. This amplifies both gains and losses. It can almost be addicting when you make a lot of money from leverage that you forget how much risk it carries. This can result in you losing more money than you invested in that security. I found that leverage caused much unnecessary stress and led to trading behaviour, which I do not think is a great trait to have as an investor. I have found that investing without leverage changes the way you invest. You will generally make more rationale decisions if you give yourself time, however you will not become a millionaire in a month. However, investing is not a race, there is no finish line.Following Analysts recommendations
Security Analysts provide recommendations on company shares generally with a 'buy', 'hold', or 'sell'. It can often be tempting to follow these recommendations, however from past experience this will not lead to much success. These recommendations are there to encourage trading, and therefore higher brokerage fees for brokerage houses. A good illustration of this is examined in the book 'Bull!' by Maggie Mahar.Penny Stocks
I have never been induced to buy penny stocks, however many people still do. They are basically stocks of companies with little substance and huge risk. Generally, advertisements that display penny stocks will promise large returns. A famous quote that sums up this well is,
If something sounds too good to be true, it normally is.
I believe all investors would do well to steer clear of penny stocks.When should I think about saving for retirement?
The simple answer: now. The earlier you start, the more you can make use of the wonders of compounding. There is nothing stopping you freeing up some cash in the future.To summarise
- Do what you can to maximise your potential by continuously learning and starting early.
- Do what you can to minimise your costs
- It is never too early to start investing for your retirement!