Your savings are at risk. Guide to Investing in the Stock Market.

12 min readSep 5, 2021

Investing in the stock market may seem tedious and challenging. Some may say that it is very risky while some not sure where to start. There are certainly risks involved in investing in the stock market, however, from my own experience, the benefits of investing in the stock market outweigh the risks. Besides, from the current economic standpoint, I believe that investing is a pathway for many to achieve financial freedom. Unfortunately, due to fear and not understanding the stock market, investing in it may seem very demanding at first. In this article, I will try to summarise everything I have learned from investing in the stock market in the past 2 years and share it with you. I should note that I am not a financial advisor and this article only serves as a guide to investing in the stock market and for education purposes only.

At the end of this article, I will show you how you can get a free stock from a stock trading platform I am using.

Why invest your money at all?

Money that you are holding right now is going through inflation, which means that the value of the money (eg. £1) is worth less than it is today than a year before. This website showcase the value of the money you were holding a few years back in today’s value. For example, £100 in 1970 is worth around £1357.56 today. You can imagine if you continue holding a large sum of your money every year, you will only reduce your purchasing power by 2% - 5% over time.

However, inflation is not a bad thing at all, and which is why the central banks wish to keep the inflation level at a median of 2% every year¹. If money is deflationary (opposite of inflationary), people would hold money instead of spending them, given that the purchasing power of your money may increase in the future. Yet, this is not a good sign for the economy since no one would be spending. You can see this event from the start of the COVID19 pandemic in early 2020 where businesses were closed due to people not spending money.

A high inflation rate also means that your money will be worth less than a year before. One extreme event of the high inflation can be seen from the hyperinflation in Venezuala where the rate of inflation exceeding 1,000,000% by 2018². The Venezuelan currency is essentially worth so much lesser in a year time. Thus, it is the responsibility of the government to make sure that the inflation rate stays at a reasonable level.

How to stop losing money to inflation?

Now that you know that the extra money you save will lose its value over time, and you are asking how do we solve this? Of course, can you put your money in a risk-free savings account where the bank gives you barely any interest, which is usually around 0.5% a year in the UK³. However, remember that the rate of inflation is at around 2% a year, you will still lose 1.2% of your value a year.

Here comes the stock market where you can invest in a publicly-traded company or companies, get a share of that company and expect them to go up in value. Companies issue shares to raise money, which they use to expand their business. Investing in companies like Google and Amazon is basically buying a stake in the company and if the company performs well, the shares’ price that you bought will generally increase and vice-versa. However, it all comes down to the basic economics of supply and demand of the shares that ultimately affect the price.

Of course, there are many sectors to invest in instead of the stock market, for example, the housing market, gold, government bonds and even cryptocurrency. However, in this article, I will be providing life hacks for beginners on how to invest in the stock market.

How do I buy shares?

There are many platforms where you can buy and sell your shares online. With the rising popularity of online commission-free trading apps such as Robinhood (if you live in the US), investing has been much easier for people. Since I am from the UK, I will talk about the one trading app that I believe is really easy to use and most importantly, it is free to trade! In the UK, I have been using Freetrade for the past few years, and I find it really simple to use and the user interface is very clean as well. However, Freetrade only offers mobile app services, so if you want to invest using Freetrade, you should probably get a phone (which I assume you have). If you are looking to open an account on Freetrade, feel free to reward yourself by using this link to get one free share worth up to £200 when you create your first account. You can invest from as little as £3. Yes, you can start investing from such a small amount of money.

Besides the mobile apps, you can try Trading212 which offers both desktop and mobile services or using online trading platforms such as Vanguard, Hargreaves Lansdown and even from your bank. Vanguard offers you a much more passive trading experience such as a tailored strategy of investing (will be discussed later in this article), which I recommend. However, the initial cost of investing in these firms may be higher than those mobile apps such as Freetrade which I am currently using.

What shares do I buy?

Of course, there are thousands of shares listed in the world’s market. Different country may have their respective stock exchange. For example, the New York Stock Exchange (NYSE) in the United States, London Stock Exchange in the United Kingdom and many more. With the number of public companies listed on the stock exchange, how do we know which one to pick? The best way for picking stock is to not pick at all. I’ll explain.

Let’s say you only pick one stock from the NASDAQ stock exchange (another exchange in the US), which is the Amazon stock (AMZN).

The price of one share of Amazon for 5 years.

If you bought it in 2016 at less than 1000 USD per share, you would increase your initial capital by approximately 350% in the last 5 years with an annual growth rate of 35% (Remember that banks only gives you on average 0.5% a year)! However the reward is very lucrative, who would have predicted that the share of Amazon would increase by such an amount from 5 years ago.

Given the chances of you picking Amazon stock, there are also chances that you will pick the shares from Apache Corporation (APA).

The price of one share of Apache Corporation over 5 years.

As you can see from the chart above, if you invested in APA 5 years ago, your initial capital would have plummeted by 62%!

The solution to this problem is by diversifying your stock portfolio. If you bought both stocks back in 2016, the value of your portfolio will still see a smaller gain when compared to only buying AMZN stock, but your risk will be further spread out. The more diversified your stock portfolio is, the lower the risk you get. One common analogy is the eggs in the basket analogy where you should not put all your eggs in one basket. If your basket fails, all the eggs would break. However, if you spread out your eggs in multiple baskets, even if one basket fails, you will still have a couple left. Diversifying is the key to risk mitigation in the stock market.

Nevertheless, it is impossible to buy all the shares from an exchange given that there are so many stocks to choose from. Luckily, there is something called an index fund such as the S&P 500 index fund where the fund is passively managed by an investment management company such as Vanguard and is designed to track the 500 largest publicly listed companies in the US stock exchange. These 500 shares make up 80% of U.S. equity by market capitalisation. Investing in one of these funds will be an easier and safer method (there are still risks involved!) to increase your capital by diversifying your portfolio over the 500 largest companies in the US while betting that the largest economy in the world, the US market will keep improving over the years.

Similar to the index funds is the ETF or exchange-traded fund. Both of them are similar except that the ETF can be traded throughout the day like normal stocks while index funds can only be bought and sold for the price set at the end of the trading day⁴.

So if you ask me what stock to pick, I would say all of them. I would even say don’t bother picking stocks at all. There are thousands of hedge funds out there paying their employees millions to pick stock for their actively managed funds. If you are going to compete against them, I would say it is probably not worth the time and energy. To add to this argument, this article shows that even monkeys can outperform some of these highly paid hedge funds in picking stocks⁶. The S&P 500 is set as a benchmark for these hedge funds for a reason since the average hedge funds could not even beat the market⁷ as shown in the report below.

Average Hedge Funds performance vs. the S&P 500 Index Fund. Image from AEI⁷.

Given that the existence of the S&P 500 index funds has made investing much easier. The only downside to this is investing may be boring, but ultimately boring is what makes you money.

The S&P 500 stock market index over 5 years.

When Should I Invest?

People always asking when should I invest? When the market reaches an all-time high, people say that it is too expensive or too late to invest and wanted to wait for a drop in share price. When the market is showing a decline, people say that it is too risky and wanted to continue waiting for the market to reach the bottom. However, once the market started to recover, people will say that they miss the chance in investing at the bottom. In conclusion, there is never a good time to invest in the stock market. Hence, the one piece of advice that I have always bring along with me in investing is to never time the market. Human emotions are unpredictable and the stock market is affected by human decisions. You will never predict how a stranger is going to feel today, definitely not all of them.

So ignore timing the markets, even with individual stocks. If you feel that the stock that you pick is undervalued after performing extensive researches, there is no need to wait. As for me, I would buy the S&P 500 instead whenever I have extra cash to spare or the cash that I can afford to lose.

Compouding

Furthermore, starting to invest as early as possible is the best choice that you should do right now. This is due to the magic of compounding. So what is compounding?

Compounding is letting your money work for you. For example, your initial investment of £1000 with an annual growth rate of 10% will give you £1100 in the following year. Given the similar annual growth rate for the following year and you will get £1210 instead of £1200 due to the compounding interest you get from the extra £100 you gain from the previous year. In 10 years, the initial investment of £1000 will grow to £2707.00 with an annual growth rate of 10%!

Chart of Compounding from Business Insider⁵.

The graph above shows the power of compounding. Compounding gives you the ability to increase your investments not linearly but exponentially. Given that you invest the same amount of money every month since the age of 25, your investments will increase faster and reach a higher return at the age of 65 than when you starting to invest at the age of 35. As you can see from the chart above, even when you double your investments but start to invest at the age of 40, you will still get a lower return at the age of 65 than starting to invest at the age of 25.

However, all these only work if you decide not to interfere with the stocks that you are buying. What I am trying to say is that holding the shares that you bought for the long term. Not a few days, months but years. Lock it in and never take it out. Only if it is for an emergency, else, invest and forget about it. This simplest task is always the hardest since we humans are hard-wired to constantly looking at our money. Seeing our hard-earned money goes up or down in value may affect our reason-based thinking, given that we are emotional creatures. The best way (at least for me) is to invest a certain percentage of your salary that you can afford to lose every month, and just let it compound over time. This technique is also called dollar-cost averaging. Let me explain this term.

The stock market is very unpredictable, no one knows what will the market be like in the future. Using the dollar-cost averaging technique enables you to reduce the impact of volatility on your purchases. For example, you invest all your disposable income into the stock market, let’s say the S&P 500 in one go. If the very unfortunate happens, such as the stock market crashes by 30% the day after you invest in the stock market, obviously the amount of money you lose will be substantial, and it might take a few months or even years for your investment to break even. Dollar-cost averaging can reduce risk like this by dividing the total amount to be invested by several months. However, no one has ever lost money investing in the S&P 500 at any point in time without selling as of the time of writing this article.

How much do I need to Invest?

If you are a young person or a student and don’t have much money to invest, invest the little remaining money you have anyways. If you start young, this will gradually turn into a habit and start to invest early then later will get you more money in the future due to the power of compounding as we discussed earlier. For me, I usually take 10% — 20% of my monthly income and invest it in the Vanguard S&P 500 ETFs (VUSA) using Freetrade. Unfortunately, these ETFs in Freetrade doesn’t allow you to buy fractional shares, however, you should be able to buy fractional shares with other individual shares from as little as £3! Still, I would recommend you to buy the S&P 500 ETFs instead of picking your stock. If you would like to try, allocate a maximum of 10% of your total portfolio to invest in these individual stocks, with the remaining 90% in the ETFs, which is what I would do.

Again, if you would like to open a new account in Freetrade, they will essentially pay you one stock worth from £3 to £200 to invest if you use my referral link (https://freetrade.app.link/vW5jff56qhb?_p=c81629c69a1c65f7ea038ffb)!

Conclusion (TL;DR)

Investing in the stock market is easy. This is what I would do. Open an account such as Freetrade to start investing. Allocate 10%-20% of my monthly income and dollar-cost average into the S&P 500 index fund or ETF. Never sell for at least 20 years unless during an emergency. There is a high chance (though not 100%) that my invested money will grow by a lot after these 20 years. Patience is a virtue. It is that easy.