Investing in stocks? Here’s what you need to know
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Investing in stocks can be a good way to maximise the return on your investments and make your money work harder for you. However, if you’ve never invested before, it can be intimidating, especially because of the associated risks. On this page, you’ll find out more about how investing works, what you might need to consider if you’re a first-time investor, and some alternatives to investing in stocks.
The stock market is where investors and traders purchase stocks. The price of stocks is generally determined by supply and demand
Investing is the act of committing money or capital into stocks with an expectation that you’ll profit in the future
Investing as early as possible and setting long-term goals can prove more rewarding than making short-term investments
What are stocks, and how does investing in them work?
Stocks are an investment in a company and that company’s profits. Holding stocks in a corporation means that you’re entitled to a proportion of the corporation’s assets and profits. The profit you earn is calculated by how many units of stocks you own, which are also known as shares.
Investing is when you purchase assets or financial products with the hope or expectation of earning a profit in the future. A basic example of investing can be any purchase made that you believe will increase in value, so that you can sell it in the future to earn a profit. You might consider buying a home or property as an investment.
Companies and corporations typically begin to issue shares through a process called Initial Public Offering (IPO). This process means a company is floated on the stock market. Once that happens, stock can be bought and sold by investors. If you decide to buy stock, it will often be another investor selling it, and vice versa should you wish to sell. These trades are handled through the stock market.
The stock market is similar to an auction house, in that buyers and sellers negotiate prices for stock and make trades as they see fit. It’s like a network of exchanges, in that investors can buy and exchange stock based on the supply and demand of the stock they own. It’s the supply and demand that usually determines the price of the stock.
How risky is it to invest in stocks?
The stock market is unpredictable, so it’s important to be prepared for the value of your investments to go down as well as up, and there might be times when your stock is worth less than you’ve originally invested. For example, this graph shows how the UK stock market has risen and fallen over the last five years:
https://www.londonstockexchange.com/indices/ftse-100?lang=en
It may be best to look at your stocks as long term investments to increase your chance of profitable returns.
If you are particularly risk-averse, it may be worth going for the safer option of opening a savings account rather than investing in stocks and shares.
How do I start trading stocks?
The five steps you’ll typically take if you want to start trading stocks are the following:
1. Choose and open an investment account
To start investing in stocks, you’ll need to open an investing or investment account. If you feel experienced enough to handle your investments on your own, then a brokerage account might be a better choice for you. A brokerage account provides a faster way to purchase stocks, funds and other types of investments.
If you’re a first-timer or you need help with investing, a managed service may be a better option. This type of investment account takes away difficult decision making and does most of the legwork for you.
2. Understand the difference between stock mutual funds and individual stocks
The main difference between mutual funds and individual stocks is that a mutual fund is a portfolio of several smaller investments, whilst an individual or single stock is ownership of shares in a particular company. Mutual funds might be best if you’re seeking quick and easy diversification in a single transaction. Conversely, individual stocks might be more suitable if you wish to pick and choose which companies to invest in.
If you’re keen to invest in one particular company, then purchasing individual stocks or shares may make more sense. Building your portfolio from several individual stocks is also an option, but may take more time. The main disadvantage of individual stocks is that although you can earn high returns, the odds of them making you rich can be slim, simply because you’re putting all your eggs in one basket.
3. Set a budget for the stock you want to purchase
If you’re investing in individual stocks, the amount of money you need to set aside will depend on the price of the stock you want to purchase. The price of stocks or shares can be anything from a few pounds to thousands of pounds.
If you’re looking to invest in mutual funds, there’s probably a minimum amount you’ll need to invest, depending on the fund. You could base your budget on that amount, or set a budget above that amount that you feel comfortable with investing.
4. Set your investment goals for the long-term
There are many strategies you can use to invest in the stock market, but the most common strategy investors adopt is to set long-term goals. For example, choosing individual stocks might only be effective if you believe that the company you’re investing in has the potential to grow. A common way to achieve this goal is to invest in a fund or in individual stocks, and avoid checking their growth too frequently.
5. Manage your investment portfolio
If you’re following the investment path, it’s important to revisit your portfolio occasionally to ensure that you’re still in line with your goals. You might consider doing this every six months or once a year, so you know you’re on track and can make any adjustments as you see fit.
How do I decide where to invest my money?
Deciding where to invest your money depends on your individual goals and how much risk you’re willing to take. If you’re saving for retirement, for example, investing in a mutual fund over the long-term can help you build a lump sum
If you have a short-term goal of fewer than 10 years, investing in a stocks and shares ISA might be a better choice.
How do I know when to buy and sell my stock?
The stock market is extremely unpredictable, and it’s impossible to tell when the best time will be to either buy or sell stock. When you choose to buy or sell also depends on your personal circumstances, and on the investment goals you’ve set for yourself.
However, the earlier you start to invest, the more likely it is that your portfolio will reap the rewards of your investments. In general, the longer you can keep your money invested in a mutual fund or individual stock, the more growth you’ll see. Investors who start early typically see greater returns on their investments by the time they are ready to sell and withdraw from the stock market.
If you’re planning to sell your stock, you might want first to consider your stock’s performance, and check if it’s increasing or decreasing.
Investing in stocks: key considerations for beginners
- Before making any investments, it’s a good idea to identify your investment goals and what exactly it is you’d like to achieve
- Before putting any of your money at risk, it might be wise to set aside some funds and create a cash reserve first. Having a cash reserve of up to three months might be worthwhile before you start to invest
- Consider investing in low-cost online services that will manage your investment portfolio for you. While this typically incurs a fee, it’s often better for first-time investors who are learning how stocks work
- If you have a pot of money to invest, consider investing it gradually rather than in a lump sum
- It’s a good idea to educate yourself on investing and how the stock market works
If you don’t feel you can commit to investing over the long-term or are simply unsure about investing in stocks, you might want to consider opening a shorter, fixed-term savings account instead. 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
How do commissions and fees on stocks work?
A broker or your investment adviser charges commissions in return for handling your investments or providing their services. Commission prices tend to differ between individual stocks and mutual funds, and you should check what they are before you commit to any financial agreement.
Fees* are often secondary charges and can range between 1% and 2% of your managed assets. Again, it’s important to check any associated fees that may come with your investment account before you open one.
An alternative to investing in stocks
If you don’t feel you can commit to a long-term investment, or you are perhaps averse to the risks of investing in stocks, you might want to consider opening a savings account as an alternative option.
To quickly and easily open a savings account that suits your needs, you can register for a Raisin UK Account and apply today. Opening an account with Raisin UK is free and offers competitive interest rates from a range of UK banks. At Raisin UK, you can manage multiple savings accounts in one place.