How to invest in the stock market

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Taking your first step into investing in the stock market can seem difficult, and can feel quite intimidating. While it comes with risks, it can be a good way of growing your wealth, especially if you invest over a long period of time. On this page, you’ll learn everything you need to know about how to start investing in the stock market as a beginner. This is not financial advice, and you should always do your own independent research.

The rundown
  • Risk vs reward: Investing in the stock market can help grow your wealth, but your capital could be at risk
  • Long-term gains: You can earn good returns from investing in the stock market if you make long-term investments
  • Investment support: There are tools you can use to make investing easier, such as robo-advisors, that manage investments on your behalf

I’m a beginner:
what should I know about investing in the stock market?

One of the main mistakes beginners make is to jump into the stock market and invest immediately. You may have heard that investing in the stock market can earn you good returns on your investment, but it’s also important to understand the risks that investing can bring. Investing blindly in the stock market without learning the basics can put your money at risk. 

It’s worth considering how much money you have to invest and if you can spare that money. Since the stock market is full of risky investments, the money you invest should be dispensable. You might want to think about investing in the stock market as a way for you to try and generate more funds out of your surplus money. You might not want to invest all your money in one go, and think about having an emergency fund set aside before you begin to invest.

Many beginner investors often try to follow other investors’ strategies. If you do this, it’s important to remember that their strategy may backfire. It’s worth taking the time to research and fully understand the stock market and how investing works, so you can make your own decisions. 

You might want to consider diversifying your investments, wherein your money is spread out as opposed to being in just one type of investment. Many investors follow this principle as it lessens the blow should an investment fail. On the other hand, over-diversifying can decrease your potential returns. 

Another important element of investing is to avoid acting on emotion. As a beginner, it’s easy to fall into this trap when investing in the stock market for the first time. However, Eemotions such as fear of loss and greed can greatly affect your investment, and may lead to decisions made in poor judgement. A cool head is important!

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How to start investing: 6 steps for beginners

To begin your investment journey, here are six steps you can follow: 

Step 1: Decide how you’ll invest in stocks

There are two ways you can begin investing in the stock market. You can either do it yourself or hire someone to manage your investments for you. If you have specific companies you want to purchase stocks from, then the DIY approach through brokerage accounts may be more suitable for you. However, if you don’t have the confidence or knowledge to choose which stocks you want to purchase, then a robo advisor (more on that below) or a stockbroker might be helpful.

Step 2: Open an investing account

If you’ve chosen the DIY option, you’ll probably be looking to open a brokerage account. An online brokerage account typically offers the fastest and least expensive way to purchase stocks, funds and other varieties of investment options. 

If you need more support as you start to invest, you might want to hire a robo advisor or take advantage of one of the many online services that can help you set this up. Robo advisors are usually a lower-cost option for investors and can offer streamlined investment advice. They work by using algorithms designed to follow your investment goals.

Step 3: Understand the difference between stocks and mutual funds

When you invest in the stock market, you’re essentially choosing between two investment types, mutual funds and individual stocks. Mutual funds allow you to purchase shares in different companies in a single transaction, and can be beneficial if you wish to diversify your investment. 

If you want to invest in a single company, one option is to purchase individual stocks. Doing so can bring you high returns, but can be risky, as you won’t have any other stocks to fall back on in the event the company you’ve invested in fails. 

Step 4: Set your budget

Once you’ve chosen where you want to invest, you’ll need to set a budget. For individual stocks, the budget you’ll need will depend on how expensive the shares in the company are. If you plan on investing with a fund, you’ll likely need to meet a minimum investment requirement, which can be as much as £1,000. Remember that you should never invest more than you can afford to lose.

Step 5: Think about investing for the long-term

Investors have many different strategies when it comes to investing. But most successful investors stick to the basics, which include investing in companies that have room for growth, and being willing to sit tight for a long-term duration. Once you start investing, you might not want to track the performance of your shares as that will just give you a snapshot rather than an overall picture of the growth trajectory. 

Step 6: Review and manage your portfolio

Once you’ve invested in an individual or mutual funds, you’ll need to revisit your portfolio to make sure that the performance of the stocks is in line with your goals. Investors typically do this on an annual basis. Doing this means you can make adjustments, such as making additional investments into other companies if you feel your portfolio is too focused in one area. You could also add geographic diversification by investing in international stocks. 

How can I earn money by investing in the stock market?

There are a few different ways you can earn money on your investments:

  • Appreciation: The value of shares can rise (appreciate) and fall (depreciate), depending on how well they’re performing. In an ideal world, you’ll buy shares for one price and sell them at a higher price, making a profit in the process. Bear in mind, however, that any profit you make may be subject to capital gains tax
  • Dividends: If you own shares in a company, you may receive money in the form of a dividend payment. Some companies give some of their earnings to their investors on a half-yearly basis. Again, any dividend income you receive may be taxable if it’s over your personal allowance or the annual dividend allowance
  • Interest payments: If you buy corporate or government bonds, you’re effectively loaning money to a business or government. In return, you’ll receive regular fixed interest payments until the bond matures.

Investments for beginners: what should I choose?

There are plenty of places and ways in which you can invest your money, and all of the options come with their own benefits (and risks):

  • The stock market: investing in the stock market can offer high returns. However, it also comes with a high risk factor, as you can lose all your money if the stock market crashes or a company you own shares in fails.
  • Investment bonds: investment bonds allow you to loan money to either a company or government, that will then repay your loan with interest, which is calculated through the duration of the loan. Investment bonds are less risky than stock market investments but typically offer lower returns.
  • Mutual funds: Unlike purchasing individual stocks, mutual funds allow you to invest in shares in multiple companies in one go. A fund manager usually chooses these stocks and will charge you a percentage-based fee when you invest. Most mutual funds don’t try to beat the stock market, which means you’ll probably get lower returns on your investment.
  • Physical commodities: this is an investment that you’ll physically own and can serve as a security. Commodities include gold or silver, and this type of investment helps you diversify your portfolio and can be a safety net in difficult economic times.
  • Savings accounts: putting your money into a savings account comes with a lot less risk than investing in the stock market. You can still earn a competitive rate of interest, and you’ll have the peace of mind that your money is safe, as long as your deposits are protected

What are robo-advisors?

Robo advisors are online platforms that can manage your investments, and offer many benefits when it comes to investing in stocks. They don’t require you to do anything when picking individual investments, which means they’re a good option for first-time investors. Companies that offer robo advisors will ask you certain questions, such as your investment goals, to build a portfolio designed to achieve these goals. 

You may think that robo advisors are expensive, but their management fees are typically a fraction of what it would cost you to have a person managing your fund, with most robo advisors charging around 0.25% of your account balance.

Stocks for beginners: how much should I invest?

How much you invest depends on how much money you have to spare, but you might want to consider starting small and getting to know how investing works and what you’re comfortable with before you invest larger amounts. 

Once you become more comfortable with investing and you’re getting the returns you want, it might then be time to invest more. Remember that investing is typically a long-term approach to generating wealth, so it’s important to be consistent. 

The risk of a stock market crash is always present, so only invest an amount you’re comfortable with losing.

What fees do I need to pay?

The fees you’ll need to pay will depend on how you’re investing in the stock market, such as whether you’re using a brokerage account or robo advisor. Robo advisors typically only charge a fraction of the management fees of a broker, who may charge you a commission fee for every trade you make. Trading fees may also vary, and can be anything from £1 to as high as £10 per trade

Depending on how often you’ll trade, these fees can build and may harm your profits. It’s important to note that a trade is an order to purchase or sell a share from one company only. So, if you plan to purchase five different shares, this is effectively five separate trades, and you’ll be charged for each one

Before you start investing, it’s worth checking how the fees work and how much you could be charged.

Investing in stocks for beginners: key things to remember

The stock market can be a daunting place for the inexperienced, but if you do your homework and are prepared to invest over the long term, the returns can be rewarding. Here are some of the key things to remember before you start investing: 

  • Never invest more than you can afford to lose – if you don’t have any savings or you’re in debt, investing in the stock market is unlikely to be the right option for you. However, if you’ve got money behind you then investing a portion of it on the stock market could be a good way to boost your wealth  
  • Don’t panic – for most people, investing in the stock market is a long-term strategy. Try to remain calm and don’t panic if the value of your investment falls during volatile periods 
  • Diversify your portfolio – building a diverse investment portfolio can be a good way to mitigate risk, although bear in mind that over-diversifying may reduce your return
  • Consider the potential tax implications – any gains you make on your investments may be subject to tax, so it’s important to factor this into your decision-making. However, it’s worth noting that any returns you make from stock and shares ISAs are exempt from income and capital gains tax
  • Review your investments – don’t forget to review your investments to check how they’re performing and determine whether they’re still meeting your needs
  • Seek professional advice – if you don’t feel comfortable managing your investment portfolio, consider hiring a professional or using a robo-adviser. However, if you’d rather not take any risks with your money, you might want to think about putting it into a competitive savings account instead.

Investing in the stock market vs opening a competitive interest savings account

When you invest in the stock market, you could encounter risks. These risks include losing your money if the company you’re investing in fails, or the shares you’ve purchased decreasing in value. You’re never guaranteed profitable returns because of the volatility of the stock market itself. If you’d prefer a safer way to grow your savings, a savings account might be a better option for you. 

Savings accounts such as fixed rate bonds allow you to lock your money away for a set time at a competitive interest rate that won’t change until the end of your fixed term, typically between six months and five years. Unlike investing in the stock market, you’re guaranteed a return on your money. Plus, deposits of up to £85,000 per individual, per banking group are protected under the Financial Services Compensation Scheme, giving you added peace of mind.

You can compare a range of competitive savings accounts through the Raisin UK marketplace. To get started, simply register for a Raisin UK Account, log in and choose from a wide selection of savings accounts from our partner banks.

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