Table of contentsWhy should you invest?What are stocks?Why does a company’s share price fluctuate?Open an investment accountShould you use a traditional broker?General Investment Account or Stocks and shares ISAHow do you make money from stocks?
But investing in stocks — or any similar assets — doesn’t need to be tricky.
If you read through this guide, you’ll be able to learn the basics about why you should invest, how you do it and what you can buy. It’s like the Freetrade version of stock investing for dummies (only for smart people).
So if you’ve been trying to figure out how to invest in stocks from the UK, read on and we’ll reveal all.
The rise of the retail investor
Retail investors — that’s regular people as opposed to companies or wealthy individuals — have always played a role in the stock market.
But in the past it was much harder for them to invest. High transaction costs and technology that made it hard to access the markets combined to make it difficult for the average person to invest in stocks.
That’s changed over the past couple of decades as low-cost providers, benefitting from improvements in technology, have entered the market and made it simpler for retail investors to access the stock market.
Why should you invest?
Looking back over the last few decades, investing in stocks has been one of the best ways to beat inflation.
Over time, the value of money changes and the cost of a good (milk, beer) or service (a haircut) that you can buy will increase or, in some cases, decrease.
Let’s say you set aside £10,000 in a bank account in 1989, earning 0 percent interest.
The cash is safe and secure, but over time the amount that you can purchase with that money steadily decreases.
As of 2019, the value of that cash has decreased by over 50 per cent, meaning that you can only buy about half of the goods that you could have purchased back in 1989 with the same money.
Most savings accounts don’t pay 0 per cent interest. But some UK savings accounts still pay interest that is lower than the rate of inflation.
For example, the average return on a fixed rate cash ISA in 2019 was 1.28 per cent but the inflation rate was 1.79 per cent, meaning account holders actually lost money in real terms.
Investing in a diversified portfolio of stocks has generally been a good way of countering this negative problem.
As you can see in the chart above, the FTSE All-Share index, which is made up of hundreds of UK stocks, generally increased in value more than the rate of inflation did over the five year period from 2015 to 2019.
Check out this ‘why invest’ piece we’ve written, if you want to dig deeper into some of the reasons to invest.
What are stocks?
Why does a company’s share price fluctuate?
If you’re going to learn to invest, you’re going to have to learn to deal with market volatility and the rising and falling of share prices.
There are a huge range of reasons why this happens. Some are hard to pinpoint and tricky to predict, like the ones that might cause the tech bubble to burst.
Still, there are some basic factors that you should be aware of before you invest.
Probably the most well understood ones are a company’s current performance and how people think it will perform in the future.
For example, a firm that is making solid profits and looks likely to continue doing so, is more likely to have a strong share price than one which is bleeding money and looks like it's about to go bankrupt.
Having said this, a company could be losing loads of money but, if investors believe it will be extremely profitable in the future, then its share price may still rise.
Another important factor to consider is any external or internal force that could harm the company or make it more successful.
For example, if governments across the world decide to ban all flights, then shares in airline companies will be very likely to drop. Similarly, if a group of talented executives all leave a firm, that might spook investors and cause the company’s share price to fall.
On the other hand, if the UK government decided to give huge subsidies to green energy companies, that could make shares in a solar panel producer rise.
So how do you get started investing? Let’s take a look at some practicalities.
We can see this by looking at the performance of an index, like the FTSE 100 or the S&P 500.
The FTSE 100 is a collection of 100 of the largest companies in the UK that have shares trading on the London Stock Exchange.
From 2000 to the end of 2019, the total return on the index was approximately 77 per cent or approximately 3 per cent a year.
Over the same period of time, the S&P 500 increased in value by 120 per cent or 6 per cent on a yearly basis.
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