What are stocks and shares?
Stock is a generic term for equity investments more generally used in the US whereas a share is an equity stake in one company. For example, you may be invested in a portfolio of stocks within which there a number of shares of different companies. The term 'stocks and shares' is an accepted term used in the UK for stock market investments.
What is the stock market?
A stock market is an equity market where stocks and shares are bought and sold by both institutional and private investors. It is an electronic marketplace with all trading taking place online. The price of shares are set by the supply and demand as buyers and sellers place orders. The price of a share goes up when demand is high and down when the demand is low.
How is share price determined?
The fluctuation of demand in a particular share and therefore its price could be the result of a number of factors such as:
- Trading performance of the business - all businesses have fluctuations in business performance and these can affect the share price
- Performance of the market sector for the business - businesses are categorised by the sector they operate within e.g. retail, industrial, IT and banking. The performance of these sectors as a whole can affect the individual share prices within that sector.
- Economy - the overall health of the economy both in individual countries or globally can affect share prices
What are indices?
Most developed countries in the world have a stock market and within each market, the shares are categorised into indices. The largest of these indices are reported on in real-time and monitored by institutions and individual investors to assist with their investment choices.
The main global indices are:
- FTSE 100 (FTSE) - weighted average of the 100 largest UK listed companies by value
- FTSE 250 Index - weighted average of the 101st to the 350th largest UK listed companies by value
- FTSE All-Share Index - weighted average comprising around 600 of more than 2,000 largest UK listed companies by value
- Dow Jones Industrial Average (DOW JONES) - weighted average of the 30 largest US listed companies by value
- Dax Performance Index (GDAXI) - weighted average of the 30 largest German listed companies by value
- Hang Seng Index (HSI) - weighted average of the 50 largest Hong Kong listed companies by value
- Nikkei 225 - weighted average of the 225 largest Japanese listed companies by value
Why you may want to buy stocks and shares
The first place most people look to put any spare money they may have is in a bank or building society account where it can earn interest over time. This approach may be sensible over the short term, if you are saving for a holiday or a house deposit but if you are looking to grow your wealth over a longer-term, then the buying power of cash savings is likely to be eroded by the effects of inflation.
To stand a good chance of achieving above inflation growth on your savings then you should consider equity-based investments such as shares, bonds or funds. The Barclays Equity Gilt study has shown that the average return from UK shares over time is around 5% which compares to 0.8% if you had kept your savings in cash. However, unlike cash savings, equity investments can be volatile and you could lose some or all of your investment if you do not take a cautious approach.
How much does it cost to invest in stocks and shares?
You can buy shares in a single company online but if you are a first-time investor you would be advised to carry out some research before investing your money. Buying shares in a single company can be risky as you are banking on a single company performing well over a period of time. It would be advisable to buy shares in a number of companies at the same time to create a portfolio and spread the risk.
If you are prepared to do some research and keep abreast of the financial markets then investing in shares and building a balanced portfolio can result in good returns over the medium to long term.
You can gain exposure to stocks and shares investments for as little as £5 per month if you invest via a fund. Investing using funds is a popular method of investing where you use an investment platform to pool your investment with other investors and invest in a fund that buys shares in companies that fit the aim and criteria of the fund. By investing in a fund you will purchase units in that fund that will rise and fall in value in line with the assets held in the fund. There is a large range of funds available that invest in medium and large companies in the UK and overseas in both established and emerging markets.
There are costs involved with investing in a fund and investment platforms will charge a fee for buying and selling units in the fund as well as a charge for the day to day managing of the assets within the fund.
How much should I invest in stocks and shares?
Investing is for the long term so you should only use money that you will not need to access for a minimum of 5-10 years. When you first start investing it may be a good idea to start small with a monthly investment you can easily afford and that way you can start to build up your investment knowledge without risking too much money.
If you are looking to invest directly in shares then you could use an online stockbroker or open an account with an online investment platform and start investing with a small monthly amount or a lump sum. Most investment platforms offer a range of tools to help investors keep on top of their investment performance in real-time as well as research articles on individual companies and sectors. Investing in shares requires active monitoring and research to achieve the optimum performance of your portfolio but with the tools and information available this can be profitable over the medium to long term.
If you are investing in funds then most fund platforms will accept a minimum monthly investment of £25 or less in some cases. You can increase your monthly investment whenever you want and add lump sum investments if you have the funds available. When deciding how much to invest you should first make sure you can comfortably meet all your monthly outgoings as well as have a cash buffer for any emergencies.
Once you have decided how much you are going to invest then you will need to decide which funds you are going to invest in and this should be dictated by your attitude to risk. Different funds have different levels of risk depending on the markets and equities in which they invest. Most fund platforms will have tools that assess your attitude to risk using simple questions and then guide you through the fund selection process.
To help you select the most suitable investment platform for your needs we have written a comprehensive article The best investment platform which will be well worth reading.
What returns should I expect on stocks?
As mentioned earlier, investing is for the long term with many ups and downs of performance along the way. The chart below shows the calendar-year returns for the FTSE All-Share Index over the 30 year period 1997-2018, but a word of caution, whilst there were only 8 years in total where annual losses occurred the losses in those years were still significant.
Source: Vanguard. Calculations based on calendar-year total returns in GBP as at 31 December 2018. Past performance is not a reliable indicator of future results.
Ways to invest in stocks and shares
Invest in products with a tax advantage first
If you are looking to invest in stocks and shares then the best way to start is by investing in products where there is a tax advantage such as an ISA, Lifetime ISA or SIPP. These products carry tax-free advantages that can help your investments grow more rapidly over time.
The chart below shows the different tax advantages on an ISA, Lifetime ISA or SIPP.
|Product||Tax relief on investment||Tax-free growth||Income Tax levied on withdrawals|
We have written three comprehensive guides to these products which are well worth a read.
- Best and cheapest investment ISAs for beginners
- Lifetime ISAs explained – are they the best way to save?
- What is a SIPP?
Other investment options available
All fund platforms will allow an investor to open an investment account where they can invest a monthly amount or a lump sum. There are a range of tools available to help with investment knowledge and the ability to track the performance of your investments online.
Robo-advisors are a class of investment management companies that operate online with moderate to minimal human intervention. When you open an account with a robo-advisor you will be asked a series of questions to ascertain your attitude to risk they will then suggest an investment strategy best suited to your risk profile.
Once you have selected your investment strategy your investments will be monitored and managed with the use of a financial algorithm. This approach has produced results comparable with standard investment platforms but because they have little or no human intervention the investment costs are lower.