Should I invest in stocks and shares?
You see a lot of adverts these days with get rich quick schemes encouraging you to trade stocks and shares as a pathway to millions!
The truth is, many of these are a scam - some even taking you to a fake platform that will literally just separate you from your money. It’s very rare (and incredibly risky) to get seriously rich overnight from trading. However, many people do make good returns from investing in the stock market, and it can be really simple if you know how!
Firstly… What Are Stocks and Shares?
Stocks, also known as shares or equities represent ownership in a company. When you buy a stock, you purchase a piece of that company, known as a share. Owning stocks means having a stake in the companies you believe in, and you can help support some of your favourite brands.
There are two ways you can make (or lose) money from the stock market:
Trading:
How does it work: Trying to make quick profits by buying and selling stocks frequently to take advantage of price fluctuations.
Timeframe: Trades can last from a few seconds to several months, but they are generally not held for a long time
Investing longer term:
How does it work: Building wealth gradually by holding stocks for an extended period, benefiting from the growth of the companies and the compounding effect
Timeframe: Long-term investing involves holding stocks for several years, often decades, to allow investments to grow over time
If you want to spread the risk and don’t have a specific company in mind, you can also purchase a financial product such as an ETF, Mutual Fund or an Index Tracker, which have value based on the price of multiple shares, typically with something in common such as geography or industry.
These financial products are a great place to start in your investing journey…
If you don’t believe me, Warren Buffett infamously bet a million dollars that an S&P 500 index fund would beat hedge fund managers, and won that bet!
Why Invest in Stocks?
Stocks are relatively easy to buy and sell, providing flexibility and liquidity. As a shareholder, you can potentially benefit financially in three main ways:
Capital Gains: The value of your shares can increase over time, allowing you to sell them at a higher price than you paid. Historically, the stock market has provided higher returns compared to other types of investments like bonds or savings accounts. Generally investing in shares will help you to beat inflationary losses.
Dividends: Some companies distribute a portion of their profits to shareholders in the form of dividends. This can provide you with a form of income.
Shareholder Perks: Some companies offer discounts to shareholders on their products or services, for example Carnival Cruises gives you onboard credit if you hold more than 100 shares, whilst Coca Cola has been known to give exclusive access to shareholder events.
Watch-out: A company always has a risk of going bankrupt, and the price can go up or down depending on how it performs. When buying a company, your capital is always at risk.
Key things to consider before investing
Diversification: Don’t put all your eggs in one basket. Spread your investments across different sectors and types of assets to reduce risk. ETFs or index funds can be a great way to diversify and reduce your risk.
Risk Tolerance: Understand your risk tolerance – the level of risk you're comfortable taking. Stocks can be volatile, and it's important to invest in a way that aligns with your comfort level and financial goals.
Research: Analyse the companies or industries you’re interested in. Look at their financial health, performance, and future prospects. Tools like financial statements and market analysis can help.
Long-Term Perspective: Successful investing is typically about patience. Stock markets can be volatile in the short term, but they have historically trended upwards over the long term.
Watch-out: Many professionals spend hours researching, leveraging the most sophisticated tools and insights to make short-term bet on stocks, and still get it wrong. Unless you are willing to lose lots and have a high risk tolerance, success relies on diversifying and playing the long-game!
Common Pitfalls to Avoid
Emotional Investing: Making decisions based on emotions, such as panic selling during a market dip, can lead to losses. Stick to your plan and make informed decisions.
Timing the Market: Trying to predict market movements is extremely difficult. Focus on long-term goals rather than short-term gains.
Lack of Research: Investing without thorough research can lead to poor decisions. Always do your homework before buying any stock.
So how do I buy individual stocks?
Step 1. Choose a brokerage account
There are many options out there, would encourage you to consider the following:
Fees and Commissions: Look for low-cost options.
Ease of Use: The platform should be user-friendly.
Research Tools: Access to research reports, analysis tools, and educational resources.
Customer Service: Reliable support when you need help.
Step 2. Add funds to your account
Typically this is done through a bank transfer or direct debit
Step 3. Place your order through the brokerage account
This is most commonly done as a market order, but there are a few other options available
Market Order: Buy the stock immediately at the current price.
Limit Order: Set a specific price at which you want to buy the stock. The order will only execute if the stock reaches that price.
Stop Order: An order to buy or sell a stock once it reaches a certain price.
One tip is to buy small amounts regularly, to avoid the day to day volatility of the share price
Step 4. Monitor your investments and review regularly based on…
Stock Performance: How your stocks are performing relative to your expectations.
Market Conditions: Changes in the market that could impact your investments.
Rebalancing: Adjusting your portfolio to maintain your desired level of risk.
Step 5. Sell your shares and cash out when you need the funds
Watch-out: Some people are not able to trade certain stocks based on their job and information they might be exposed to, for example many bankers, consultants or accountants are privy to insider information ahead of the market. Double check whether you are legally allowed to trade before buying or selling any stock.
Other ways to invest…
Exchange-Traded Funds (ETFs)
ETFs are investment funds that hold a collection of assets, such as stocks, bonds, or commodities. They are designed to track the performance of a specific index or sector.
Benefits of ETFs
Liquidity: ETFs are traded on stock exchanges, similar to individual stocks, making them accessible and flexible investment options.
Reduced risk: ETFs are diversified, because they provide exposure to a broad range of assets, which helps to spread risk, and reduces impact of one company doing poorly.
Accessibility: ETFs can be purchased through a broker, similarly to stocks, and most ETFs disclose their holdings daily, allowing investors to see what assets they are invested in.
Mutual Funds
Mutual funds are investment vehicles that pools money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, or commodities. They are actively managed by professional fund managers who make investment decisions on behalf of investors.
Benefits of Mutual Funds
Liquidity: Mutual funds are highly liquid. Investors can buy and sell shares at the fund’s net asset value (NAV) at the end of each trading day.
Diversification: Diversification reduces the risk of significant losses compared to investing in individual securities.
Accessibility: Mutual funds are accessible to individual investors with varying levels of capital. Many funds have low minimum investment requirements.
Potentially higher returns: Short term, mutual funds can significantly outperform the market, whilst requiring minimum effort of the investor as a fund manager is doing all the work.
Watch-outs: Performance of mutual funds are highly dependent on the success of the fund manager. Although they can significantly outperform in the short term, they often have high fees associated with them and there are no guarantees.
Index Trackers
An Index Tracker or Index Fund is a type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific financial market index, such as the FTSE100 or the S&P 500.
The fund purchases all or a representative sample of the securities in the index.
Benefits of Index Trackers
Low cost: Index funds are passively managed, with fund managers holding all of the securities in the index rather than being actively selected. This means there are minimal fees.
Performance: Over the long term, index funds often outperform the majority of actively managed funds due to their lower costs and broad market exposure.
Reduced risk: Diversification reduces the risk of significant losses compared to investing in individual stocks. Even if one stock performs poorly, the impact on the overall fund is minimal.
Simplicity: Index funds offer a straightforward way to invest in the stock market, and can be purchased through a broker. By buying shares in an index fund, you automatically invest in a diversified portfolio of securities.