Keep in mind that investments can go down as well as up in value, so you could get back less than you put in. A rule of thumb is to hang on to your investments for at least five years to give them the best chance of providing the returns you want.

How to Invest in Stocks and Shares

Contents:

1. The Best Investment Platforms for Beginners in the UK
2. What Is Investing?
3. Why Invest in Stocks and Shares?
4. What Is the Stock Market?
5. What Should Beginners Invest In?
6. How Much Money Should You Start With?
7. How to Invest in Stocks and Shares in the UK
8. Typical Investment Fees
9. Tips for Success in the Stock Market

Investing in stocks and shares can seem daunting, especially if you're just starting out. However, it's a powerful way to grow your wealth over time. In this post, we'll explore the fundamentals of investing in the UK and foreign stock markets, guiding you through the key concepts, strategies, and steps to begin your investment journey.

The Best Investment Platforms for Beginners in the UK

There are several excellent investment platforms tailored for beginners in the UK. Here's a list of some popular options:

1. InvestEngine: Ideal for cost-conscious investors prioritising ETFs, with low fees and an easy-to-use interface.
2. Moneybox: Great for automatic investing, allowing you to round up your purchases and invest the spare change.
3. eToro: Known for its social trading features, which let you follow and copy the trades of experienced investors.
4. Freetrade: Perfect for beginners with limited funds, providing commission-free trading on a wide range of stocks and ETFs.
5. Interactive Investor: A solid choice for those wanting a comprehensive platform with a wide range of investment options.
6. Moneyfarm: Ideal for beginners looking for a long-term passive investment strategy with managed portfolios.

Please remember that when you invest, your capital is at risk.

What Is Investing?

At its core, investing involves setting aside your money with the expectation that it will grow over time. This could mean purchasing assets like stocks or shares, which you hope will appreciate in value. While the goal is to make a profit, it's important to remember that investments can also decline in value, and you may lose some or all of your initial investment.

Why Invest in Stocks and Shares?

Many of us have financial goals, whether it's saving for retirement, buying a house, or funding a significant life event. Investing in stocks and shares can be an effective way to meet these goals, often yielding higher returns than traditional savings accounts.

A 2019 survey by Barclays found that shares outperform cash nine times out of ten over a decade, though this decreases to seven times over five years. Typically, investors can expect annual returns between 3 and 12%, though these figures can vary widely based on several factors, including portfolio diversification and market conditions.

One of the most powerful advantages of investing in stocks is the potential for compound growth. When you reinvest your returns—whether dividends or capital gains—you essentially earn interest on your initial investment and on the interest that accumulates over time. This compounding effect, known as compound interest, can significantly enhance your investment growth, making it a key reason to start investing early and consistently.

What Is the Stock Market?

The stock market is essentially a marketplace for buying and selling shares of publicly listed companies. In the UK, the primary exchange is the London Stock Exchange (LSE), which hosts a variety of companies ranging from household names like Vodafone to smaller entities listed on the Alternative Investment Market (AIM).

When you start investing, you'll encounter market indices like the FTSE 100 and FTSE 250, which track the performance of the largest companies on the LSE. These indices serve as benchmarks, helping investors gauge market trends.

What Should Beginners Invest In?

For those new to investing, it is crucial to understand the different asset classes available:

1. Stocks and Shares: When you buy a share, you purchase a small stake in a company. If the company does well, so does your investment, but conversely, if it fails, you risk losing money.
2. Bonds: These are essentially loans you give to corporations or governments in exchange for interest payments.
3. Funds: Instead of picking individual stocks, you can invest in mutual funds or ETFs, which pool money from multiple investors to buy a diversified range of assets. This can help reduce risk.
4. Property: Investing in real estate can be another avenue for wealth creation, although it requires more capital and involvement.
5. Commodities: This includes investing in raw materials like gold, oil, or agricultural products.

How Much Money Should You Start With?

Before diving into the stock market, it is vital to have a clear financial foundation. Make sure you have an emergency fund that covers at least three months' worth of living expenses. This safety net will prevent you from needing to liquidate investments in a financial crisis.

In terms of initial investment, many platforms now allow you to start with as little as £25 a month—or even £1 in some cases. Regular, smaller contributions—known as "drip-feeding"—can be a smart strategy, allowing you to build your investment gradually over time.

How to Invest in Stocks and Shares in the UK

To invest in stocks and shares in the UK, you'll need to:

1. Set Up an Emergency Fund: Ensure you have savings that can cover unexpected expenses. An emergency fund acts as a safety net, covering unexpected expenses like medical bills, car repairs, or job loss. Ideally, this fund should contain at least three to six months' worth of living expenses. Keeping these savings in a high-yield, easily accessible account, such as a Cash ISA or an easy-access savings account, ensures you can tap into it when needed without disrupting your investment plans.
2. Choose an Investment Platform: With your emergency fund in place, the next step is to select an investment platform that suits your needs. There are various options available, including eToro, InvestEngine, and Interactive Investor. When researching platforms, consider factors such as fees, available investment options (stocks, ETFs, mutual funds), user interface, and educational resources. Look for a platform that aligns with your investment goals and offers the level of support you desire, whether you're a hands-on investor or prefer a more guided approach.
3. Open an Account: After selecting a platform, the next step is to open an investment account. This process usually involves providing personal information such as your name, address, and date of birth, as well as verifying your identity with documentation. This is a crucial step to ensure compliance with regulations and to protect your investments. Most platforms offer a straightforward online application process, making it easy to get started.
4. Fund Your Account: Once your account is set up, you'll need to fund it. This can typically be done using a debit card, bank transfer, or Open Banking. Decide on the amount you want to invest initially, keeping in mind your overall financial situation and any upcoming expenses. Some platforms may offer features like automatic deposits, allowing you to set up a regular investment schedule that aligns with your budget.
5. Select Your Investments: Now comes the exciting part: choosing what to invest in. Take the time to research various stocks, funds, or other assets that align with your financial goals and risk tolerance. Consider factors such as market trends, company performance, and industry outlook. If you're uncertain about picking individual stocks, look into index funds or ETFs, which provide built-in diversification by pooling investments across multiple companies or sectors.
6. Create an Investment Strategy: Before placing any orders, it is essential to develop a clear investment strategy. Decide how long you plan to hold your investments—are you in it for the long haul, or do you have short-term goals? Think about how you'll diversify your portfolio to mitigate risk; spreading your investments across various asset classes and sectors can help balance potential gains and losses. Your strategy should also consider your financial goals, whether that's saving for retirement, a home purchase, or funding education.
7. Place Your First Order: When you feel ready and have researched your options, it's time to place your first order. You'll need to input the name of the asset, like "Netflix" or "$NFLX" for Netflix stock or "S&P 500" for the S&P 500 index fund or ETF. Additionally, you'll have to indicate how many shares you'd like to purchase or the total amount you wish to invest.
8. Invest Regularly: Once you've made your initial investment, consider adopting a strategy of regular contributions. This approach, known as pound-cost averaging, allows you to invest a set amount consistently over time, reducing the impact of market fluctuations. By spreading out your investments, you can buy more shares when prices are low and fewer when prices are high, which can lead to better long-term results.
9. Monitor Your Investments: Finally, it's important to keep a close eye on your portfolio. Regularly reviewing your investments will help you stay aligned with your financial goals and allow you to make necessary adjustments as market conditions change. Keep in mind that the stock market can be volatile; avoid making impulsive decisions based on short-term fluctuations. Instead, stick to your long-term strategy and rebalance your portfolio if certain assets begin to dominate your holdings.

Typical Investment Fees

Understanding the costs associated with investing is crucial. Common fees include:

1. Annual Platform Fee: Charged by your investment provider for maintaining your account.
2. Fund Management Fees: Costs for managing mutual funds or ETFs.
3. Trading Fees: Charged each time you buy or sell assets.
4. Transfer Fees: Fees incurred when moving investments to another platform.

Tips for Success in the Stock Market

Here are our top 10 tips for success in the stock market:

1. Understand Risk: Higher potential returns often come with increased risk. Be mindful of your risk tolerance as you age.
2. Diversify Your Investments: Spread your money across different types of assets and industries to mitigate risk.
3. Think Long-Term: Investments should typically be held for five years or more to weather market fluctuations.
4. Be Aware of Fees: Watch out for fees that can eat into your returns.
5. Regularly Review Your Portfolio: Stay informed about your investments, making adjustments as needed.
6. Avoid Timing the Market: Focus on long-term strategies rather than trying to predict short-term movements.
7. Utilise Tax-Free Accounts: Take advantage of ISAs or pensions to maximise your tax efficiency.
8. Educate Yourself: Stay informed about market trends and investment strategies.
9. Set Clear Goals: Know what you're investing for—be it retirement, a home, or education.
10. Stay Disciplined: Keep emotions in check and stick to your investment plan.

Credits

1. London Stock Exchange
2. NASDAQ