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Investing in stocks is one of the best ways to make a steady return on your money. It can be much more profitable than putting your money in a savings account – the average annual savings account return is less than 1%, while the average annual stock market return is about 10%.
Most people invest in stocks in order to build some wealth for retirement, while others use stocks to pay off kids’ university fees or even buy their first house. In most cases, it’s a long term investment strategy rather than a short-term way of making money.
So just how do you invest in stocks? This layman’s guide aims to explain all.
What are stocks and shares?
Investing in a share is pretty much paying for a small percentage of a company’s ownership. As that company grows and becomes more valuable, you then get to enjoy a small percentage of that company’s profits.
When you own more than one share in a specific company, you own ‘stock’. The biggest percentage you own in a company, the larger the slice in profits.
Stocks and shares are traded via the stock market. There are billions of shares traded every day around the world.
Common misconceptions about the stock market
A lot of people are put off investing in stocks due to misconceptions about the stock market. Below are just some of the common misconceptions that put people off.
- You need lots of money to invest in stocks: There was a time centuries ago when only wealthy people could afford to get access to the stock market. Nowadays, pretty much anyone can invest in stocks, regardless of wealth. There are free trading apps that allow you to invest as little as £1 per share. You don’t have to be investing thousands and you don’t have to pay expensive broker fees.
- Investing in stocks is like gambling: There is some risk to investing in stocks, but it’s nothing like the risk of playing at a casino. You can get a pretty good idea of whether a stock is likely to go up or not just by researching the company. It’s true that unforeseen disasters such as the 2020 pandemic happen, but as current market figures show, most companies have largely recovered already. The chances are very, very slim that a company will become permanently worthless overnight (you’ll usually get some warning).
- You need a lot of financial knowledge to invest in stocks: Investing in stocks does not require a degree in finance. Most people can pretty much work out what is going from looking at the graphs. Of course, it doesn’t hurt to educate yourself if you want to get seriously invested in stocks. There are books for offering advice such as A Man For All Markets: From Las Vegas To Wall Street, How I Beat The Dealer And The Market – Edward O Thorp. There are also plenty of blogs dedicated to the more specific details of stocks. Such knowledge is useful if you want to take more riskier investing strategies like day trading or investing in high volatility stocks.
Photo by Joshua Mayo on Unsplash
How to invest in stocks (and make money)
Want to get started? Below are a few steps that show you how to start investing and how to make sure your investment makes money.
Choose the right broker platform
To start trading stocks and shares, you need to set up a trading account. This is where you store your money that you would like to invest. You can set up a trading account with the help of a broker. This could be with the help of a stockbroker company, an individual stockbroker, PC trading software or a mobile trading app.
Mobile trading apps have become one of the most popular options. These apps tend to be free for those that want to invest small amounts and you can manually buy and sell the stock you want. Trading account deposits may be as low as £10.
PC trading software also allows you to invest manually. Some of this software also has automation tools, that allow you to automatically invest when stocks reach a certain price. Such software may require you to place a larger deposit when opening a trading account and may have more fees.
When you use a stockbroker, it’s likely that they will do most of the investing for you. This could maximize your return, however you’ll likely have to pay greater fees to hire a stock broker.
Decide how much to invest (and how regularly)
Once you have a trading account, decide exactly how much you want to put in it and how much of that money you then want to invest. You could put £10 into it and then buy a few £1 stocks. Alternatively, you could put £10,000 into it and invest in much larger stocks.
You may decide to pay into your trading account on a regular basis. This could be something as small as £10. This allows you to slowly invest more and more.
Study the market
When you invest, take the time to see what’s going on in the market. Which stocks are on the rise and which are falling?
‘Buy low, sell high’ is the most basic strategy to stick by. Another popular strategy is to ‘buy the dip’. Every year there will be a moment when stock prices briefly fall before shooting back up – by investing during this brief fall you can maximize your return.
Diversify your portfolio (invest in lots of different stocks)
You should never just invest in one company share. If that company fails, you’ll have lost all of your money. It’s much better to invest in multiple companies. This ensures that if one company suddenly goes bankrupt, you’ve still got lots of money invested into other companies.
This is known as diversifying one’s portfolio. Ideally, the stocks you invest in should be from a range of different companies across various industries.
Consider setting stop losses
If a stock starts plummeting, you need to decide whether to hold onto it (in case it goes back up again) or sell it (in case it continues to plummet). Stop losses can help to alert you of when a stock has reached a certain price. This could allow you to then sell the stock before it gets any lower. When used effectively, stop losses can prevent you from incurring losses.
If you want to play it safe, stick to big established companies
When choosing companies to invest in, it can be tempting to throw money into fast-growing new tech companies. However such companies can be more risky when thinking about long-term investing – there’s no guarantee that they will be around in 20 or 30 years time.
Your best bet is to stick with the companies that have been around for decades and that have steadily increased in value year-after-year. These include the likes of Starbucks, Coca Cola, Berkshire Hathaway and Disney. Such companies can be relied on to make a profit. This means that you don’t have to keep as close an eye on them.