Investing For Beginners

Until the digital revolution in the late 20th century, human life evolved steadily and in a unidirectional way. But the digital revolution brought unimaginable solutions and paradigm shifts in every sphere of human life, from health care to entertainment.

Even the most brilliant brains of the current generation are clueless about the future. Even though we can't predict the future, one thing is sure; the future will be different. It makes our legacy tools obsolete and useless in many areas such as parenting, personal finance, or education.

Planning for your future is not a simple game as for your parents. The conventional patterns of schooling, work or business, family, and retirement are going through a tectonic change.

Life expectancy has increased, which means you may have an extended old age compared to your earning phase. Life is not easier for the working class either. The rapid technological changes necessitate them to acquire new skills periodically to be relevant.

All over the world, the interest rates are hitting bottom. The current interest rate in Europe is unable to beat inflation. So the traditional inherited wisdom of saving money in bank deposits and living a comfortable life with interest payments will not work for you. Inflation hikes the commodity prices, forcing many to touch their investments to meet unavoidable expenses.

A dwindling financial reserve makes people scared, anxious and stressed. Not at all a good situation during your old age. The only way to avoid such a situation is the creation of multiple sources of passive income that keep coming even after your retirement.

You can't achieve financial freedom on a fine morning. It requires a strategic approach by exploring suitable investment vehicles to sail you through the future uncertainties in a secure and stress-free way.  There are zillions of articles or YouTube channels that provide guidelines for investing money for beginners, with scant consideration for your income or life goals. Not all conventional investment strategies are bad. There is no meaning in blindly adopting a financial approach simply because it is unconventional.

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It's your money and life. So take a cautious approach by considering your financial status, life goals, and risk appetite.

Types of Investments for the beginners

Identifying your financial goals and starting your investment journey at the earliest are the most crucial elements in investing. There is a famous saying,

"The best time to start investing was yesterday. The next best time to start investing is today."

There are various small investments for beginners. Many believe that such small investments wouldn't help to create wealth. But the power of compounding over the years proves them wrong with exceptional returns.

The conventional belief of becoming financially independent through accumulating cash or property is not viable for the future. Instead, one should focus more on wealth creation by spreading your investments across different asset classes varying from fixed income sources, collectibles, equities, or even intellectual properties.

Luckily, unlike our parents, the FinTech revolution brings a broad set of suitable investments for beginners to achieve financial independence.

Bonds

When governments or corporations need money for their operations, they take loans from the public for a certain period by offering a fixed interest, known as the coupon rate, by issuing bonds.

The bond issuer, government or corporation, guarantees you regular interest payment and return of the principal upon reaching the maturity date. Usually, the interest rates are higher than the prevailing market interest rate. The protection for the capital and better interest rate is the primary reason for the popularity of bonds.

Bonds are tradable. One need not hold the bond till its maturity. Suppose if the central bank reduces the interest rate, then a bond with higher interest will be in demand. So you can sell it to another person for a margin.

You can convert your bonds to equities if the bonds are of the "convertible bonds" type.

Identifying the proper bond is essential. Some bonds may offer you a high-interest rate, but the chances of default can be higher.

In Europe, Internationally acclaimed bond rating agencies like Moody's, Standard and Poor's, Fitch Ratings, and DBRS give a rating for each bond based on their credit quality and risk levels.

"AAA" or "Aaa" rating indicates investment-grade bonds with low risk. Naturally, conservative investors will be keen on investing in such bonds even at a low-interest rate or more extended maturity period.

Bonds do not provide very high returns. Still, they are the best low-risk investments for both beginners and the elderly.

So if you are an aggressive investor, bonds are not a good choice for wealth creation.

Peer-To-Peer Lending (P2P)

In banking, banks collect money from investors for a lower interest rate and use the money to give loans to borrowers with higher interest. They use the gains to meet their operational expenses. Besides, the investor has no control over the loan lending process.

In Peer-to-peer lending, an investor can create a profile in the online platform and express their willingness to give loans. They can set the lending conditions such as interest rate, loan amount, term, business type, or even borrower-specific requirements. 

The platform identifies suitable borrower profiles and performs instant loan approval. Since there is no involvement of banks, the investor can set better interest rates than banks. For the borrower, it is a chance to get a loan if they don’t meet the requirements of traditional banks. So it is a win-win situation for both.

Still, P2P lending is not risk-free. Many borrowers in the platform lack the necessary creditworthiness for securing a bank loan. Besides, most loans in P2P lending are unsecured. So the chances of default are higher. There is no bank guarantee for your investments either.

Even though P2P lending is a relatively novel fintech solution, its popularity has expanded tremendously. Many countries are in the process of giving some level of protection for the investors through regulation. For instance, if the platform is FCA licensed in the UK, it provides a certain level of security about the platform. The platforms meet their expenses through transaction charges.

The flexibility of setting your loan conditions, 24/7 availability, borrower selection, diversification, and better returns makes P2P lending a popular option for investors. The extended loan period can create cash flow issues for the lender. But the regular income in the form of interest is an advantage.

P2P lending is an evolving investment and will mature in the future with better regulations. At the moment, P2P lending is considered highly risky. So it is not suitable for conservative investors.

Due to the low capital requirement and 24/7 availability, P2P lending is one of the popular smart investments for beginners.

Stocks

Stocks refer to your ownership of a company. A group of investors constitute a private limited company. Typically the share transfer happens within the group.

When such companies need money, they will try to raise capital from the public. For that, they will sell a portion of company shares to the public through the stock market. Once the company is listed in the stock market, it will change to a public limited company.

Unlike in the past, you can start a business without huge capital. So if you have resources, you can invest your money in companies or entrepreneurs with a future. Once the company grows, you can earn gains by selling your stocks.

Investing in equities is the best way to beat inflation and create wealth. By investing in the stock market, you get fractional ownership of a company by buying their stocks. 

If the company performs well, there will be a massive demand for your shares. You can sell it for a higher price, and the profit is capital gain. Similarly, the company can distribute its profit to the shareholders as dividends.

The major expenses for stock market investment are broker fees, transaction charges, and account maintenance charges.

Stocks have great growth possibilities and liquidity but are also highly volatile. The market can go crazy over anything without an apparent logical reason and is highly tempting. The greatest wealth destructor in the share market is your emotions.

Stocks are good long-term investments for beginners. Creating a portfolio for long-term wealth creation without equities is a mistake. While you are young, you can have good stock exposure, and as you age, you can reduce it.

But taking a share in a private limited company requires excellent levels of analysis and contemplation. Only invest if you have conviction in the company's business model and growth prospects. Suppose you can perform proper market analysis and be an expert in the number-crunching game. Investing in shares can bring you multibagger returns. But if you are too impulsive and are driven by emotions or tips, investing in shares can be dangerous.

Mutual Funds

For a new entrant into the world of investing, there will be many questions in their mind. Such as:

• How to start investing in equity?
• Do I need to have an investment account to start investing in stocks?
• How much money do you need to start investing in the stock market?

Mutual funds are the best investment vehicle for anyone to start investing in the equity market.

Here you purchase the units of a particular mutual fund by paying some money to the fund house known as Asset Management Company or AMC.

The fund house uses such accumulated money to invest in various entities such as equities, debts, or shares of companies in a particular segment. The company uses the service of fund managers to manage its investment and charges a fee for its management expenses, known as the expense ratio.

The significant advantage of MF investment is that you can invest in shares of different companies without the worries of stock selection. Since you have no control over the investment process, your emotional tantrums can't ruin your wealth creation possibilities.

If you have a financial requirement, you can redeem the units to the fund house, and you will get the money within a couple of days. There is no mandatory requirement of an investment account, and you can start investing with a minimal amount.

Funds that use the service of a fund manager are known as active funds and have a high expense ratio. Some funds try to replicate the index of the particular stock exchange, such as FTSE100, S&P500, Nasdaq, or Dow Jones.

Such funds do not make any active portfolio arrangement; instead, they make the allocations as per the index. Such index funds do not use fund managers, so their expense ratio is meager. These types of funds are also known as passive mutual funds.

MF doesn't need a broker on an investment account. But they can't trade in the stock market. So you can't take advantage of the market fluctuation. Since the fund manager manages the entire operation, you can't be involved with the fund allocation process. The liquidity is low in comparison with stocks.

Investing in MFs is one of the efficient ways to build your wealth. You can make a one-time lump sum investment or follow a systematic investment plan.

In SIP, you regularly invest some money in an MF, say monthly. The fund house purchases shares for you every month.

The advantage here is that you get more units when the market is bearish. And the total units accumulated over time would be higher than that of a lump-sum investment. Apart from unit allocations, it instills better financial discipline without seriously affecting your quality of life.

MFs are ideal for all age groups. Mutual Funds are simple investments for beginners. It also acts as a learning platform to study investment basics for beginners.

Exchange-Traded Funds – ETFs

ETFs are index funds offering a bouquet of stocks from a particular index and can be traded like stocks in the share market. In short, ETFs combine the safety of MFs and the liquidity of stocks.

Various ETFs are available on specific indices like Bank ETF, Commodity ETF, Debt ETF, or Sectorial ETFs such as Pharma ETF.

If you purchase an index ETF of FTSE100, you will have a portion of the 100 companies that constitute the FTSE100 index of the London Stock Exchange.

The significant advantages of ETFs are low expense ratios and trading features. Suppose there is a buyer; you can sell the ETF units for a premium.

Since experts make the stock selection, as in the case of MF, the risk is shallow.

Unlike MFs, you have a clear idea about the stocks or investments in an ETF.

In the case of MFs, the Fund house will buy back the units upon redemptions. But in ETFs, you have to find the seller or buyer for ETF transactions.

So before investing in an ETF, one has to check the transaction volume. If it is very low, the possibilities of poor returns or even loss can't be overruled. 

ETFs are a good choice for investment for all categories of investors.

Real Estate

Real estate investments have been the most popular investment mode across the world for ages. The significant advantages of real estate are its ability to produce passive income as rent, capital gain by selling, and the convenience of using it as collateral for loans.

The drawback of real estate investment is the huge capital required for purchasing a property in prime locations. It makes real estate not an easy investment for beginners.

Besides, it can create cash flow and liquidity issues as getting the right buyer for the right price can be challenging at times.

As long as it doesn't create any serious cash flow issues, Investing in real estate is always a good investment option for all.

Precious Metals

Humans have considered metals, especially gold, silver, or platinum, as an investment for ages. There are traditional, historical, and emotional reasons to hold metals in your portfolio.

As an investment, the primary advantage of metals like gold is increasing value and easy liquidity. Mining is costly now and leads to scarcity for the availability of these metals. Naturally, the price has been hitting new highs continuously for years.

All these metals have a global market. So you can sell it anywhere without bothering about forex rates. It is a great way to transport your assets to another geographical location, especially in turbulent times like political unrest or war-like situations.

Its liquidity is terrific. Apart from selling, you can use it as collateral to secure loans. Gold price is not affected by share market behaviors; most of the time, it moves in the opposite direction.

When there is a fall in stock prices, people move their investments to gold to re-enter the market at a better time. It is a clear indication of its liquidity.

The primary issues for gold or precious metal are storage. Since there are no ownership certificates or verifications, even a thief can sell it. These metals do not create any cash flows like dividends or rent. If you invest in jewelry, the making charges can make a hole in your pocket.

Investment in gold can add diversification to your portfolio and is a good choice for all. 

However, instead of purchasing physical gold, one may consider investing in digital gold such as Gold ETF or shares of mining companies.

Initial Public Offerings – IPO

An initial public offering (IPO) is the process whereby a company decides to sell its shares to all who wish to buy them, and thus becomes public. To do this, the company decides to list on the stock exchange. The company sells its shares with the help of investment banks, and then the shares go into free circulation.

If a popular business goes for an IPO it means that the hype would be much higher.  People tend to bid aggressively for the shares even at a higher price, expecting future gains.

Ironically, data indicates that such a value appreciation happens on rare occasions. A much liked or popular company can be a bad investment.

Analyzing a company's financial fundamentals is essential in making proper investment decisions. But in the case of IPOs, the absence of such verifiable previous performance indicators makes investing in IPOs a gambling-like situation. 

Always invest in IPOs with a pinch of salt.

CryptoCurrency

Cryptocurrencies are genuinely global currencies that enable people to perform transactions without geographical or currency conversion worries. The euphoria about Cryptocurrency and its increasing adaptation, high profits makes it a pretty tempting investment option for many.

The major concerning issue with Cryptocurrency is that regulatory bodies of many countries are not favorable to it. A policy change from the government can put all your investments in Crypto assets in vain.

Unlike other currencies by central banks, Cryptocurrencies do not have any intrinsic value; speculation drives the values. It makes Crypto highly vulnerable; even a tweet from industry giants like Elon Musk alone can fluctuate the prices sharply.

Due to the emergence of new cryptocurrencies, there is no guarantee that the Cryptocurrency you invest in will flourish. So cryptocurrencies are not an advisable investment for building a retirement corpus.

Youngsters can invest a small percentage of money in Crypto for asset diversification. You may also consider investing in an ETF that invests in Crypto-assets or Cryptocurrency mining companies.

Trustee Funds

Protecting your wealth and ensuring its transfer to your heirs is crucial in finance planning. Trustee funds are an excellent way to ensure the proper distribution of your assets even in your absence. The settler entrusts a trustee to execute the distribution of their assets as per specified terms to his benefactors.

Trustee funds are a great tool to save inheritance or estate tax from an investment perspective. Similarly, trustee funds give a good level of immunity for your assets during divorce or bankruptcy.

Setting up a trusty account involves many legal processes and financial burdens.

Robo-advisor

Getting personalized financial planning support to achieve their investment goals is difficult for many. Certified financial analysts are pretty expensive, and they require your portfolio to be extensive with huge investments.

Robo Advisors provides AI-powered automated financial solutions to suit your requirements. They get details of your financial health and goals by taking some questionnaires. After that, they give you advice on your investment and perform portfolio restructuring without any bias.

Since they follow an algorithm to design your investment portfolio, your convictions or preferences may not get a place in investment decisions of your money. It can create some emotional issues.

These automated Robo-advisors are very cheap compared to human advisors and are available 24/7. Robo-advisors are an excellent choice for those who don't have much time studying investment options or analyzing each company's balance sheet.

Individual Investment Account

The very first step of investment starts with opening an investment account with the stock exchange through a broker. An investment account addresses all your worries about how to start investing online.

In Europe, the significant type of investment accounts are:

Stocks and Shares ISA. You can invest up to £20,000 per year without any tax liabilities.

Self-Invested Personal Pension. A flexible investment option for your retirement with excellent tax advantages

Junior ISA or SIPP. You can secure the future of your children through systematic investment along with tax benefits.

Investment Account. Anyone who has exceeded the yearly tax allowances can use the investment accounts with no limitation for the investment amount.

Individual investment accounts give you great control over your investment decisions. They also help you achieve tax advantages for capital gains based on existing tax laws.

Dividend Tax

When a company makes a profit, it is distributed to its investors and is known as dividends.

Naturally, dividends fall under your income and are taxable if it goes beyond your tax-free personal allowance limit. But there is a separate tax-free allowance for dividends of up to £2,000. It means even if your income is beyond the individual limit, you can get further deductions for the income you received as dividends.

Suppose you are a retired person with no regular income. In that case, you can use your entire allowance, like personal allowance plus dividend tax allowance, as tax-free income.

Similarly, all the dividends earned from Stocks and Shares ISA investments are exempted from tax liabilities.

Annuities

At some point, all of us will retire from our active professions. Annuity schemes give you a steady income after your retirement till your death.

Subscription to annuities is a must for everyone's portfolio. You can make a good fund if you are younger due to the time advantage. That will give you a handsome income during your old age, sufficient to meet the expenses even with high inflation levels.

So start early.

Fixed Deposits

FDs are the most popular and familiar investment for all. Here you put money in your bank account for a certain period for fixed interest. Your money will grow there, and you can get it at maturity.

The significant advantage here is the safety of your account and immediate liquidity. You can encash the FD for a minor penalty even before maturity if you are in an emergency.

The declining interest rates reduce the returns. But it is one of the safe investments for beginners and the elderly.

Comparative table on types of investments

(*data are based on German companies)

When you are young, you have a long horizon for investment. In investment, risk and returns go hand in hand. Higher the risks, the possibilities for high returns are high. But capital protection is crucial as well.

Best investment options for beginners in 2022

The best options for someone who starts investing would be Stocks, P2P, ETF, mutual funds, Real Estate, and Cryptocurrency.

Real estate is a High capital-intensive investment, and it might be difficult for someone to get the funds. Even though fractional investment is possible, cryptocurrencies are highly volatile. Understanding the nuances of stock trading or the market can be challenging for many.

In the case of P2P lending, there is no requirement for massive investment; its working is uncomplicated, provides a steady income, and is less volatile than stocks or Crypto. So a good investment option for a beginner is P2P lending.

The crucial element is the credibility of the platform and its charges. Some platforms or lenders may go default, so it’s advisable to check the legitimacy of both.

Robo.cash offers advanced technological adaptation and transparency. Our working model is simple. The loan originators in our platform are affiliated companies of Robocash Group, the platform’s parent holding. These companies are responsible for your payment. So even if one of their borrowers goes into default, you will get your money back without any issues as stated in the due agreements. 

Robo.cash does not collect any charges from the investor. So you can start investing with no money for registration or account opening activities. The maximum amount one can lend in a calendar month is 15000 EUR. There is no minimal threshold to start investing.

By joining Robo.cash, you can earn up to 13.3%1 annually, and the perfect track record speaks for itself.

Basic steps to start investing in P2P

The steps to joining as an investor on Robo.cash are:

1. Login to the website and create an account for yourself.
2. Any resident of the EU, the UK, or Switzerland, age of 18, with a personal bank account in the EU, the UK, or Switzerland in EUR currency, can become an investor on Robocash.
3. After registration, submit the documents for verification.
4. Once you are verified and the account is active, you can transfer funds from your bank account to Robo.cash account.  By default, your money will be credited to your investor's balance account.
5. Create a portfolio and set your loan conditions such as loan amount, interest rate, country, risk profile, etc. Choose how much money you wish to add to each of your portfolios.
6. Our robot will pick the most suitable loans and invest the money within one hour.

Useful investing tips for beginners

Investing is a marathon, not a sprint. It needs a proper strategy and realistic expectations about returns.

Not all stocks can be multibagger. The past performance of a stock or fund is not an assurance about its future performance. If you want to invest in equities, spend some time understanding the market or interpreting the balance sheet. Choosing stocks based on tips or youtube gurus or PE ratio can be deceiving.

Diversification is always a good strategy. But over-diversification can kill your growth. There is no sense in keeping 100 stock and 50 MFs in your portfolio without any rebalancing. So always maintain a trim portfolio so that you can track regularly and efficiently. Before starting to invest, always set aside an emergency fund of easy liquidity so that you can survive at least 3-6 months in the event of job loss or health emergencies. Clear your debt first and do not invest with borrowed money.

Also, if you cannot understand a business, it’s better to stay away from investing in it. Your best friend and enemy in investment are your emotions.

Wealth accumulation takes time, and you need to give ample time for your investments to grow, mature, and yield fruits for your better future.

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* The information in this article is intended for educational and entertainment purposes only and cannot be considered investment advice.

1 - Based on the weighted average of available loans, your portfolio returns can be higher or lower.