A beginner’s guide to investing in the stock market.
Investing is one of the best ways to create wealth longer term and if you are a first time investor it all might seem overwhelming. This guide covers the basics to help you get started with a bit more confidence.
See what types of investment accounts are available in the UK, as well as what are the most popular assets you can invest in. Learn how to run basic stock analysis and what are few of the strategies you can implement to grow your portfolio.
🎯 Key takeaways
Investing in stocks is one of the best ways to grow your savings over the long term.
Time is the most important growth ingredient, the longer you can leave your investments to grow the better.
Whether you’re a pro or just starting out, keep investing simple: diversify, invest regularly and don’t fiddle - set and forget.
Investing for beginners
What is investing?
Investing is a bit like going to the gym. It’s something we know is likely to be good for us but we put it off.
One of the problems is that the investment industry likes to make it all sound more jazzy, more technical, than it is and definitely more than it needs to be.
Investing is simply putting money aside today with the aim that it will be worth more in the future.
In this guide we’ll cover how to invest in stocks, starting with the basics and building up to potential investment strategies.
Before diving in, you need to be comfortable with the fact that the value of your investments can fall as well as rise, so you might get back less than you originally invested.
Why should you invest?
Keeping cash in the bank is one way to save but when it comes to growing your savings, it may not be the best option.
That’s because 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, decreases.
When prices rise, this is known as inflation and it can mean your money is worth less in the future.
Here’s an example, with rising prices over time the longer you leave your savings as cash, the less your £2,000 is worth.
Disclaimer: The table shows how inflation can erode savings throughout the years. This table is just for illustrative purposes only and does not use real inflation rates.
This is where investing comes in.
Investing in a diversified portfolio of stocks has generally been a good way to combat the challenge of inflation.
💡 Check out more on why invest.
What are stocks and why invest in them?
When you buy a share in a company, you are becoming an owner of that company. As an owner, you’ll share in the ups and downs of the business and that’s generally why you’ll see the value of stocks fall and rise over time.
Some businesses also pay out part of their profits (known as dividends) to investors and this is another way you can share in the success of a business.
In exchange for becoming an owner and taking on the risk of the potential ups and downs of the stock market, investors have historically been rewarded with a higher rate of return on their cash and an opportunity to grow their savings.
How to invest in stocks in the UK
Retail investors — that’s regular people as opposed to companies or professionals — 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 old technology made it harder for retail investors to invest than it should be.
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.
In the UK, there are now multiple ways to invest in the stock market from DIY platforms to robo or financial advisers.
How to start investing in stocks - 8 steps
8 steps to investing in stocks
- Get started investing - In this section we cover the importance of setting up goals and understanding your risk appetite.
- Decide what you want to invest in - In this section we succinctly cover the main types of investment assets.
- Get to grips with stock analysis basics - In this section we cover the most common methods people use to judge investments.
- Think about an investment strategy - In this section we cover some of the most common investment strategies.
- Choose an investment account - In this section we cover the types of investment accounts available in the UK.
- Open an investment account - In this section we cover the things you should keep in mind when opening an investment account.
- Things to know for beginner investors - In this section we give few tips first time investors should consider before they start.
- Managing your portfolio - In this section we discuss how you can make money from stocks, what returns to expect and how to build a high performing portfolio.
Set your investment goals
Before you start investing it's important to decide what you want to get out of it.
Some people invest to save for their retirement. Others may just want to beat inflation.
Understanding what your goals are is important because it can help you decide which are the best stocks to buy for your portfolio.
If you don’t figure out what your goals are, you may end up taking on too much risk and losing money that you can’t afford to lose.
How do you feel about investment risk?
How you feel about risk is an important topic to figure out before you start investing in stocks.
The easiest way to think about risk is a way of assessing how much money you are prepared to lose in order to see a gain. The more risk you take on, usually the more you stand to lose or gain.
How much risk you are willing to take will depend on your own circumstances and things like:
- how much income you have leftover after essentials
- how you feel about the value of your money falling as well as rising
- how long to plan to stay invested
If you are investing over a long period of time, you can probably afford to take on more risk than someone that’s going to need to sell off their investments in the near future.
If you don’t have a huge amount of cash, either to invest or in savings, then you’ll probably want to take on less risk than someone with millions of pounds in the bank.
💡 Check more on investment risk.
Once you’ve decided why you are investing and how much you can invest, the next thing to think about is what to invest in.
As we’ve discussed, stocks represent ownership in a company.
This means they offer the best opportunity for you to enjoy the current or future success of a business.
Many big name firms have stocks that you can buy. That could be everything from global tech names, big banks to popular fashion or car brands.
But it doesn’t just have to be big companies, lots of smaller companies have shares too. Smaller companies tend to attract more adventurous investors.
📱 See the full list of US and UK stocks you can invest in via the Freetrade app.
Some company stocks can be pricey. In the past, this may have meant they were prohibitively expensive for retail investors.
But today a number of stockbrokers offer investors access to fractional shares. These are parts of a single share that you can buy. For example, if a share cost $1,000, you could buy half — or $500-worth — of that share.
Fractional shares can be a great way to start investing with little money required.
📱 See the full list of fractional shares you can invest in via the Freetrade app.
An exchange-traded fund (ETF) gives you exposure to a collection of stocks or other assets.
Most ETFs tend to track an index - like the S&P 500 or NASDAQ.
In the financial world, an index is a group of stocks or other assets that are put together and used for analysis or gauging how a market is performing.
For example, the S&P 500 is an index that comprises 500 of the largest companies trading on the US stock market.
An ETF that tracks the S&P 500 is a simple way of investing in the companies that make up the index.
From a practical point of view, this is much cheaper and faster than buying shares in each of those 500 companies. It also provides investors with a more diversified portfolio, reducing the risk that they may lose a large amount of money.
The downside to ETFs is that they mean you cannot capture the outsized returns that individual stocks can. You can also still be subject to market crashes, some of which may have a long-lasting impact on returns.
📱 See the most popular ETFs you can invest in via the Freetrade investing app.
Investment trusts are companies that are usually set up by asset management firms.
Once they’ve been established, they are listed on a stock exchange, giving investors the opportunity to buy shares in them.
The funds raised from their initial share sale are then used to invest in different assets.
For example, an investment trust might focus on buying stocks in the tech industry. Others hold a broader range of stocks and invest in industries as varied as telecoms, finance and energy.
Like ETFs, investment trusts are a great way to get exposure to lots of different stocks or assets via one investment.
📱 See the full list of investment trusts you can invest in with Freetrade.
One popular type of investment trust is known as a real estate investment trust — or REIT.
As the name implies, REITs invest in real estate. They’re a good way for people to put money into the real estate market, without having to pay huge sums of cash for the building.
REITs also tend to invest in different types of property, so one share could give you access to commercial, residential and even industrial property.
📱 See the full list of REITs you can invest in with Freetrade.
A special purpose acquisition company (SPAC), also known as a "blank check" company, is a company formed for the sole purpose of raising money through an IPO and using this capital to acquire an existing business.
Over the past few years, they’ve become a popular vehicle for taking private companies public since they can provide an easier route than the traditional IPO process.
In general, a SPAC is set up by a management team, formed by financial experts, private equity sponsors and activist investors, that can use their knowledge of a specific industry to raise capital.
📱 See the full list of SPACs you can invest in with Freetrade.
One of the most common problems people run up against when it comes to picking stocks is...well….what should you pick?
Starting can feel daunting but the most important thing to realise is that there is no one ‘right’ answer here.
There is a reason different investors, professional and amateur, take a variety of approaches. It’s because they’ve all got a set of criteria they use to determine what’s a good investment and what’s not. Only time will tell whether they’re correct or not.
Some of the common methods people use to judge investments include:
- Company fundamentals — This is a really broad term but it refers to anything tangible which is likely to impact a company. Looking at fundamentals means examining everything from a company’s management, revenue and debt levels to its brand image, regulations that impact it and the effects of the wider economy on the business.
- Revenue — This is how much money a company makes from selling its goods and services. Investors generally want to see that a company is making a stable or increasing amount of money. If not then there should be a good reason for it.
- Net income — This is a fancy word for ‘profit’. So once a company has paid all its debts, rent, employees, taxes and so on, how much does it have left? Investors generally look at net income relative to revenue. If you are keeping a good chunk of the money you earn in revenue as profit then that’s often a sign of a healthy business.
- Earnings per share (EPS) — This tells you how much a company makes in profit relative to how many shares it has. You calculate it by dividing a company’s profit by its number of outstanding shares. The goal of EPS figures is to give you a better idea of how profitable a business is. Ultimately shares are a stake in a company, so a higher EPS means more profits are apportioned to you as a shareholder, even if all those profits are not paid out to you in reality.
- Price-to-earnings (P/E) ratio — A P/E ratio tells you how much a company’s shares cost relative to its profit. It’s calculated by taking a company’s current share price and dividing it by its earnings per share. This means it gives you an idea of how expensive a company’s shares are, in relation to how much money the company makes. As such it’s probably the most common metric used to gauge how expensive a company’s shares are.
💡 Learn more on how to pick stocks.
Everyone’s investment strategy is going to look a little different, as we all have different things we’re aiming for.
Here are a few common strategies.
Passive vs active
A distinction that’s often made between investors is whether they have an active or passive strategy. In reality, many of us will do a bit of both but here’s a quick breakdown:
A core-satellite strategy lets you combine elements of both passive and active investing in your portfolio.
Passive investments form the core part of your portfolio while you choose more specific investments to make up the rest of the portfolio.
With a passive core, most of your portfolio will perform in line with the market it’s tracking. But it also means you can still get some of the main benefits of passive investing i.e. a low cost, broad investment.
Satellite investments could include stocks, investment trusts, or even more specialised ETFs and will help you nudge your portfolio into more specific areas.
Ideally, your satellite investments would be areas that you think could grow at a faster rate than the market or be assets (such as bonds or commodities) that might perform well at different times to the rest of your portfolio.
Asset allocation is a strategy where you split your portfolio across different assets like stocks, bonds, real estate and cash.
The aim is to create a diversified portfolio, one that isn’t reliant on one thing to grow and where different assets will perform well at different times, so offset each other. By combining different assets, you should be able to build a portfolio that can be tuned to your appetite for risk.
A higher percentage of stocks in your portfolio tends to be associated with a higher risk portfolio whereas adding in cash and more cash like investments like bonds, reduces portfolio risk.
All this comes back to the earlier point about investment risk and it being the risk that the value of your investment can rise and fall while cash generally holds its value in the short to medium term. Cash isn’t riskless though, it’s important to keep inflation in mind.
If you are starting in your 20’s or 30’s and plan to invest over a long period of time, you can probably afford to take on more risk than someone that’s going to need to sell off their investments in the near future.
UK investors have a few options when it comes to choosing which investment account to hold investments in.
General investment account
What is a GIA?
- A general investment account (GIA), is a simple share dealing account that lets you deposit cash and invest.
- GIA’s generally have less rules associated with them in terms of how much money you can invest and when you can access your investments.
- With a Freetrade GIA you can invest-commission free and there’s no charge for having a GIA account.
Stocks and shares ISA
What is a stocks and shares ISA?
A stocks and shares ISA, or stocks and shares Individual Savings Account, is a tax-efficient investment account that allows you to put money into a wide range of investments.
The key difference between a stocks and shares ISA and a GIA is tax.
With an ISA there’s no:
- Income tax on UK dividends or interest
- Capital gains tax if you sell your investments for a profit
Each tax year HMRC sets an ISA allowance. It’s the total amount of money you can put into ISAs each year.
The ISA allowance for the 2021/22 tax year (which ends on 5th April 2022) is £20,000.
Disclaimer: Please remember, tax relief depends on your personal circumstances and current rules can change
💡 To help you get to grips with ISAs we wrote a whole guide on what stocks and shares ISAs are and how to use them.
📱 If you already hold an ISA with a different provider you can transfer your ISA to a Freetrade stocks and shares ISA and potentially lower your charges.
Self-invested personal pension (SIPP)
What is a SIPP?
A self-invested personal pension or ‘SIPP’, as it’s more commonly known, is a way to save and invest for retirement.
A few SIPP basics:
- SIPPs are an account for saving for later life. You can't access it until you are 55 years old (rising to 57 in April 2028).
- SIPPs are tax-efficient. You get pension tax relief on contributions, investments grow tax-free in a pension and when you retire you can take a portion of your personal pension tax-free (but you’ll pay income tax on the rest).
- SIPPs are a useful way to grow your savings. By investing small sums regularly over your working life the aim is to build up a pension pot that you can live off in the future.
Disclaimer: Please remember tax relief depends on your personal circumstances and current rules can change.
💡 Understand your retirement planning options better with our guide to what is a SIPP pension.
📱 If you know that a SIPP pension is right for you, you can use of pension tracing service to find all old pension pots, and bring them all under one roof.
If you’re a first-time investor you’re going to have to choose both a provider and the type of account you’d like to put your investments in.
What each of us would like or need from an investment provider will be different. Some may be focused on cost whereas for others the range of products or whether it’s app or web-based will be more important.
Think about charges
Different platforms charge customers in different ways. When looking at which platform to invest with, the charges to look out for are:
- Platform charges
- Trading commission
- Foreign exchange fees
- Ongoing charges for products like ETFs, investment trusts and funds
- Exit charges
Charges can have a real impact on your investments especially if investment performance is not doing enough to offset them, so it’s important to check if your ISA is of good value.
💡 Check out our investment fees calculator to compare charges across different platforms.
Commission is a fee most stockbrokers in the UK charge you to buy and sell shares. When you want to buy and sell shares you don’t go knocking on the stock exchange door yourself, a stockbroker does that for you.
Zero commission trading is when you can buy and sell shares without paying this fee.
With a free trading platform, like Freetrade, you’ll be able to buy and sell stocks, ETFs, investment trusts and more, without the extra charge.
With overseas shares, while they are still commission free, there is a foreign exchange fee.
Other charges may also apply like your account fee, see our full pricing table.
Investing vs trading stocks
Investing in stocks and trading stocks are often used to mean the same thing - buying stocks.
And while we don’t suggest getting too hung up on terminology, it’s a good idea to understand the different behaviour of investors and traders.
When to think about financial advice?
It does take some time to figure out what the right way for you to invest is and getting advice isn’t a bad idea if you feel a bit stuck.
Advisors do cost money but then it may be worth paying if it means feeling comfortable with what you’re doing.
For most people, simply getting to grips with the basics of investing will be enough to set them on the right course. But if you’re dealing with a complicated situation like inheritance planning it may be that a professional can add value.
There are lots of advisors out there and they charge a range of pricing. If you’re not sure where to begin, the UK government’s Money Advice Service is a good place to start.
What about robo-advisors?
A robo-advisor is an automated financial advisor. They tend to be digital, so you access them via an app or website. Like a financial advisor, they’ll ask you a range of questions to assess your investing goals and financial circumstances and at the end of the process, they will invest your money automatically for you in what it thinks is best.
Remember to make sure you do your own research on what investments are right for you before investing or consider seeking expert advice.
💡 Read on to see if you should invest with a robo-advisor.
How do you make money from stocks?
The simplest way to make money from stocks is to buy a stock at one price and then sell it at a higher one. This is known as a ‘capital gain’ and it can be subject to tax.
The other way you’re likely to make money from stocks is from dividends.
Dividends are payments that some companies make to shareholders, usually two or four times per year.
These payments generally take the form of cash and are expressed on a per share basis. So you’ll receive a certain amount of money for every share you own in a company.
It's important to remember, the fact a company pays a dividend doesn’t say much about how good it is as a business.
Lots of high performing companies don't pay dividends and plenty of businesses which are less promising still do. So don’t think that a company is a must-buy just because it pays dividends.
💡 See which were 2021’s top dividend stocks.
Compounding is not a direct source of income in the way capital gains or dividends are. But it’s one of the greatest benefits of being a long-term investor.
Compounding is growth on an already growing investment pot.
Let’s say your investments grow 5% in a year from £10,000 to £10,500 and if they grow by the same amount in the second year your investments will now be worth £11,025. So the same 5% growth has led to a slightly bigger jump up in the value of your investments.
Compounding becomes more powerful the longer you leave it.
The chart below shows an example of compounding and taking a long-term view. Time, not extra cash has created the growing investment pot.
Disclaimer: Please note this chart is just an example and is not a guide to realistic returns. Continuous 5% growth is not realistic, some years it could be more and some years less. Investments can rise and fall in value, so you may get back less than originally invested.
What returns to expect
When it comes to what returns to expect, we think the key thing to keep in mind is that over the long term, five, ten years and beyond, stock markets tend to rise.
It won’t be a continuous rise, there will be dips along the way, but what’s important is that underpinning the stock market is a whole host of businesses, looking for ways to grow, innovate and ultimately thrive.
See this for yourself and take a look at the performance of the major world markets like the S&P 500 UK All-Share Index over the last few decades.
How to build a high performing portfolio
Spread your investments across different countries, sectors and companies. This way your portfolio isn’t reliant on one thing to make it grow and if one area is not performing so well, other investments could help to offset this.
🗓 Make investing a habit
Instead of waiting for the right moment to invest, you could start by investing small sums regularly. Regular investing means you won’t miss out on the most important growth ingredient - time.
It also means you can worry less about the price you pay, as you’ll likely pay slightly higher and lower prices over time.
⏳ Set and forget
This is the one to remember. By staying invested you give your investments the best chance to grow and you can worry less about any short term market movements. You’re also less likely to miss out on any growth periods due to mistimed decisions.
How long should you stay invested? That’s up to you. But you shouldn’t really be investing if you need your money back in the next five years.
With investing, the longer you can stay invested, the better.
💡 Learn more: Freetrade’s 10 (+1) investment principles.
What are Freetrade investors buying?
If you’re still not too sure how to invest your money, it might be worth looking at what others on Freetrade have bought.
It’s important to remember that each Freetrade customer will have their own investment goals and risk appetite so you should adjust these insights according to your own position.
Always keep your own circumstances front-of-mind when making investment decisions.
Just remember that this should be the beginning of your investment journey. There are always things to learn, whether it's about risks or asset classes.
📈 See what are the most traded shares weekly on Freetrade. These are the most bought and sold stocks and shares on our investment platform.
Top 10 stocks on Freetrade
We recently surveyed Freetrade users that have an ISA account with more than £10,000 invested to see what they’re putting money into.
As you can see, Tesla is in the top spot. The electric carmaker has been very popular with lots of investors over the past couple of years and has seen its share price rise dramatically as a result. Things have slowed down a bit recently though, probably as people start to doubt whether the firm can grow enough to justify its high share price.
Further down the list we have some GameStop and Argo Blockchain. The former gained a lot of attention during the meme stock saga, something that’s dipped in and out of the news since February 2021. Argo Blockchain wasn’t quite the same but it also gained a lot of retail investor attention on the back of a surge in the price of Bitcoin.
Spread across the rest of the list are three ETFs. The iShares FTSE 100 and Vanguard S&P 500 are both index trackers, issued by iShares and Vanguard respectively. One thing here to be cautious of is the fact they both distribute dividends they receive, hence the ‘(dist.)’ at the end of their names.
As we said in the compounding section of this guide, if you’re taking these income payments out and not reinvesting them, you’re reducing the ability of those returns to compound and generate returns of their own. So unless these investors are reinvesting their dividends very quickly, there’s a chance they could be missing out on greater gains than they may otherwise receive.
Top 5 sectors on Freetrade
Another interesting set of data from the Freetrade customers we sampled is the sectors that they invested in when buying stocks.
The financial services industry tops the list here, with 17 percent of all orders being in banks, insurers and credit card providers.
Next on the list is tech, which includes big names like Apple, Amazon and Facebook. Just over 13 per cent of all the sampled orders were in tech firms.
A similar number of orders were made in the energy and food-and-drink industries, with approximately 16 percent of all stock investments made in each.
Last on the top 5 list is healthcare, which managed to attract close to 7 percent of our £10,000 investors’ orders.
For more news and insights on stocks and shares, you can check our stock market analysis daily news.
Investing in stocks - FAQs
How much money do you need to start?
You don’t need millions to start investing, in fact, thanks to things like fractional shares, you can start investing in US stocks from £2.
How much money should you invest?
Like any spending, how much money you should invest should be guided by what you can afford. When you invest you need to be ready to leave those investments alone for a number of years, so for any money you might need to use in a few months or a year, it could be best to keep it as cash.
Here are a few things to think about before diving in:
- Pay off any money you owe, like credit cards, before investing.
- Consider how much money you have left each month after you’ve paid for essential things essentials like food and housing.
- You can always change the amount of money you invest, so investing small amounts regularly and building up could be a good option.
What stocks are good for beginners?
There is no right answer when it comes to which shares to invest in first. It's going to be different for each of us.
Spreading your money across different investments is a key first step, so your portfolio isn’t reliant on one thing to grow.
You can do this by choosing a few different companies to invest in or by choosing investments that do it for you like ETFs and investment trusts.
How to find stocks for your portfolio?
Here are a few key things to keep in mind when choosing stocks:
- Invest in stocks where you understand the business, how does it make money?
- Aim for profitable business and growing businesses, ones that could withstand shocks (for example like the COVID-19 pandemic).
- Check the hype and be wary of tips that come from ‘hottest stocks now’ and ‘best stocks to buy now’.
- If you’d rather not choose, look for investments that can give you a ready-made basket of stocks like ETFs and investment trusts.
How many stocks should you own?
Increasing the number of stocks you hold across different sectors, should help you to build a diversified portfolio. A diversified portfolio is one that doesn't depend on one company or outcome to grow. It also means that if one company or sector underperforms, your whole portfolio isn’t affected and other stocks may even offset the poor performance.
How many stocks do you need to be ‘diversified’? There unfortunately isn’t a one size fits all answer.
Research over the years has suggested that holding around 30 stocks can help build a diversified portfolio.
But that won’t work for everyone.
Here are a few things to think about:
- Does researching and choosing 30 stocks seem like a lot? As ready-made baskets of stocks or other assets, ETFs and Investment trusts could be a good option.
- The core-satellite strategy mentioned above could help you hold a few stocks alongside core passive investments that provide a more diversified investment at the core.
🤔 Want to find out more?
The Freetrade community is a great place to ask questions if you’re unsure about something.
You can also learn more about investment with our ‘Building your portfolio’ collection of learning material or by signing up to our daily stock market newsletter, Honey for a fresh dose of insights.
In the meantime, you can browse through the Freetrade app and see if there’s anything that fits with what you’re looking to achieve. Just don’t go all-in on Tesla...
This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.
When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.
Eligibility to invest in an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.
Before transferring an ISA you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. ISAs are usually transferred as cash so you will be out of the market for a period.
SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (raising to 57 from 2028). Current rules can change, and tax relief depends on your personal circumstances.
Before transferring a pension you should ensure that this is the right thing for you to do and in particular you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period and therefore there is a risk you may lose out on investment gains during this period.
Freetrade does not currently offer drawdown products for our SIPP.
Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).