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.