In recent years there has been a huge shift towards growth investments. More than ever, people are seeking to participate in Stocks, ETFs and Growth Funds. This article provides some useful information on how to get started, what to do and what not to do!
Investor trends are clearly showing that increasingly people want to build an investment portfolio targeted at growth and that owning a basket of investments is becoming mainstream. Money has been steadily flowing into the stock markets with 277% account growth in 2020 alone from what we experienced on CCTrader
➡️ Investors aged 60+ traded the largest amounts in 2020 whilst the largest % growth was investors under the age of 20
➡️ Investors under the age of 30 fuelled new new account growth
➡️ 78% of new accounts were under the age of 40
➡️ +351% number of trades
➡️ +277% increase in number of accounts
History shows that markets have always done well over long periods of time and therefore it makes so much sense for every single person to own a high quality investment portfolio and to build it diligently across time. Starting to save and invest early can have a profound impact on a persons long term financial health. Based on historic rates, investing just €100 per year in the S&P 500 at an average rate of return of 10% adjusted for inflation of 3% would yield 1,282% in 10 years, 2,143% in 15 years and 4,000% in 20 years.
The earlier you start, and the more consistent you are, the bigger the potential for Growth over time! Below is a 10 year graph for the S&P500 for instance.
Common Beginner Mistakes
If one avoids the beginner mistakes, investing can be very rewarding over time. The most common mistakes beginners make when investing include:
❌ Rushing into investment decisions before having a plan or researching about an investment
❌ Choosing a commission “free” platform which is actually much more expensive due to price loading / limited service.
❌ Falling into the CFDs trap instead of buying Stocks
❌ Choosing a platform with limited human support and limited investment selection
❌ Not diversifying
Getting started with investing can be exciting but you need to take their time to understand the environment especially because of so much information out there that one has to sift through and decipher.
Investing is anything but Gambling and should not be treated like so. If you are starting off with that mentality you are starting on the wrong foot. When you invest in a company there is a story behind it, there are also financial results and one must remember that you actually own a share of that company, possibly even receive a periodic dividend.
At the most basic level the more a company grows and the more profitable (or the prospect of being profitable) a company is, the more its stock price grows over time. There are many factors that can affect a company’s stock price and that is a complete subject for another post however it is important to understand and believe in what you are investing in, take an interest, ask questions, attend investment seminars and get involved where possible. This is your hard earned money and investing is something you do throughout life therefore the time you spend taking an interest will pay itself back in a very short time!
The investment community is made up of people with different ideas and full of healthy debates. It is a friendly and helpful one and brings very bright people together.
If you have larger sums of money you wish to invest for instance 10k or more you might decide to use an established financial advisor which also has a number of benefits and experience which cannot be underestimated and such services might be considered as a complement. A number of people in-fact have two portfolios, one for online investing and one for financial advisory. In Malta the way it works is that you can visit your financial advisor for a free, no obligation consultation however I cannot comment about other countries.
Increasingly however many people just want to get started themselves with something small at first, to try it out and do their own thing. Fractional shares has further facilitated this and made the markets even more accessible with small amounts like for instance making an investment of just $1 or 5$.
This blog post aims to help people who are just getting starting with online investing and I hope that the information below will prove to be useful and helpful. So many people ask me about how to get started with investing that I felt it was high time to put it down in writing.
How to get started with online investing
There are a number of steps one should take to get started with online investing.
- Choose an online trading platform
- Read Read Read!
- Make a plan
1. Choosing an online trading platform
Choosing a online trading platform is not necessarily the first thing to do but other the other-hand it is beneficial to get your account setup, submit your documentation, get accustomed to the platform itself, ask support or the trading desk support any questions you might have and possibly also ask for a remote demo session before you make your first deposit by card or bank transfer. It does not cost anything to open an account.
Choosing the a trusted platform is one of the most important considerations. When choosing an investment platform it is crucial to check out the following:
Platform support is one of the most important considerations, you want to be able to pick up the phone and call someone if you need. Live chat sometimes is simply not enough. If something goes wrong or you need help nothing is worse than not being able to actually talk to someone, especially when your portfolio starts growing and its no longer the 200 Euro you started with. There are situations where for whatever reason you want to be able to call and even have access to the Trading desk.
Transparency and pricing model
This is where many beginners fail and are lured into platforms which do not have the investors best interest at heart no matter what the marketing makes you think.
If you see “free commission.” there is no such thing as a free lunch. The general strategy here is to lure investors with “free” commission on stocks, and instead to make money from the price (spread) which is FAR higher! Novice Investors do not realise that these platforms charge high spreads up to 5% is not uncommon, these are well hidden. Apart from that they might lend your securities to others or offer limited investor protection and investor compensation if they go bust. It is simply a no brainer to avoid such platforms. These platforms are actually more expensive when you realise this and not worth the risk, it is much wiser to select a transparent established platform which provides peace of mind and low transparent cost.
When you send an order to the market on CCTrader for instance, it gets routed to one of the 35+ Stock Exchanges the platform supports, an execution price is received from the exchange and this passed directly to the client. There is no mark-up to this price. Sometimes in fact if pricing data feed is delayed people think that if they send an order at that point in time they will get the price on screen! This is not correct, the execution price of a trade always comes directly from the exchange. The price you see on screen is coming from a data provider, the two are not connected. For platforms like CCTrader that pass on the execution price directly and route directly to market, you can trust in best execution for every trade 100% guaranteed.
A note on CFDs!
Another very important thing to watch out for is CFDs, some platforms seem to be specifically designed to subtly make one think you are investing in a Stock when in fact you are buying a CFD, upto 75% of investors LOSE money with CFDs. ETORO, PLUS500, TRADE 212 all pushing CFDs hard and are making vast sums of money using this strategy. CFDs charge interest daily called overnight fees, a margin on the price and more. AVOID!
Below is an extract from TRADE212 for instance.
“We are the first commission-free broker in Europe. Our trading “fee” is the Spread, meaning the difference between the bid (BUY price) and the ask (SELL price) rate of a financial instrument.
On CFDs, there is also a 0.5% currency conversion charge as well as an interest for holding a position open overnight. Please refer to the Trading Conditions page on our website for further details.
On the Invest account, there are no commissions, just the Spread.”
“Just” the spread meaning the price you get when you buy is not the price from the market! This is like removing a delivery fee of $5 but the adding $10 to the price.
On the other hand with platforms like CCTrader what you see is what you get. The price you buy a Stock at is coming directly from the exchange and additionally you can ask to talk to the trading desk if the need arises.
Instrument selection as you will see from below is crucial, you do not want to be limited. Choose a platform that has a wide selection of Stocks, Funds and ETFs. All will play an important role at some stage since all have their benefits. If you do not see what you are looking for, ask the trading desk to see if its possible to have it added.
Desktop Browser Access
Choose a platform that also provides desktop access, whilst on the go you will use a mobile app for price alerts and quick trades however the desktop provides a much easier way to go through your portfolio from time to time comfortably maybe over a hot drink 🙂
It also allows for multiple tabs in your browser to be open which I find extremely convenient personally. When you have a few stocks its one thing but when you build a full portfolio reviewing it on mobile it is not what you want. In fact for this reason I think desktop will never be completely eradicated.
Now that you have selected your online trading platform and have setup your account we can start talking about selecting your investments and asset allocation.
Company Background & Security
Needless to say, when selecting an online platform you should ensure that
✔️ The company is licenced by an European regulator of repute
✔️ The company participates in an Investor Compensation Scheme (such as the one provided in Malta)
✔️ The company’s is Audited by one of the Big 4. (This will give you peace of mind that client assets and monies are held in a segregated bank account which are recognised as client monies and therefore you will be eligible for the depositor compensation scheme also)
✔️ The company uses reputable bankers to maintain client monies
✔️ The company is profitable
✔️ The company’s platform offers 2FA (two factor authentication)
2. Read, Listen, Watch!
The markets are not going to run away. Spending some time to form your own opinion is essential. Follow the markets, many companies you hear about in the news you would actually know about and you have probably used their services.
Take an interest, financial markets are really interesting! Do not just rely on a recommendation from a friend or a random email. Spend time reading and taking notes, shortlist investments that you find interesting and start formulating a plan. It is important to believe in what you invest however you go about it.
Yahoo Finance is a great place to find such information, the daily news is light and easy to read. Morning Star Premium is also a tool I also really like, its a paid service with a 14 day trial, its really not necessary to begin with but worth a consideration eventually when you start investing larger amounts.
Generally when doing my research and placing orders or tweaking them, I have CCTrader open on my desktop and these two portals open in another tabs. This way I cross reference information. Once your portfolio is setup this becomes fairly easy to manage.
Education is never enough, if you come across a reputable online investing course or maybe an evening course organised go for it!
Podcasts are really great, you can listen practically anywhere and the information can be really engaging apart from keeping you upto date on the very latest.
One particular one I have really come to love is the CNBC halftime report.
3. Make a plan
Firstly you need to understand the difference between Stocks, ETFs and a Funds. Then its time to start planning which investments you will choose to start and how you will handle your asset allocation.
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to your goals, risk tolerance, and investment horizon. It is not the purpose of this post to explain how to do this but just to give a general idea of the process.
At this stage you have probably already setup your account with your chosen online trading platform and you have already started to get acquainted, it is therefore tempting to simply dive right in and to buy some stocks however the formulating a plan is the way to go.
Form an idea of your preferred sectors
It is important to diversify across the sectors which right now you think are appealing for the long term. For instance you might consider with Technology, Health Care and Consumer Staples. Major sectors can be broken down into sub sectors. You might also decide against specific sectors you think do not have as much potential such as Industrials just to provide an example. You might also decide you do not like specific industries such as Oil & Gas.
It is ok to decide that you wish to have a higher exposure to a specific sector so long as the exposure is not too overly exaggerated. Below for example one can see that that this portfolio has 35% invested in the IT Sector which is fine however if this figure was for instance 70% it might not be ideal since it would carry more risk and especially as a beginner you want to avoid that.
Understand geographical regions.
Similarly it is important to diversify across Europe and the US for instance, possibly Asia too and not invest all in a single country or region. These are simple, basic rules which are easy to follow but they are important and pay off.
2. Select some Direct Stocks
It’s time to start looking at what your portfolio will look like. In todays world with fractional shares a new world of opportunity has opened because you can invest smaller amounts in many stocks without the need to start with large amounts and build confidence as you learn more. Therefore the process of diversification can be applied easily nowadays.
Investing in a direct stock such as Apple or Shopify means that you are investing directly in that company. If you strongly believe a specific company can continue to grow into the future then investing directly makes sense because you take the maximum benefit. For instance you believe Apple’s shift to Services and its Apple Car is going to really grow the company over time and you want direct exposure. Short list that stock and take note of the sector. The more you believe in something the more you can allocate but generally not more than 10% of your portfolio in a single stock.
You also need to ensure that the stock is not massively over valued, some indicators such as PE can help also you can take a look at the Graph. A PE of 1,349 is sky high and means Tesla has very little margin for error.
Especially when starting out, one way to protect yourself is to select companies that have a market cap of over 5 billion i.e those that qualify as a Blue chip stock and which you believe will grow.
Blue chips are popular among investors because of their reliability and growth history and therefore they are perfect for beginners or those who are more cautious. You might think 5 Billion is a lot, but there are still plenty of companies available especially on the US Markets. As you can see from the image below that the market cap of Apple is a whopping 2.296 Trillion!
As your investment portfolio grows you can then allocate a smaller % of your investment portfolio to venture out into smaller companies that have the possibly to grow at a faster rate but also might fluctuate more.
It is important to ensure that the companies you choose are financially sound and that has good fundamentals and are not massively overvalued. Both Yahoo Finance and Morning star provide a number of indicators including fair value. Sometimes these tools and calculations underestimate how fast a company is growing in between results but it’s certainly an indicator worth looking at. Another very commonly used indicator is the PE Ratio.
💡 TIP! If you are a CCTrader client you will receive an updated investment list regularly, this is sent every 2 weeks and includes Top Rated Equities / ETFS / Funds that have been selected based on many criteria and which helps you to do your homework.
Select some ETFs
ETFs can be great because they track themes or sectors and provide instant diversification.
For instance, I might believe that its the right time to invest in EVs (Electric Vehicles) but I really do not want to go into a single stock Tesla at these overvalued prices there is simply no margin for error and the price could come shooting down if they miss a target. I do not want to invest in a single EV company when there is intensifying competition within traditional car makers, there are also new entrants like NIO coming in which are interesting.
To participate in the sector I choose to go for an ETF such as DRIV ETF which gives me some exposure to Tesla, NIO, Qualcomm and 72 other stocks as part of basket of EV stocks. DRIV invests in companies that are involved in the development of EVs and autonomous vehicles, including companies that produce electric/hybrid vehicles, components and materials, autonomous driving technology, and network connected services for transportation.
Other great examples of ETFs for 2021 themes are Cyber Security CIBR, I might choose Palo Alto PANW as a direct stock if I strongly believed this company has something special coming and also because its a long standing market leader but mostly I believe Cyber Security is going to continue to grow massively and therefore I want exposure to the sector not the stock.
For a theme like Green Energy for instance one could use an ETF like ICLN.
Make a list of themes and short list the ones you like the most. Choose the ETFs with the largest traded volumes and sizes as these tend to be the better performers. You should also compare performance.
ETFs are really great and should be part of every portfolio. They help with diversification but keep in mind that like stocks they are not managed. You still need to evaluate the prospects for the EV sector from time to time for instance.
Select or consider UCITS Funds.
Funds are similar to ETFs in the sense that they invest in a basket of stocks, but instead they have the added benefit of being managed. The main draw back is the minimum amount which is about 1,000 and fees are higher but when one considers the positive performance of some of these it should not be a real consideration.
For instance the Morgan Stanley Growth Fund covers US Growth Stocks and is managed by professionals. In this case it has provided great Performance.
Below is a snippet of the Morgan Stanley Growth Fund holdings to provide an idea of holding allocation. As you can see on 31/12 it had 7.46% in Amazon
When talking about Funds it does not need to be sectorial, one could go even Broader into a Global Growth Fund for instance.
TIP!: If you are a client of CCTrader you have access to the fund list which is refreshed every 6 months, this is based on a fund selection model which aims to choose the best performing funds from various sectors. Its really quite useful.
4. Investment Allocation
Once you have shortlisted your Stocks, ETFs and Funds you can then plan the actual amounts you will invest.
Depending on your financial situation you should decide on the total amounts you will invest over the short term. You do not need to invest all at once! However knowing what you are working towards and ticking the boxes over time as more excess cash becomes available to you is very helpful. Once you have a well thought out plan, and you are convinced about it, unless something drastic changes or a new really good idea comes along, try to stick to the plan to allocate the investments.
It is important to understand that you should not invest money you need in the shortly. For instance, money you might need for a down payment, to pay the rent or anything of the sort. This should be excess cash you are willing to invest for the medium term and to grow over time.
Below is a snapshot of the excel sheet template I mentioned earlier. You can download it here.
A note on Currencies
Something to keep in mind is currency risk. Generally in recent years the US Markets have outperformed the European Markets significantly and therefore the gain was bigger than any loss from currency fluctuations however when possible if your base currency is Euro you should try to see if you can buy the Euro stocks equivalent such as APC for Apple and others. Investing smaller amounts over time can help to somewhat offset but not eliminate currency risk. Another option too mitigate currency risk is investing in Funds which manage currency risk. As a rule of thumb, if the opportunity is greater than currency risk fluctuation, go for it.
How many investments should i make and should they be all the same amount? 🙋
There is no hard rule but generally you are looking to aim for anywhere between 10 and 30 Stocks / ETFs / Funds.
In terms of how much to invest depends on your financial situation, with fractional shares you can start with a small amount and build confidence. It is better to start with less than more, this also gives you chance to average down or to drip feed
I hope this article helps you get started, it is impossible to cover everything in a single post however in this post I have tried to cover the most important things you need to know.
Please do leave comments below! Happy to take any questions and hear about suggestions on how to improve content.
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