How To Invest in Stocks - A Quick Guide
Investing is one way you can earn additional financial returns beyond savings and property. But 'investing,' observed one famed investor, 'is simple, but not easy.'
Here are eight pointers to help you ease into the stock market investing. This is only a starting guide.
Investing in the stock market is volatile
People always underestimate the volatility of share prices. Prices can halve or double in a few short weeks. In 1987, prices collapsed one-fifth on one windy day. Always factor this in when investing in stock markets.
Forecasting stock markets is very difficult
Big swings in stock prices means very few can forecast stock prices accurately, day in day out. Since you can not control what the market will do, better do something more productive and on things you can control, such as risk management.
Focus on risk management when investing in stocks
This is to make sure that your portfolio does not blow up after six months. Some general guidelines:
- Diversify - Invest in different stocks in different sectors. Owning five different stocks in the same sector does not count.
- Owning other asset classes - Equity investing should only be a part of your portfolio. Consider gold and bonds too.
- Use stop losses - To control losses in case investments turn sour.
- Position sizing - Divide your total equity into, say, 20, units. Do not exceed 2-3 units in any single investment.
- Plan - Have a decent plan on which how you decide to invest your hard-earn capital.
Having these risk management guidelines in place does not mean your equity risk have been eliminated. It merely reduces some of the risk. The trick is: Any plan is better than none at all.
Know what you know about how to invest in stocks
Are you an expert in any sector, such as oil & gas, technology, medical equipment, construction etc? Leverage your knowledge into the stock market by buying into stocks within your knowledge circle. Understanding the key players, their strengths, and new trends in the sector before everyone else. This forms the basis of your 'edge'. If you don't understand how a firm earns its profits, stay away.
Hold long-term and reinvest dividends
You have to let the market do the work for you. Churning and trading only add to the trading costs, which make earning profits much harder. So aim to buy for the long term. If your investments produce dividends every year - dividends are cash earned by the company and distributed to shareholders - you can invest them back into the market (see How Warren does it). This increases the size of your equity investment. Consider regular investment too.
Be tax efficient
Always use up your Individual Savings Account (ISA) stock account first. This is £20,000 per year which you can earn tax free (gov link).
Consider Exchange Traded Funds (ETFs)
If you think you don't have time or expertise to pick stocks yourself. Many investors choose this route because of the simplicity and low cost. Buying into the FTSE 100 Index could be a start. There is an ETF for this, called iShares FTSE 100 (ISF, see below). See some of our guides on ETFs.
Alternatively, you can invest in Investment Trusts (our guide here).
Start as early as possible
Put your money to work and employ the magic of compounding. Set up an ISA stock account to put regular investments into the stock market. The trick is to get started as early as possible and learn as much as you can.
Buying stocks and shares can be a way to make a profit from companies listed on stock exchanges like the London Stock Exchange (LSE), New York Stock Exchange (NYSE) and other stock markets around the world.
Investors and traders hope to buy stocks and shares in companies listed on these stock exchanges in the hope that these companies will become more valuable over time meaning that the shares can be sold for a profit.
Other traders or investors buy stocks to receive a dividend from profitable companies that are performing well.
Stockbrokers act as intermediaries between traders and the companies on the stock market. By purchasing stocks and shares through a share dealing broker you can access companies listed in almost any exchange around the World and normally, make trades much faster than older methods like buying paper shares.
As well as stocks and shares brokers can offer you access to trade ETFs or Exchange Traded Funds, these products are specifically designed to track the performance of a particular index, sector, strategy or investment style and the funds can be traded in the same way as other stocks and shares.
Stockbrokers may also offer their clients access to the fixed income markets where they can trade and invest in bonds and other debt-related securities. Some stockbrokers also offer savings products such as ISA’s and access to mutual funds.
If you have paper share certificates or have inherited some recently, you can convert these shares into digital and online shares.
Doing so will mean that you can trade them more quickly and can mean you will pay less in fees each time you do.
Many brokers offer paper share conversion and the process normally begins with you opening a share dealing account.
There are many factors to consider when you look to begin stock trading and doing your research before you begin could be the difference between success and failure.
- Understand the stock market
- Decide whether you want to;
- Invest in stocks or
- Trade stock
- Establish your strategy
- Open an account with a broker
- Practice with a demo account
- Test your strategy
- Begin trading
Understand the stock market
Firstly, it is a sensible idea to take some time to research the stock market, the companies listed there and how the buying process works along the chain.
On the one hand, companies use stocks and shares to raise capital as public IPOs and individuals who believe in the company and its success acquire these shares in the hope of making a profit.
Likewise, shareholders of companies who are facing trouble may look to unload their shares and hold their money as cash or invest elsewhere in lower-risk companies.
Stock trading is now primarily run online.
You will also want to get a good understanding of what kinds of things impact the price of shares. This will include things like;
- market sentiment
- Interest rates
- Earnings reports
- national economic data
- Global & national events which cause disruption
Investing vs. Trading
Investing is purchasing shares directly in the hope that the value of the company's shares will increase over time and can eventually be sold for a profit.
Investors generally hold on to their assets for much longer than traders, although this is not always the case, and may also benefit from dividend payments from their shares each year if the company they have invested in offers them.
Trading derivative products, such as stocks, bonds, commodities currencies and even interest rates, which take their value from the markets are the focus here. Traders don’t generally own the underlying asset but instead, look to profit from the rise and fall of the value of these assets over a shorter period.
These trades are generally executed via;
Generally, investing can be considered as a longer-term approach to making money from the stock market, whereas trading is generally a much more immediate approach.
Both investing and trading carry risks, so you should be familiar with each before you begin.
Establish Your strategy
A strategy for your investing or trading activities will be critical in helping you to achieve success.
This will need to go beyond just making money and should consider points like;
- Why you want to begin trading or investing
- Your goals
- Your budget and your available capital
- How much risk you are willing to take
- Your preferred markets
- How much time you can spend on it
You will also need to think about how you are going to be sure that your activities will be profitable, it could be that there is a level of trial and error involved in this, especially as you familiarise yourself with the markets.
Be sure to test your strategies with demo accounts before you commit your own money.
Open an account with a broker
Opening an account with a broker is normally as simple as signing up for any other online service.
You may need to provide the following details;
- Your full name
- Your email address
- Your phone number
- A valid form of photographic ID (passport or driving licence)
- Bank account details
Some brokers may ask you to confirm that you are an experienced trader before you can commit real funds to your account.
Test Your Strategy Practice using a demo account
Some brokers may suggest that you practice trading with demo funds before you start and this is recommended especially if you are new to the markets or are testing out new strategies.
Once you’re ready and happy and have refined your strategy after testing it, you can begin trading with real funds.
If you are new to investing tax-efficient wrapper that allows you to invest up to £20,000 in stocks and shares each financial year April to April.
Any profit made investments in stocks and shares ISA is free from capital gains tax and you’re also entitled to a £2,000 tax-free dividend in addition to your personal allowance (the amount you can earn annually before paying tax).
Dividend payments received above £2,000 are taxed at 7.5% for basic rate taxpayers or 32.5% for higher rate and 38.1% for additional rate taxpayers.
For tax efficiency reasons, stocks and shares ISAs make for a good starting point if you are looking to invest in and hold stocks and shares rather than trade.
You have up to £20,000 to invest each financial year, this figure does not roll on and accumulate year on year, if you do not use it one year, you will still only have £20,000 the next year.
However, you can buy and sell shares freely once you have invested your money, and transfer old ISAs into existing funds, so if your existing strategy isn’t profitable, you can sell existing shares and reinvest the money elsewhere an unlimited number of times.
Many brokers like IG, Hargreaves Lansdown and Interactive Investor offer stocks and shares ISAs as well as many high street banks.
Here is how to compare stocks and shares ISA accounts so you can find one that suits you.
Like investing in any stock market product, stocks and shares ISAs carry their own risks. The value of your shares could rise or fall and you may get back less than you originally invested.
Stocks and shares ISA’s are protected in a similar way to the protection offered by high street banks under the FSCS scheme, however investment products are handled slightly differently. If the firm holding your investment failed after 1st April 2019 your deposit could be protected up to £85,000, if the firm failed before this date, the maximum protection is likely £50,000. Further details of the investment protection scheme are available on the FSCS website.
This protection does not cover natural rise and fall in the value of your investment, only if all of your money is lost due to the collapse of the firm who manages your money.
You can use stocks and shares ISA performance tables to gain an understanding of their historic performance and decide which suits your investment needs.
What are the advantages and disadvantages of stocks and shares?
- Better returns than cash alternatives
- Low or no tax on dividends up to £2,000
- Capital gains are 100% tax-free
- Diversification - stocks and shares, bonds, and unit trusts are all available
- Flexibility to invest how and where you would like to
- Tax-free income in retirement - accumulation over multiple years could mean a large and diverse portfolio upon retirement
- The real value of your investment may fall
- Stock market volatility could affect your returns, which could be especially inconvenient if you are close to retiring and the value of your investments falls considerably.
- Charges & fees can mount up if you are not careful to manage them
- You must actively manage them, meaning you must spend time on them
- Interest rates can be very low, meaning that, unless the value of the shares increase or you are paid a dividend, then inflation could erode the value of your investment over time.
- Only tax-efficient if you use or exceed your capital gains tax allowance of £10,000 per annum
- Losses cannot be used to offset capital gains tax incurred elsewhere.
What can you trade through a stockbroker?
Firstly, of course, the stocks and shares of companies listed and quoted in the UK, depending on the broker you may also be able to trade in stocks from other markets such as Europe, the USA and further afield.
Some brokers will allow you access to trade ETFs which normally track the performance of a particular index, sector, strategy or investment style. Funds can usually be traded in the same way as other stocks and shares.
Access to other products such as fixed income markets for bonds and debt-related securities are offered at the discretion of the brokers themselves.
You can very often open savings products like stocks and shares ISA’s to keep your stock market activity in one place.
There are many types of shares you can purchase including listed companies from around the World.
Ultimately, the stocks and shares that you invest in or trade will vary and depend upon where your expertise lie, the markets and the companies that you are most familiar with as well as much more.
Some popular U.K. and U.S. companies to consider shares in are listed below
Listed companies in the UK are included on the FTSE 100 (Financial Times Stock Exchange) is the 100 largest companies in the U.K. and some popular companies include;
|BAE Systems||BA.||FTSE 100|
Companies are measured by their market capitalisation, essentially, what the company’s market value is.
FTSE 250 companies are the largest 101st to the 350th largest publicly-traded companies in the U.K.
US companies have shares listed on markets like the NASDAQ some examples of companies listed on the NASDAQ are included below.
|Advanced Micro Devices Inc.||AMD||NASDAQ|
The DAX 30 are the 30 most valuable companies in Germany. It’s index includes companies like;
|Advanced Micro Devices Inc.||ALV||DAX|
Different types of shares exist for you to invest in, these include;
Ordinary shares; these mean you part own the company that you have invested in. You will normally get a vote in company matters like agreeing to a takeover, paying company directors and more.
Preference shares; These shares carry no voting rights but you will normally get a share of the company profits before ordinary shareholders. Although the amount you get will be limited by the issuing company.
Can I buy penny stocks?
Yes, you can normally buy penny stocks when investing through a broker. IG offers access to over 9,000 shares from companies based in the U.K., USA and more. Penny stocks are normally priced at £1 or less in the U.K. or around $5 in the United States.
Penny stocks tend to be much cheaper to buy than shares in more well-established companies as can often be by newly listed companies who are looking to source funding. These shares are considered a riskier investment than those more well-established organisations.
Q. Where can I buy stocks?
A. you can buy stocks and shares online through a broker like those listed in our comparison.
A. a stocks and shares ISA is a tax-efficient wrapper for investments made in the stock market. Purchasing stocks and shares through an ISA makes sense if you have ISA allowance left as you will pay less or no tax of any financial gains your investments make.
A. You can buy them through a broker or you can buy them in another way, choosing to buy them through a broker can offer several advantages but may cost a little more.
A. There are plenty of resources online that can help teach you the basics of trading and investing in company shares. Our piece where to learn to trade can help get you started
Q. What is a stockbroker?
A. A stockbroker acts as an intermediary between traders and investors, it facilitates trades and investments normally for a fee. Some brokers can also offer managed accounts and advisory services to help you make a profit from your stock market activity.
Q. What are the best UK stocks to trade?
A. Here is an article which looks at some of the best U.K. stocks to trade and why.Home » Compare Stock Brokers Online in the UK »