Has a friend mentioned that they invest into stocks such as Apple, Tesla and Aramco? Want to decide whether investing in stocks is right for you? We have you covered! In this guide we will cover all the basics of what stocks are and what are the different ways that you can invest in them so you can decide whether investing is right for you.
An Introduction to Investing into Stocks
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What's Covered
1. What Are Stocks and a Stock Market?
2. Different Ways to Invest into Stocks
3. The Benefits and Risks of Investing into Stocks
4. How to Get Started
5. What’s the Right Stock Investment Strategy For You?
6. Top Tips for Investing in Stocks
7. Basic Definitions
1. What Are Stocks and a Stock Market?
Investing in stocks just means buying a small share of a public company. If that company does well over time, the value of the stocks should increase, meaning that you are able to sell the stocks for a higher price than what you purchased it for. In addition to a change in the value of the stock, some companies also pay a dividend which is where a company pays some of its profits out to investors.
Stocks are traded through a stock market or stock exchange. Most countries have at least one exchange and some countries have more than one exchange. The Saudi stock exchange is Tadawul.
2. Different Ways to Invest in Stocks?
You can either invest directly into stocks, invest into an index fund or invest into an actively managed or mutual fund. All options are available through a stock broker.
| Risk | Cost | ||
|---|---|---|---|
|
Direct Investments
|
You can invest directly into a stock. Your investment returns will be based solely on the performance of the company stock. Therefore the value could increase or go down to zero.
|
Very High
|
Low
|
|
Index Fund
|
An index is a large collection of stocks that all have similar traits. This could be a global fund or the investments could be in the same country, same industry, similar size etc. An Index fund invests in some or all the stocks in the index to mirror the performance of the index.
|
High
|
Medium
|
|
Actively Managed Fund or Mutual Fund |
An actively managed fund is where a fund manager is selecting what they think are the best stocks in an index in order to provide an investment return that is better than the index. Because actively managed funds require more resources, they are generally more expensive than index funds.
|
Medium |
High |
3. The Benefits and Risks
The main benefit of investing into stocks is that it can increase your wealth and help you to reach your goals faster. Whilst in the short term stock prices can go up or down, historically over the long term stock prices have shown to increase (however this does not mean that this will be the same going forward). Stocks can also pay a dividend that can help you create an additional income.
However stocks are classed as a higher risk investment because whilst the value may go up, the value could go down which may mean that you get back less than what you invested. Single stock investments are considered particularly risky as the value could go down to zero. This is less likely to happen with index funds and actively managed funds.
4. How to Get Started
The easiest way to invest into stocks is to open an account with a stock broker. A stock broker is a platform that allows you to invest in stocks or funds. Choose a stock broker that has a low minimum level of investment and has a low level of fees. If there are particular stocks you want to invest into, check these are available through the stock broker before you sign up.
If you are looking to get started quickly, check out Derayah. You can open an account for free with no minimum balance requirements. Once you have registered, choose whether you want to invest into stocks, index funds or actively managed funds and make your first investment.
5. What’s the Right Stock Investment Strategy For You?
New to investing
Keep things simple and start by investing in a global index fund or actively managed global equity fund. This will invest in the major companies from across the world. This way you can gain experience without having to decide on which stocks to invest into. Choose a low cost option where you can invest a small fixed amount every month. This avoids the risk of trying to time the market and by spreading your investment over several months, you are reducing price volatility. You may also want to consider investing into stocks as part of a diversified investment portfolio. See our guide on [Investment Strategy for New Investors] on how to get started.
Cautious but want to Invest Directly into Stocks
You can consider a simple buy and hold strategy that can create wealth over time. This is where you invest into stocks that you like and continue to hold them over a long term period with the view that they will increase in value over time. If you are investing directly into stocks, make sure you do your own research and are comfortable with the risk that the value of the stocks could fall to zero.
Happy to Take More Risk
You can consider trading stocks. This involves speculating whether the stock price will go up or down and then buying or selling your stocks. For example if you think that the price of the stock is going to go down, you will sell it with the view to buying it back at a lower price. If you think that the price of the stock will go up, you will buy it with the view to selling it at a higher price. This is a high risk strategy because whilst you may be able to make a higher return, there is also a chance that you may make bigger losses.
6. Top Tips for Investing in Stocks
Reinvest Dividends: If you don’t need the income, reinvest dividends into buying more stocks. This will help increase your investment returns
Diversify Your Stock Investments: Don’t invest all your money in a small number of stocks. Diversify across industries and countries, ideally through a fund.
Consider Other Asset Classes: Don’t just invest in stocks. Make sure you also invest in other asset classes such as bonds/sukuks and [real estate] as part of your investment portfolio.
Research: Don’t invest based on share tips. Always do your own research
Be Patient: Investing is a long term activity. Don’t panic if the market falls – remember the reasons why you first invested
Regularly review your portfolio: If your circumstances have changed, you may want to change your investment portfolio.
7. Basic Definitions
| Name | Definition |
|---|---|
|
Stock
|
A unit of a publicly traded company
|
|
Stock Price |
The current price of the stock (the buy price or “bid” and sell price or “ask” might vary slightly. The difference is called the spread) |
|
Stock Symbol |
An ID that is used to search for a stock in a particular stock market. For example the ID for Tesla is TSLA
|
|
Initial Public Offering (IPO) |
An IPO is the activity related to a private company becoming a public company and offering their stock to investors |
|
Market Capitalisation (Outstanding Shares x Stock Price) |
The current value of the company |
|
Dividend |
A payout made to stockholders from the company profits |
|
Dividend Yield
(Dividend / Stock Price)
|
The percentage of a company’s share price that is paid out as a dividend. Usually the higher the dividend yield, the more |
|
P/E Ratio
(Market Cap / Annual Earnings) |
An indication of how the stock is valued relative to the earnings produced. A high P/E Ratio could indicate there are higher growth expectations of the company whilst a lower P/E Ratio could indicate lower growth expectations of the company. |
MyMal Hero’s View
If done correctly, investing in stocks can help you to increase your wealth and get to your goals faster. If done incorrectly, you can lose all your money. Don’t listen to stories of people making millions or losing all their savings in the stock market. Only you can decide if investing in stocks is right for you. Use this guide to decide whether you want to invest into stocks and if so, follow an investment strategy that is right for you.
What's Next?
Before investing in stocks, get good at saving. See our guide to Different Saving Options in the Kingdom
Investing into stocks should be considered as part of an Investment Portfolio. See our Guide on How to Build an Investment Portfolio
Looking for other ways to earn an income? See our guide on 6 Different Ways to Earn an Income
Sponsor
The organization below has kindly sponsored this guide to cover the cost of providing it to you. However the company has not had any influence over what is written.
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