When it comes to investing, most people start looking into stocks and shares, but how do you invest in the stock market? What are the risks? And how difficult is it?
As this is a beginners’ guide, it’s a good idea to start with the basics and look at what stocks are and the reasons why people invest in them.
What are stocks?
When a company wants to raise money, they’ll often look to issue stock in what is known as an Initial Public Offering or IPO. They’ll split the company into lots of little parts – called shares, or stocks – and will have a set price per share for the IPO.
During this point, any purchases made will typically provide that company with a profit.
Once an IPO is finished, stock is typically sold on the stock market where the price changes in line with supply and demand, but any profit of these sales does not go back to the company – instead the investor benefits from it.
When an investor buys a stock, they effectively become a part-owner of that company – although each stock only accounts for a very small part of that business.
Why do people invest in stocks?
There is a lot of potential when it comes to investing in stock, part of this is due to its volatility which refers to how much the price moves.
If the price of the stock you’ve purchased increases, then you could profit from it. But in addition to this, some stock may also pay dividends, either in the form of a cash payment or in more stock, rewarding you for being a shareholder.
While your returns aren’t guaranteed, the hope with investing is that you can beat both inflation and interest rates.
The theory here is that your money isn’t attached to a single influencer – for example, a savings account interest rate – it’s benefitting from lots of different things, such as the share price movements, dividend payments, and even interest from things like corporate or government bonds (although these last two aren’t available by just investing in stock).
Having your money invested in stock could provide you with better rates than you’d get from an interest only account, although you are taking a risk as returns aren’t guaranteed.
How do I invest in stock?
Investing in stock can be as simple or complicated as you want it to be. For the easy option, you could use a robo-investing service like Wealthify. This way, experts do all the heavy lifting for you and you just need to decide how much you want to invest and what level of risk best suits your need.
Doing it this way means you won’t have to spend ages researching and learning how stock markets operate in order to take advantage of the potential that investing in stocks could provide.
With robo-investing, that’s exactly how simple it is to invest in stocks. No hassle, no confusion, and a team of experts working hard to give your money more potential. But if you have the time, and the inclination, then you may want to take a DIY approach to be able to pick, buy and sell exactly the stocks you want.
This does require a more in-depth level of understanding and you’ll need to continually check in on your investments to ensure that it stays aligned to the level of risk you’re willing to take.
To invest in stocks this way, you may need to open a brokerage account to be able to buy stocks – these come with varying levels of trading commissions and account fees which can eat into any profits you make, so be sure to compare different platforms.
You may also find that not all brokerage accounts will give you the same access – for example, some may not offer a wide range of funds, which act as a basket of different investments so that you can quickly and easily diversify your investments.
Should I only invest in stock?
There’s a principle in investing called diversification, which is exactly what it sounds like – having a diverse range of investments. While, yes, if you wanted to you could only invest in stock, it does carry significant risk.
If you only invest in one single stock then your money would rise and fall with that company, so if they have bad results you would too.
You could diversify across a range of different stocks by investing in a number of companies around the world in many types of sectors. This would help reduce your risk if any one company or area is impacted, but your investments would still be significantly impacted by changes in stock market – good or bad.
There are many other types of investments you could also buy to try and provide a little bit of stability. For example, government or corporate bonds, commodities like oil and precious metals, property, and even cash in different currencies.
How much money do I need to invest in stocks?
If you’re taking a DIY approach, then this will depend on how expensive each share is. Some stock is relatively cheap and may only cost you a couple of pounds, while others can run into the thousands.
This is something you may want to consider when looking at buying individual stock as your budget may dictate what you can and cannot buy.
With robo-investors, the cost can be much lower – some as little as £1. There are a number of reasons for this, the main one being that robo-investors use funds which may be exchange-traded funds (ETFs) or mutual funds – funds are like hampers full of many different investments (e.g. shares, bonds, and property). As ETFs can be traded like stock, investors can buy a little slice of a fund at a much lower cost, allowing for a diversified portfolio even with small budgets.
Where to start?
If you’ve decided that robo-investing is right for you, then you could get started by opening a Stocks and Shares ISA with Wealthify. Not only will you have experts looking after your investments, but you can invest up to £20,000 tax-free each year, and not have to fork out on income or capital gains tax.
When you take this approach, your investments will include stock, but you’ll also be invested in lots of other things too, helping to reduce the amount of risk you’re exposed to.
Choosing an investment style that’s right for you will change the amount of shares your investment Plan holds, the more Adventurous you are, the more stock you’ll typically hold. Not sure what the right level for you is? Don’t worry, in Wealthify’s onboarding journey we’ll ask a couple of questions to find out what’s best suits to your needs.
Your tax treatment will depend on your individual circumstances and it may be subject to change in the future.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.