One of the easiest ways to determine whether someone is financially successful is to ask them the question: ‘Do you invest in the stock market?’ That’s because investing your money produces staggering results over a number of years, compared to stashing it in a low-interest bank account. If you want to invest but don’t know how, this quick guide is your answer. We’ll explain how to invest your money as a beginner in the stock market.

Before we begin, we need to warn you that this article is not financial advice. If you are unsure about taking your first steps, you should consider paying an independent financial adviser to give you specific advice based on your personal circumstances.

This guide will explain how to invest in six simple steps. We will not cover more complex questions like how to craft the perfect investment portfolio or when is the right time to sell your investments, as we have dedicated articles covering these topics.  

How to invest in the stock market – the six steps

1. Identify your spare cash (see how to save money)
2. Understand the maximum time horizon for that money
3. Decide how much risk are you prepared to take
4. Choose a stockbroker or investing app
5. Pick a passive fund (or multiple) that spreads your risk
6. Keep investing

1. Identify your spare cash

To be able to invest some money, you must save some money first. That means having some money left from your payslip at the end of the month, or receiving a lump sum from the sale of a car, or perhaps even receiving an inheritance.

Some people grow up with a frugal mindset. They naturally find it easy to say ‘no’ to opportunities to spend more money, and they become prodigious savers. 

Others may fatefully come into a financial windfall at a point in their life. This might be through an inheritance, a lottery win, a legal claim or a gift. 

But it’s fair to say that the rest of us find it a struggle to have a meaningful amount of cash left over at the end of the month to use to save or invest.

There are good ways and bad ways to go about investing; mistakes can be made and some people pay far more in fees to financial institutions than they need to. 

But one thing is for sure; the more money you can put into the stock market at any time, the better the financial outcome. The quantity of cash you are able to save each month will have a dramatic effect on the amount of wealth you can create. 

• Consider that just £100 invested each month at a 5% return from the age of 20 to 60 would grow to £200,000.

• But if you could up that figure to £350 per month, it would grow to £700,000

• If you can push the envelope and save £1,000 per month, it would be worth £2 million. 

In the UK, the median household income is £2,566 per month (source). This means that it is within the gift of most families to become ISA millionaires. It’s only a question of how much of that income we can save.

Each of these investment levels opens the door to a very different lifestyle. Our first saver is getting by, the middle saver is taking adventurous holidays and the final saver is visiting one of their multiple holiday homes across the world. 

This shows the powerful impact of being able to save more money. Read our guide on how to save money for tips and advice on how to spend less and save more.

2. Understand the time horizon of your money

Once you’ve successfully saved up some money and feel ready to invest, it’s important to take a second look at that cash and ask yourself – is there a good chance I will need this money in 1, 3, 5 or even 10 years?

This question is how you will determine the time horizon of that money. In other words; the length of time you can comfortably commit it to an investment without needing to withdraw it. 

This is an important question for two key reasons:

1. Some savings and investment products will tie up your money for a fixed period of time and will not allow you to withdraw before the maturity date.
2. The value of investments may rise and fall dramatically in the short term. Being able to commit to a long time frame will give you peace of mind during dips because you have the patience to wait until the stock market recovers. 

If you are realistic about your time horizon, this could deliver some bad news for your investing ambitions: stock market investments are not appropriate for time periods of less than 5 years. 

If you are saving for a short term savings goal like buying a car or going on a holiday, you will be taking a large risk by investing in the stock market. As we condense the time period tighter and tighter, the greater the risk that the stock market will fall while you are invested, and you may need to sell your investments before it has had time to recover.

If you are saving for a long term goal, like a retirement date which is two decades away, then your time horizon may be long enough to tolerate the maximum level of risk. 

But that doesn’t mean you should crank up the risk to the maximum. You may now become the  limiting factor, which brings us to our next step:

3. Decide how much risk are you prepared to take

We often think about risk in terms of a spin of a roulette wheel at a casino, but this isn’t a particularly helpful metaphor for investing.

When playing roulette, casino goers will often stake only a few chips on a single spin. When betting on one of the 37 numbers on a wheel, the likelihood of loss is high. The potential payoff from an unlikely win is massive.

In contrast, investing sensibly in the stock market is a one-sided bet. If you pick any 20-year period stock market history in the US, the market has never ended the period lower than it started. 

This is equivalent to saying “A roulette wheel might look risky, but if you sit at the table and play every day for a month, you’re almost guaranteed to come out ahead”. In a casino, this would be absolute nonsense, thanks to the house edge which gives each player a negative expected return on each bet. This is a key reason why investing is not gambling. 

That’s the academic view on stock market risk, but we need to also consider the human element. 

Sometimes it doesn’t matter if someone’s time horizon is long. It doesn’t matter if all the historic price charts suggest that stock markets will always rebound.

If they have a low appetite for risk, then their personal experience of riding through a temporary 30% loss could be intolerable. They may feel regretful, angry, or ashamed. Worse; they may decide to cut their losses in a fit of panic, effectively converting a temporary paper loss into a real, permanent cash loss. 

The financial consequences of being unable to patiently wait out a drop in the stock markets are bad enough, but the unpleasant emotions that come alongside this chapter can turn people off investing for life. 

Take our risk appetite questionnaire to get to know your own attitude towards risk. Let the result prompt an internal discussion of how you think you’d feel if the stock market fell by 50% in the month after you have invested. 

If your past experiences suggest that you would be very uncomfortable incurring losses, it is better to be honest now and take a cautious investment approach than regret it later. 

4. Choose a stockbroker or investing app

You’ll use a stockbroker to buy and hold your investments. Choosing a great stockbroker is like choosing a good bank. You’ll want to find a service provider who:

• Provides the right type of account
• Offers the range of investments you want
• Charges reasonable fees
• Has good reviews

We’re an excellent source of online stockbroker reviews, so feel free to read some of our comprehensive review of some of the best UK stockbrokers:

• eToro review
• AJ Bell YouInvest review
• interactive investor review
• Hargreaves Lansdown review
• Dodl review

The stockbroker industry is odd in the sense that providers call themselves by a wide range of names such as ‘investment platform’, ‘share dealing service’, ‘fund supermarket’ and ‘online trading platform’. In practice, most services have considerable overlap and offer a variety of shares and funds to buy as investments. 

You may find it helpful to use our comprehensive stockbroker comparison which lists most stockbrokers in the UK. Here’s a glimpse of the results:

5. Pick a passive fund (or multiple) that spreads your risk

When learning how to invest as a beginner, we recommend that you start very simply by investing in a fund. 

What is a fund? A fund is a company run by investment professionals. It’s a collective investment which means it pools money from thousands or millions of investors and uses it to buy a portfolio of investments according to the strategy of the fund. 

A UK equity fund would buy the shares of UK companies. A US corporate bond fund would invest in American corporate bonds, and so on. This way, an investor buys shares or units in a single fund but effectively owns a slice of a large diversified portfolio of investments.

Multi-asset funds deliberately invest in a mixture of bonds and shares to provide investors with a simple way to buy an entire portfolio in a single go. 

Read our explainer guides; what are shares and investing in corporate bonds to learn more about these underlying investments. 

Examples of multi-asset funds include the LifeStrategy series of funds by Vanguard. These blend a percentage of equities and corporate bonds in varying proportions to suit different investor risk preferences.

Vanguard LifeStrategy 60% Equity Fund – Available directly through a Vanguard Personal Investor account

Vanguard LifeStrategy 60% Equity UCITS ETF – Available to buy through stockbrokers

The advantage of keeping it simple and using few funds are that you can focus your attention on saving more rather than getting lost in the science of portfolio management. 

Particularly early on in life, spending your time and effort generating more savings to invest will yield more fruit than endlessly fiddling with your portfolio composition. 

6. Keep investing

Investing isn’t a one-off event, it’s a lifestyle choice that will gradually lead to the financial results you crave. 

Through the ups and the downs, through your highs and lows, if you can continue making an ambitious contribution to your investment account then you’ll eventfully be able to reap a bountiful harvest. This even means investing when the stock market outlook is bleak. In hindsight, the periods in which the media was collectively losing its mind over the future of the financial markets were some of the most lucrative periods to invest. That’s because the best investments are usually unfashionable assets that have fallen out of favour (and are therefore undervalued).

How to invest in the stockmarket – final thoughts

The best books about investing make clear that simply being in the market is a far bigger factor for returns than any sophisticated investment strategy. Whether you eventually invest for dividends, seek out growth stocks or experiment with crowdfunding platforms, the vanilla fund you use to invest in the whole market should deliver results.