Today I want to talk about how to invest in stocks. This might seem strange, given that the FTSE 100 is down by nearly 20% this year, while gold and Bitcoin have both risen by nearly 30%.
However, I believe that if you want to invest and get rich, the stock market offers far bigger long-term opportunities than Bitcoin or gold. Let me explain why.
What’s wrong with gold and Bitcoin?
Bitcoin was originally invented as an alternative currency. Despite this, hardly anyone actually uses it. Most people who own Bitcoin only seem to want to trade it in the hope that the Bitcoin price will rise. I don’t see this as a sensible way to invest — it’s just gambling to me.
Things are a little better with gold. Although the yellow metal will never expand or generate income, gold has been used to store wealth and make payments for thousands of years. I think that will continue. I also like gold’s portability and security — unlike Bitcoin, physical gold can’t be hacked.
However, the reality is that the last time gold rose above $1,800/oz. was nine years ago. That peak was followed by a six-year slump that saw the yellow metal lose up to 45% of its value.
I don’t think this is a good time to buy gold. But falling share prices mean that I do think it’s a good time to invest in stocks.
Why I buy shares
When you own shares, you own a slice of a real business. Assuming you invest in profitable, successful companies, this means that the value of your shares is backed by profits, assets and cash dividends.
Unlike Bitcoin and gold, shares do have an intrinsic value — the value of the business you part-own. Most good businesses grow over time. They add new customers or products, or increase their prices to reflect stronger demand. This is reflected in rising share prices and larger dividends.
How to invest in stocks
Getting started in the stock market is easier than you might think. The first thing I’d do is open a tax-free Stocks and Shares ISA. You can pay up to £20,000 a year into an ISA and all future profits and income will be free of tax.
The simplest way to start buying stocks is to just put cash into a cheap tracker fund, such as a FTSE 100 index ETF. However, many indices — especially the FTSE 100 — are heavily weighted to a few sectors.
Almost 30% of the FTSE 100 is made up of oil stocks, miners and banks. Technology stocks account for less than 1%. Personally, I want more exposure to sectors with good long-term growth potential, such as tech and pharmaceuticals. I’m not so keen banks.
The way I approach building a stock portfolio is to choose 15-20 good quality stocks that I’d be happy to hold for at least five years. I then start to buy them gradually, investing a fixed amount of cash each month.
By investing regularly, I can profit from periods when prices are low. I can also avoid any risk of putting all my cash into the market just before a crash. Dividends get reinvested whenever I buy new stocks.
This is how I invest in stocks. It’s…