How to Begin Investing as a Student: A Practical Guide

Embarking on your investing journey as a student presents a unique opportunity to lay the foundation for future financial success. Identifying your strengths is vital when diving into the world of investments.

Table of contents:

1. Understanding Your Benefits
2. Find Suitable Investment Options
3. Learn the Basics
4. Prepare the Infrastructure
5. Build Your Portfolio

Understanding Your Benefits

As a student, you possess distinct advantages that set you apart from others. Leveraging these advantages when starting to invest can help you be a winner from the beginning.

1. Time horizon:  you can enjoy a longer time horizon for your investments than older individuals. This extended investment horizon allows you to weather market downturns and benefit from the compounding effect over an extended period.
2. Risk tolerance: with a longer time to recover from potential losses, you have a higher risk tolerance, enabling consideration of more aggressive investment strategies that may yield higher returns with increased risk.
3. Lower financial responsibilities: having fewer financial responsibilities compared to individuals with families or significant debts allows more discretionary income to be directed toward investments.
4. Access to information: leverage free online educational content on investing topics to enhance your knowledge. Additionally, partnering with your classmates can aid in research, as collaborative efforts increase the chances of success when seeking investing opportunities. Building a community of like-minded individuals will assist with idea generation and provide a platform for validating your own ideas.

Find Suitable Investment Options

Now that we’ve identified your strengths, let’s delve into the opportunities available for you to channel your financial efforts effectively.

Stocks

Stocks offer a direct pathway to ownership in companies, providing investors with opportunities to benefit from their success in multiple ways. Dividends, which are payments made to shareholders from a company’s profits, offer a source of regular income. Share price appreciation reflects the increase in the value of the stock over time, contributing to capital growth. Additionally, buybacks, where a company repurchases its own shares from the market, reduce the total number of outstanding shares, thereby increasing the ownership stake of existing shareholders and enhancing shareholder value over the long term.

Embracing the opportunity to invest in stocks requires a tolerance for risk and a longer time horizon, characteristics that align well with the advantages enjoyed by students. Investing in growth-oriented companies and holding for decades can yield significant returns, as exemplified by Amazon’s (AMZN) remarkable transformation from an e-shop to one of the world’s largest companies. The investors who held the stocks for 20 years benefited from the company’s success with their investments multiplying by over 800%. However, achieving such success demands dedication, patience, and a solid understanding of financial markets.

Mutual Funds and Exchange-Traded Funds (ETFs)

The versatility of mutual funds and exchange-traded funds (ETFs) provides investors a powerful tool for diversifying their portfolios across a wide range of assets. These investment vehicles pool funds from multiple investors, allowing individuals to access a diversified portfolio without the need for substantial initial capital.

Mutual funds and ETFs streamline the investment process, saving time on individual stock research and analysis. By investing in a single fund, investors gain exposure to a diversified basket of assets, spanning various sectors, industries, and geographic regions. This not only reduces the risk associated with individual stock picking but also positions investors to benefit from long-term market growth and economic trends.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) offer a straightforward and accessible way for students to invest in real estate without the complexities of property ownership. With attractive dividend yields, REITs provide a unique income-generating opportunity tailored for student investors.

Investing in REITs is particularly suitable for students seeking exposure to the real estate market without the need for significant initial capital investment. Recognizing the financial constraints commonly faced by students, investing in fractional shares of real estate through REITs emerges as a practical and viable solution.

Cryptocurrency

Venturing into the realm of cryptocurrency investment presents exciting opportunities for those with an appetite for technological trends. However, it’s important to recognize that cryptocurrency investment entails significant risks, including the industry’s youth and ongoing development, which expose investors to various scams, fraudulent projects, and market volatility.

For students intrigued by the potential of cryptocurrency investment, exercising caution and conducting thorough research is paramount. While the allure of high returns and exposure to innovative technology may be appealing, it’s vital to approach this curiosity with care and acknowledge the inherent risks within this evolving and volatile market.

Regardless of the investment option chosen, whether it be stocks, real estate, or cryptocurrency, the journey to becoming an investor involves additional efforts to start.

Learn the basics

In the rush to begin investing, many individuals often overlook the critical step of learning the basics. There’s a temptation to dive straight into an investment based on hearsay from friends or the internet. However, before taking that leap, it’s essential to ask yourself a few fundamental questions about the investment options you’ve chosen.

Stocks

1. What is my investment goal, and what timeframe am I comfortable with?
2. Have I thoroughly researched the company’s financial health and growth prospects?
3. Am I mentally prepared for market volatility and potential losses?

Mutual Funds and Exchange-Traded Funds (ETFs)

1. Do I understand the underlying assets held by the ETF and their correlation to each other?
2. What are the expense ratios and trading costs associated with the ETF?
3. Is the ETF aligned with my investment strategy and risk tolerance?

Real Estate Investment Trusts (REITs)

1. Have I assessed the underlying real estate assets held by the REIT, including their location, type, and quality?
2. What is the historical performance of the REIT, including dividend yield, growth, and total returns?
3. Am I aware of the tax implications and liquidity risks associated with investing in REITs?

Cryptocurrency

1. Have I thoroughly researched the cryptocurrency I intend to invest in, including its technology, use case, and adoption?
2. Am I comfortable with the high volatility and regulatory uncertainty associated with cryptocurrencies?
3. Do I have a secure storage solution and understand the risks associated with holding cryptocurrencies?

If these questions pose a challenge, it’s important to take the time to educate yourself about the topic. Dive into the available information about the asset you’ve chosen to acquire. Understand the associated risks, and be clear about the return you expect and why you anticipate it. Remember, a solid foundation of knowledge is key before venturing into any investment.

Prepare the Infrastructure

Cash Account

Determining the currency for your base is a crucial consideration from the outset. While this may be a straightforward decision for US investors, it holds significant importance for others as well. Given the potential need to exchange your local currency or make deposits with higher fees, every penny becomes paramount, especially when dealing with smaller amounts. Personally, I opted to minimize unnecessary costs by leveraging the efficiency of SEPA transfers, which are fast, reliable, and often commission-free. To convert Czech Krona into Euro without incurring additional fees, I utilized Revolut as a bridge between my bank and the broker. This approach not only facilitated a seamless SEPA transfer but also ensured that each contribution was made to the brokerage account without unnecessary deductions.

Brokerage Account

Now, let’s delve into selecting a brokerage that is safe, reliable, and affordable. I recommend thorough research into fees associated with trades, account inactivity, and money transfers. Additionally, ensure that the platform supports your currency and country, and consider the added benefit of fractional shares trading. In my quest, I identified two options that ticked all the boxes – Trading 212 and Interactive Brokers. Both passed my stringent criteria, boasting excellent insurance coverage and offering either minimal fees (as low as $0.35 per trade) or no fees for their services.

Tip: if you find yourself without funds to invest, consider honing your skills with a paper-trade account. With a mock deposit, you can practice investing and refine your strategy before committing actual funds.

Utilizing Technology

As part of the younger generation, leverage available sources and free tools to optimize your time. Here is a curated list of complimentary resources that can assist you: 

• TIKR Terminal – access free historical financial data and a stock screener.
• DATAROMA – utilize this free tool to monitor super investors’ activity. 
• Google Sheets – seamlessly track your investments, evaluate stock values, and more.

By incorporating these tools into your investment strategy, you can harness the power of technology to enhance your financial decision-making process.

Build Your Portfolio

Throughout your learning curve, you’ll encounter numerous opinions on where to allocate your funds. It’s necessary to bear in mind that what makes sense for one investor might not be suitable for you as a student. Here is a step-by-step I would approach as a student.

1. Define your investment goals
   • Determine whether your objectives are short-term or long-term.
   • Consider factors such as tuition fees, travel expenses, and long-term financial security.
2. Educate yourself
   • Familiarize yourself with the different asset classes mentioned above.
   • Learn about the risks and potential returns associated with each asset class.
   • Utilize online resources, books, and reputable financial websites for information.
3. Start small and gradually increase investments
   • Take advantage of low-cost or commission-free trading options for students.
   • Begin with small amounts and increase investments over time as you gain confidence and knowledge.
4. Embrace diversification
   • Spread investments across various asset classes to mitigate risk.
   • Balance high-risk, high-return assets with less volatile assets helps stabilize the portfolio during market fluctuations.
   • Learn about different diversification strategies.
5. Stay informed and avoid impulsive decisions
   • Stay attuned to economic trends and market news.
   • Avoid making impulsive decisions based on short-term fluctuations.
   • Focus on long-term goals and stick to your investment strategy.
6. Regularly review and adjust your portfolio
   • Periodically assess your portfolio to ensure it aligns with your goals and risk tolerance.
   • Make adjustments as needed based on changes in your financial situation or market conditions.