The stock market. Should I invest? What should I buy? Who’ll give me advice? Isn’t my cash safer in the bank? Many questions lurk for the first-time investor.
First, the stock market is not as complex as you think. It’s the place where publicly-owned companies are bought and sold.
These companies might make chocolate biscuits, software or dog food. Widgets or smart phones. Fighter jets or lipstick. Or financial or accountancy services. The diversity is huge.
Though cash is safe in the bank, historically ‘stocks’ do better in the long term. Rising prices erode the real power of cash in the bank. Investing in stocks also gives you extra firepower: dividends. They’re a proportion of profits paid out (with luck) to shareholders.
Deploy the secret D-weapon
Dividends boost your total return from something called compounding. When dividends are re-invested compounding begins. It means you get income on income. It’s a very powerful tool.
Numbers tell it best. Between 1992-2017 the FTSE All-Share grew in value by more than 200%. But with dividends re-invested this number more than triples to 644%. Compare that rate of return from the miserable returns offered on in high street banks’ savings accounts.
What’s the FTSE All-Share? It’s the index containing 600 of the UK’s top 2,000 companies. From BP to British Retail Group (owner of Homebase and Argos) to Next and Sky and easyJet.
“Before investing you should make sure that you have paid off any expensive debt and have enough money in cash to cater for any short-term emergencies or requirements,” says Patrick Connolly from Chase de Vere financial advisers.
“This will stop you going into debt or cashing your investments in at the wrong time if you need to get hold of some money quickly.”
Get on track
Before looking at individual shares, it might pay to look at a basic index tracker. A tracker follows a collection of underlying shares. For example, a FTSE 100 index tracker will rise or fall (give or take) with the value of the UK’s top 100 companies.
Some trackers ‘track’ indexes in the US. There are ‘world’ trackers including ones that follow the Japanese stock market (the Tokyo Stock Exchange). You get the picture.
The great thing about them is their low cost. That’s because no one manages trackers. They’re computer controlled. Fees can be often just 0.25% a year or less. That compares with costs of 1-3% for actively managed funds.
- Tracker cost differences might sound small. In reality they’re massive. Especially long term as excess costs compound every year
- Trackers are a solid foundation to build your long-term financial future on (and many don’t see sense investing any other way)
- Many funds accept small monthly amounts in regular savings and can be used in pensions and ISAs
After you’ve built up some general stock market index tracker exposure, you might want to invest in individual companies.
“Do invest in something you know and like. A shop you use regularly – M&S or Next perhaps,” says financial adviser Martin Bamford from Informed Choice Ltd.
“You understand their values and what they’re about. That means you can link the share price to your own experience: the product range; the customer service you get. You feel connected. Investment can sometimes feel a pretty remote process.”
A bit of homework?
As Mr Bamford says, investing in things you know and like is a great start if you want to invest in individual shares. There’s a wide range of support services to get you going.
Some will offer – for a price – tailored investment advice. Execution-only online share dealing services gets you going immediately. Their costs are much lower.
Bear in mind investing in individual companies demands research and time – and you’ll need to make judgements.
- Are you impressed (or not) with an annual report?
- How does the company compare with competitors (can you identify their competitors)?
- How much debt do they carry?
- How do they perform when market conditions turn tough?
- How exposed are they to overseas earnings and currency fluctuations?
If all this sounds like too much work then consider investing in a fund. A fund manager will do this slog for you. You pool your money with other investors. Your risk is also lowered because the fund manager will be investing in a spread of companies they also like.
“You want to avoid getting disillusioned early. If you have, for example, £50,000 to invest, put £25,000 in a specific destination, then drip-feed the other £25,000 over 12 months,” says Ray Galt of Glasgow-based Macarthur Denton Asset Management.
“We don’t want people to have a potential bad time in the short term which colours their judgement long term.”
He adds: “The rest is patience. Ignore the background noise. Over time it [your investment] will go up. We just don’t know the time scale and by how much.”
Don’t ignore investment trusts
While some funds may appeal there’s also another route. Investment trusts. They’re the lesser-known cousin of unit trusts (unit trusts are used widely with funds). They are sometimes considered a little riskier because their structure is slightly more complex.
But investment trusts often deliver better returns in the long term. Because they generally don’t incur a commission via a financial adviser, there’s less incentive for some advisers to recommend them. They can be a canny move.
If you do want help to identify financial goals, a financial adviser may be able to help. They may also get you thinking about a longer term pension strategy as well
All stock market investing involves risk. Stock markets are volatile by nature. But as Ray Galt says (above) investing over time reduces risk. Part of this approach is ‘pound cost averaging’.
It helps you bag shares on the cheap when things turn rough. That way you even out the times when prices are higher.
But the biggest weapon available of all is time. Or, ‘time in the market’ as City jargon goes. In other words, the best time to invest is now.
“Time in the market, not trying to time the market,” says independent financial adviser John Stirling from Walden Capital, “is absolutely the recipe for longer term investing success.”
For a better understanding of financial markets, try our course
- Animals to equity: stock market histories of the world
- Major milestones on way to modern stock markets
Top ten stock exchanges of the world
- New York Stock Exchange (NYSE)
- NASDAQ (originally the National Association of Securities Dealers Automated Quotation exchange)
- London Stock Exchange (LSE)
- Tokyo Stock Exchange (TSE)
- Shanghai Stock Exchange (SSE)
- Hong Kong Stock Exchange (SEHK)
- Shenzhen Stock Exchange (SZSE)
- Toronto Stock Exchange (TMX)
- Frankfurt Stock Exchange (FWB)