Stocks are the most common investment vehicles in the United Kingdom. They offer a diversified portfolio of shares and bonds that can provide steady returns over time. If you want to start investing in stocks, here are some things you should consider before jumping into the stock market.
Investing in stocks requires patience and discipline. The good news is that you don’t need to be an expert to get started. All you need is a little bit of knowledge and a willingness to try new things.
This post aims to act as a starting point to gain an understanding of what investing in stocks entails, and what you would need to get started. It will also help you understand how much money you could potentially make from investments.
We are not financial advisors, for any major financial decisions consult a professional.
What are Stocks?
Stocks are pieces of ownership in a company. When you invest in stocks, you buy a piece of a business or corporation. You own part of it, but you do not control it. Instead, you have a say in its future by voting on who gets to run it.
For example let's say company A would like to issue 1000 shares to the public. If the company is valued at £1,000,000 then the share price can be calculated by dividing the value of a company by the outstanding number of shares in circulation. e.g. £1,000,000 / 1000 = £1000 per share.
Using the same logic as above, if company A is now valued at £2,000,000 and you bought a share when the company was worth £1,000,000 the your share prices would have followed the same doubling. £1000 to £2000. If you sold now you would have profited £1000.
Taxes on Stocks
You do have to pay taxes on investment profits but luckily there is an allowance similar to that of income tax allowance. The value varies each year depending on inflation and other factors. Below is more information on capital gains tax and paying tax on stocks from the official government website:
https://www.gov.uk/capital-gains-tax
https://www.gov.uk/tax-sell-shares
Pros and Cons of Investing
There are pros and cons to investing in stocks. Some people find them easy to manage while others find they are difficult to keep track of. Here are some of the benefits and drawbacks of investing in stocks:
Benefits
• Can Provide Stability
• Can Reach an Early Retirement
• Can Be Tax Efficient
Cons
• Can lose money
• Requires Discipline
• No Guarantees
How to Start Investing
The best way to decide whether investing in stocks is right for you is to dive into what the world of investing actually entails. It is such a vast scape depending on your interests, the type of investor you want to be and the types of companies that you are invested in. I truly believe their is a type of investing for everyone (whether it be stocks or some other asset), and the first hard part is finding out what is right for you.
I started my journey nearly 4 years ago exploring online resources such as YouTube with Meet Kevin, Andrei Jikh, Stephan Graham and MANY more. The online FIRE community is thriving with investors and endless streams of information to learn pretty much anything related to personal finance.
In that time I have massively grown my confidence with investing and fallen in love with the whole process. Being able to learn new stuff everyday and seeing hope for an early retirement in a realistic way is a great motivator!
Purchasing Stocks
Thankfully for our generation, we have amazing access to financial assets like never before. When I first started investing (once again only 4 years ago) I created an account with Halifax Share Dealing which would charge me £12.50 PER TRADE! So that's when I buy shares or sell shares.
At the time I was only making £60/week working a part time job so it took me a while to save up my cash to £300 where I made my first stock purchase. The issue was because of the commission, I knew I would be down £25 straight away which is about 8.3%.
8.3% is the rough average yearly return for an investor so I did not like the idea of having to wait a year just to get my cash back before actually seeing any growth. Robinhood wasn't an option in the UK but we did have some other options such as Freetrade and Stake (These are my two main apps for investing right now)
Both of these apps offer commission free trading. There are fees but they are so small it is basically negligible. Because of this it really meant I could start investing without instantly being at a loss from such high commissions.
Commission free trading in addition to being able to buy fractional shares means investing is now possible with very little cash. Some apps allowing as little as £1 to get started investing.
Checkout our blog post on the Best Stock Trading and Investing Platform's UK (2022). Each have their own perks so check which one you think will best suit you.
Now How Do I Pick Stocks?
So this is where things really get tricky. Picking stocks takes practice and is a combination of things . You need to know what you are looking for, how to find them, how to analyse them, how to pick them and then finally how to hold onto them.
Risk Tolerance
It’s important to understand that there isn't always going to be a perfect fit between an investment opportunity and your needs. This is why it is important to do research and find something that works for you.
The first thing to consider is your risk tolerance. If you are willing to take on higher levels of risk then picking stocks that are in early stages of development with more unknowns may work for you. Of course the benefit with higher risk is potentially a higher reward.
Or would you prefer a lower risk tolerance. Slow growth, over a long period of time leveraging the power of compound interest can prove massively profitable in the long run with patience.
Check out our blog post on Compound Interest
Personally I go for higher risk, investing in stocks such as $TSLA, $SPCE, $BNGO and more. I am happy to take on the additional risk as currently I am 22 years old so having my retirement savings in order isn't as important as it would be if I was 1 year away from retirement.
It is all opinion though and there is not necessarily a right or wrong, You may want to go down the path of more secure buying assets such as Index Funds which are essentially little baskets of lots of stocks so you can gain better diversification and steady growth.
Analysing a Business
There is so much to do when it comes to analysing a business and so many different factors can be used to create models and estimate company values. However, the two main categories of analysis to remember are Fundamental Analysis and Technical Analysis
Fundamental Analysis
Fundamentals are the core numbers that make up a business. These include things like sales, earnings per share, profit margins, debt ratios etc. All of these numbers provide insight into the health of a business.
Fundamental analysis is often used by longer-term investors trying to predict a companies future revenues, profits, valuation and subsequently, the share price of the stock.
Technical Analysis
Technical analysis is about using charts to predict future performance. It is based around historical data and trends. The most common technical indicators are moving averages, MACD, RSI, Bollinger Bands and others.
Often technical analysis will be used by people trying to day-trade stocks for short term profits. Day-trading usually referring to buying and selling within the same day or sometimes a couple of days (swing-trading).
Are Other Investments Available?
Stocks aren't the only investments available for growing wealth. Other options include the already mentioned index funds. There are also the options of properties (real estate), investing in mutual funds, or purchasing bonds. These are some common financial assets which all have their own cost, benefits and limitations.
Conclusion
I hope this helps you decide whether or not investing in stocks is for you. Remember that investing is a marathon not a sprint. So don't expect to hit the ground running straight away. Take baby steps at a time and learn along the way.
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Thanks for reading!
FAQ
What are your goals?
If you're trying to build up enough money to cover the cost of a new car, a holiday or a wedding in the short term, then investing is probably not the right option.
But if you're putting money away for something at least 5 years away – such as a child's education or just more flexibility later in life – then investing may be right for you. (hsbc.co.uk)
Why invest your cash?
Interest rates on savings accounts have remained low for years, with plenty accounts not even keeping up with inflation.
Looking for higher returns, many people have tried alternative products like Investment ISAs or share dealing in the hope that they can earn a better income from the dividends paid or the amount the investment's value increases over time. (money.co.uk)
What returns to expect?
When it comes to what returns to expect, the key thing to keep in mind is that over the long term (five, 10 years and beyond) stock markets tend to rise. (freetrade.io)
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. (freetrade.io)