How to invest in the stock market
Investing in the stock market can seem daunting at first, but historically the returns over time have been far better than you’d get on any cash savings. Here’s how to invest.
The stock market can seem like a scary place for novice investors. First of all, it is vast, with a multitude of company stocks, indices and funds to choose from. And it can also be unpredictable, with individual stocks rising and falling countless times within the space of an hour.
What is the stock market?
Stock exchanges, like the London Stock Exchange or the New York Stock Exchange, are where stocks are traded or exchanged. They differ from other means of trading shares, such as over-the-counter markets, in having strict regulations for the trading of shares and of the companies that list on them.
However, stock market returns have historically beaten cash savings, even if there are a few dips along the way. In fact, between 1 April 2007 and 1 April 2017, the FTSE 100 returned 11.31% for investors, while cash savings accounts languished at just 1% or 2%.
There is a misconception that stock market investors are all high-powered bankers and financial experts, but anyone can invest in stocks and shares, whether you have £100 or £1,000,000 to spare.
In fact, it has never been easier to access the stock market. Here is our guide to start investing in stocks and shares:
Do-it-yourself stock investments
If you want to cut out the middlemen and buy stocks directly, the first thing you need to do is work out where you want to put your money. The main stock exchange in the UK is the London Stock Exchange, and within this there are a number of different groupings or ‘indices’. The most famous of these is the FTSE 100, which, as the name suggests, is made up of the largest 100 publicly-listed companies in the UK.
Choosing an exchange traded fund to invest in
Using the FTSE 100 as a guide, you could choose to either invest in a handful of specific companies (eg Marks and Spencer Group, Barclays, or Vodafone). Alternatively, you could spread your investment across all 100 companies by putting your money into an ETF - an exchange traded fund - which tracks and mimics the overall performance of the entire group.
ETFs have become hugely popular with direct investors, as they are cheap (the total cost of fees is usually well under one per cent of the total investment) and easy to use. ETF investments can also be made within a stocks and shares ISA, which means that any returns will be tax free.
Finding an online stock broker
Once you have figured out where you want to invest your money, you simply need to find a trustworthy online broker or trading platform to act as your intermediary. Sign up for an account, deposit your funds and direct them wherever you want to invest, then top up your investment pot whenever you can.
The most important thing to remember when investing directly in the stock market is to be patient. Resist the temptation to withdraw your money any time you make a small loss. Over time most indices and stock markets will even out and move back into profit. What’s more, there is a small cost every time you make a trade, and these fees can add up quickly if you are in the habit of changing your portfolio day by day, eroding away your returns.
Investing in the stock market with a professional
If you don’t feel confident enough to make a direct investment in the stock market, there are thousands of professionals out there who can do it on your behalf, in exchange for a fee of course.
Professional stockbrokers spend all their time playing the markets, and use their specialised knowledge to buy and sell company stocks.
Similarly, fund managers offer access to any and every part of the stock market, whether you want to invest in small-cap businesses, healthcare companies, fintech, or any other number of sectors and firms. These funds are designed to suit the manager’s particular background, and managers will usually take an active role in the portfolio construction, adding and removing certain stocks and shares according to market movements.
As with direct investments, it usually pays to leave your money in these funds for a longer period of time, and most funds will include exit clauses in their contracts so that you are forced to give notice of a week, a month, or more.
However, before you put your hard-earned savings into the hands of a professional investor, you have to make sure that you trust them and that the higher fees you will pay really do earn those promised higher returns. Always review the fund manager’s past performance and, if possible, arrange a face-to-face meeting so they can talk you through their investment strategies. Cautious investors may want to consult an independent financial adviser (IFA) who can do all of this due diligence on their behalf.
It is also worth remembering that the more renowned the broker or manager, the higher their fees, and you may end up paying them even if your investment makes a loss.
Regardless of how you choose to invest in the stock market, the rewards are there — just do your research, keep your wits about you and seek professional advice when needed.