What do I need to start investing?

Many people want to start investing, but they are not really sure if they are in a position to do so. In this article we will look at the two aspects of the question- What do I need to start investing?

What do I need to start investing? – The financial side.

To invest you need money. This is quite simple, yet many people don’t fully understand what it means. If you have debt, loans, that are on a quite high interest rate- you will probably be much better off by paying them off first. This was already mentioned in Why should you invest and it is worth repeating. Money that you borrow, is not really your money, as you are expected to pay it back and most likely you are paying quite a high interest rate on it. This is why there is this very important rule that you should follow if you want to be responsible about your investing:

  • Never borrow money to invest in stock market!

Doing this, turns the investment pretty much into gambling, as for this to pay off, you would need to be really lucky… Also, when you think about this rule- it is also easy to see the other problem. If you are investing money that you will need soon, you may be forced to sell your investments or borrow money, which turns our quite similar. Hence, our second rule:

  • Never invest money that you need. You may be forced to either sell your investments too soon or borrow money if you do!

It is really worth emphasizing how important these rules are. In the second part of this article we discuss the psychological side of investing and how important it is to have the right state of mind and attitude. It is much more difficult to achieve these when you are borrowing money and worrying about it from the beginning.

How much money do I need to start investing?

This really depends on how you want to invest. Usually there are charges involved and the best way to see what is the minimal amount that makes sense is to see how many % of this amount will be eaten by charges. Let’s say that you want to start buying some individual stocks on London Stock Exchange. You did some research and you find that you have 2 options:

  • To invest in regular intervals (once every month or a few months) and pay £1.50 per transactions.
  • To invest whenever you want and pay ~£15.00 per transaction.

Now, you know that you want to invest £100 per month (just to start). You can quickly see that the £15.00 fee is just not affordable at this rate! You probably would be better off investing £200 every other month keeping your charges under 1%. I think that if you are very cautious and expect ~6% a year from investing in stock market, you should really keep your trading costs under 2%… If you let it grow, you may be not much better than saving accounts! If you are not from UK, I highly recommend you to check rates in your country, as in some countries they could be as cheap as £0.50 per transactions (I saw this somewhere in Poland). So to answer this question in short:

  • To start investing you need to have enough money to make your transactions cost stay low compared to the potential profit.

What do I need to start investing? – The mental side.

It is extremely important to approach investing with the right mindset. Here, we will try to give you some tips on what you can do to make it easier on yourself:

  • Have realistic expectations.

The first thing to understand is that it will not make you a millionaire over night. The best investors in the world averaged around 20% yearly returns. Stock market has better and worse years and on average returns something between 6-8% depending who you ask. If you are getting 5% a year, it is already not bad- you are doing better than you saving accounts, you are developing the right habit (of saving money) and you probably have room for improvements (unless the whole market went down by quite a lot, and you still somehow made profit-then you are doing very well). Set your expectations straight and it will make the journey nicer for you.

  • Be comfortable with what you are doing.

It is quite a big decision to start investing and for people new to it, this can be quite scary. If you are not sure if you should do it- read about it, learn about it, until you feel comfortable that you know what you are doing. You can quickly find out that investing can be as safe or dangerous as you want it to be (not just stock market investment). Find what levels of risk you are comfortable with- financially and mentally, by reading about different possibilities.

  • Be patient

This website is mostly about investing (longer term) rather than trading, so this advice is very important. Most of the strategies are supposed to work in a span of years, not weeks, days, or minutes… We all know how it is. You just bought your new shares, then you take your mobile, or visit some website and keep checking the price every few minutes hoping for something to change… This is probably a bad habit that may cost you quite a lot of nerves, as market fluctuates constantly. Also, you may need some longer term patience- if your stock is not raising for a few months after you got it, or even fallen a bit- it does not mean you need to immediately sell it and get something else. Remember what we said before about the costs- you are just going to increase them by constant trading.

  • Try to keep emotions out of your investments

It is important to try to separate your emotional state from the performance of your investments. For someone not investing it may sound crazy, but a bad day on a stock market can put you in a bad mood, and a good day can make you quite ecstatic. This emotional roller coaster can be really exhausting in the long run, so you should really approach it in a calm way.

That’s it for now!

Investing can be very fun and rewarding- but you need to treat it seriously, so that it does not turn out bad. We hope that the above advice will help you with deciding what you should do with regards to your investing future, or what you need to change to start investing. For now- good luck, and until the next time!

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