How To Invest In Shares For The First Time

Jane Baker

If you’re thinking about plunging into the stock market for the very first time, read these tips to help you get started.

The Bank of England base rate now stands at just 2%. That means getting a decent return on a savings account is becoming a real challenge and it's getting worse all the time. With further base rate cuts on the cards, some of you may now be wondering whether the thrills and spills of stock market could be a better place to invest your money.

If you don’t think cash is king anymore and you’re considering investing in shares for the very first time, here’s everything you need to know to get you started:
Should you invest in shares?

This is the $64,000 question. Investing in shares won’t be suitable for everyone. If you fall into any of the following categories, you may need to think again.

You have debts - I’m talking about debts other than your mortgage such as loans and credit cards. It’s unlikely that you’ll earn a better return on your shares as a new investor than the interest you're paying on your debts, so clearing your debt first should be your top priority.

You need your savings for a specific goal - Perhaps you’re saving up for a house deposit or for home improvements. You don’t want to gamble these savings on the stock market. If share prices drop you could be far off your target just when you need the cash most.

You aren’t willing to invest for at least five years - Investing in shares is a risky business. Shares can be very volatile, so if you need your money quickly, you may have to sell your shares at a loss. Five years is generally regarded as the minimum appropriate period for stock market investment.

You’re risk-averse - Some of you may not feel comfortable with the peaks and troughs of stock market investment. If this sounds like you, it's probably best to steer clear of shares.

You can’t afford to lose the money - Don’t invest money on the stock market you can’t live without. Capital in a savings account is guaranteed (barring the collapse of your bank) but capital invested in shares is always at risk. Nuff said.
How to invest in shares

If none of the categories above apply to you, then share investing could be for you. But how do you go about it?

If you’re a novice investor and you’re stock picking skills aren’t yet finely honed, you can still invest in the stock market without having to choose shares yourself. One way of doing that is to invest in an index-tracking fund.

At The Fool we’re big fans of trackers. Index-tracking funds normally invest in all the shares quoted on a particular share index with the aim of matching or ‘tracking’ the performance of that index. If you buy a FTSE 100 Index tracker and the FTSE rises, your tracker fund will increase by the same amount -- more or less. Of course, the reverse is also true if the index falls.

I think trackers are a good way to start investing in shares. You’ll normally be able to invest into a tracker regularly, so you can drip feed your money into the market. What’s more, many are available within an ISA wrapper so you’ll be able to earn a tax-free return too. (Read more about trackers here.)
Going it alone

If you feel more confident you may want to try your hand at stock picking yourself. But be warned picking winners, rather than losers, is easier said than done. Buying individual shares is very risky, in my opinion. It’s absolutely vital you do your homework and learn how to evaluate a company’s prospects before you invest.

Read Investing Terms Explained which will cover off all the basics from how to read a company’s annual report to stock market volatility and when to sell.
Help is at hand

If the idea of picking your own shares sounds a bit scary -- or just too much like hard work -- help is at hand. You could try our share tipping service with The Fool’s Champion Shares electronic newsletter written by investment analyst, Maynard Paton.

Maynard will trawl the market on your behalf, providing you with regular share recommendations. Better still, you can sign up for a free 30 day trial of the Champion Shares service. This will give you the chance to explore all of Maynard's past recommendations, and will give you full access to the Champion Shares members-only website, which features discussion boards, scorecards, updates and research.

All that remains for me to say to all first time Foolish investors is best of luck!

More: The Index-Tracker Shake Up | Small Companies, Big Profits | Be your own broker with The Motley Fool Sharedealing Service

No comments: