Investing in the stock market can be tricky when we are just starting out. There is so much information available on various kinds of stocks that it can be a bewildering process. Over the years, I have found that asking two questions could have been helpful when starting my own investing journey with, say, £10,000.
#1. What is my holding period?
I may want to trade-in stocks and buy and sell them frequently. Or I may want to hold them for decades. I may even wish for them to be security for the next generation. Once there is clarity on my holding period, I can invest accordingly.
For first-time investors and those who are busy with other pursuits, short-term investments may not always be the best idea. Stock purchases made with a medium-to-long-term timeframe in mind are likely to yield better results.
#2. What do I hope to achieve?
My goals may be different depending on the stage of life I am at. For instance, I may want to invest as soon as I start earning to have enough money to make big asset purchases at a later date, like real estate or starting my own business. Or I may want to provide a regular income stream after retirement. Or a combination of the two. Depending on the relative ratio of my financial wants, I can allocate my £10,000 accordingly.
One caveat
Once these questions are answered, I can start picking stocks. The underlying assumption here is that I’d practice a fair bit of risk-aversion. This translates into steering clear of stocks that may have a lot of promise, but are yet to prove themselves.
These include cryptocurrency miners and recreational marijuana stocks, as examples. Both of them are not just relatively new to the environment, but can also be subject to legal limitations.
Stocks to buy
With that caveat out of the way, my stock-picking process can be far simpler because I am now looking at only a limited number of stocks. FTSE 100 and FTSE 250 stocks typically fit the bill of being relatively low-risk.
Among these, there are three kinds of broad categories. The first is growth stocks, which promise to make significant capital gains if held for some time because of a rise in their share price.
The next is income stocks that offer a high dividend yield. The dividend yield is nothing but the dividend amount as a percentage of the share price. So stocks that earn me the biggest dividends compared to their share price would be my target investments to earn a high income.
Then there are what I like to call combination stocks, which offer growth plus income. These are stocks that not only offer me capital gains overtime, they also pay me good dividends.
Next steps
After this, it is just a matter of narrowing down to the best ones for my requirements, and allocate my £10,000 accordingly.