To a newcomer, the idea of investing in the stock market can seem daunting. But with banks offering poor returns, by investing in shares you can in theory obtain a greater return than other methods of investment, including property and bonds.
The other advantage of investing in the stock market is that the internet is full of useful advice on how to make the most of your investments. There are many services, forums and advice sites out there, and in some cases, subscription includes access to the stock trading chat room, enabling you to get stock advice direct from traders.
So where do you start? Here is a brief guide to investing in the stock market.
The main stock market in the UK is the London Stock Exchange. This is where stocks, derivatives and government bonds can be bought and sold. Within the stock market, there are a number of different indices, with the best-known being the FTSE 100, which is made up of the largest 100 publicly listed companies. There are also the FTSE 250, FTSE Fledgling and AIM (Alternative Investment Market), which lists smaller companies.
Direct and indirect investment
You can invest in the stock market in two main ways: directly or indirectly. This doesn’t refer to the process of buying the shares, which is always handled by a third-party broker. A direct investment means that you buy shares in one company, becoming a shareholder, while indirect investment refers to investing in a fund that owns shares in a range of companies, often confined to one industry or industrial sector.
How to start
The best way to begin is to open an online, execution-only share account. This means that you simply pay the broker to carry out the buying and selling of shares, without any additional payment for advice or management of your stock portfolio. This keeps the cost of investing in shares to a minimum, which is important when you are starting out.
At the beginning of your stock-trading career, it is a good idea to look for blue chip shares – that is, shares belonging to top companies – and keep them for a period of several months, rather than making regular trades. Every time you trade, you will have to pay a fee, and early on, this can end up costing you more than the profit you make from trading.
When deciding which shares to buy, you can glean a lot of information from reading the main financial publications in print or online, and there are numerous sites and forums that can offer important stock market information.
Take a long-term view
Investing in the stock market is not a get-rich-quick scheme. You will have to hold your shares for several months and maybe even years to make a significant profit, but this may still be better than the income you would generate with a savings account. Review your investments every six months or so, to check how they are performing, and as your confidence and funds grow, you can expand your investing, increasing your profit and adding extra financial benefit.