Beginner’s Investing – How to Invest in the UK Stock Market

What is investing?

Investing allows you to set aside money to expect it to increase over time. Investing is putting money aside to hope that assets will appreciate in time.

Your assets’ value increases, leading to positive returns and some income. You could lose your investment if the value of assets falls.

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Why do you want to invest in shares and stocks?

Everyone has financial goals. It might be saving money towards long-term goals like retirement. It might also be saving for important life events, such as getting married or buying a home.

No matter your goals, investing in shares and stock can help you grow your wealth and offer a higher long-term return than saving money or keeping it in a current account.

According to a 2019 Barclays Equity and Gilt Survey, shares are better than cash nine out of ten times over ten years. If you only invest for five years, this number drops to seven out of ten.

How much money one can make on the stock exchange is often asked. The average return on your investment is between 3 and 12% each year, depending on various factors. But there are no guarantees.

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The success of your investment portfolio depends on many factors.

  1. The number of assets in the portfolio.
  2. Your portfolio’s diversification.
  3. Performance of each asset
  4. The time that you keep each asset.
  5. The investment fees

In addition to seeing your investments increase in value, regular income can be earned from companies that profit. This income is called a “dividend”. A dividend is your share of a company’s profit.

As you make your way through your investment journey, you will hear the phrase, “past performances are not a reliable indicator to future results”. This is to let you know that your investments may fail. No algorithm or person can predict how your investments will perform. Past performance does not guarantee the company’s future success, so it is your responsibility to do your research before investing in the stock exchange.

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What is the Stock Market exactly?

The stock market is where shares and other assets can be purchased and sold. There are many stock markets in the world. The London Stock Exchange (LSE), however, is the largest.

LSE allows trading in shares of big companies, such as Vodafone on its main markets, or smaller companies, such ASOS on the Alternative Investment Markets (AIM), which are its junior markets. An authorized stockbroker is required to purchase shares on London Stock Exchange.

Market indices will be helpful when you first start investing in stock markets. The FTSE 100 (an Index of 100 Large Companies on the LSE), FTSE 250, FTSE All-Share (an Index of All Shares on the LSE’s Main Market) are the three main indices in the UK.

A market index is simply a set of shares representing a certain segment. These companies are typically grouped by their size or value.

Indices are used to determine the performance and movements of different market segments. To gauge the fortunes in the UK’s economy, you can use the FTSE 250.

What should a Beginner put his or her money in?

The stock market offers a wide range of investment options for beginners. There are many types of assets, including stocks, shares, bonds and commodities, and funds, bonds and commodities.

  1. Stocks & Shares: An share is a unit in ownership of a public corporation. You own a tiny portion of a public company when you purchase a share. You will be a part-owner if you purchase a share in Apple Inc. If it is successful, you will reap the rewards. It may not perform well, and you could lose some money.
  2. Companies issue shares to raise capital to finance their activities. To benefit from the successes and reputation of companies they believe, investors invest in shares.
  3. Sometimes, you may also hear the term stock or equity. In most cases, stock, equities and share all refer to the same thing. Stocks can also be used to refer to all shares you own in one or more companies.
  4. Corporate bonds: You lend money to companies in return for interest when you invest in a corporate bond.
  5. Government bonds: By investing in a gilt or government bond, you are lending money in return for interest to a government.
  6. Commodities When investing in commodities, you’re investing in precious metals such as gold, silver and oil.
  7. Properties You are investing in property, just like the name implies.
  8. You can invest in a mutual fund instead of purchasing individual shares, bonds, property, commodities, or any other assets.
  9. A mutual fund (or fund) collects money from investors and invests it in assets such as shares, bonds and properties. It saves you the time and hassle of purchasing shares in multiple companies or building diversified portfolios.
  10. Fund investing is safer and more cost-effective than investing individually in stocks, bonds, or commodities. You share the risks and costs along with other investors. Funds can be either active (actively managed) or passive (index funds). They can also be traded on a stock market (exchange-traded fonds – ETFs).
  11. Funds are used for investing by almost everyone, even those who are more experienced. Learn how to invest funds in our How to Invest in Funds guide.

How much money should a beginner have to invest before investing?

Before you invest, you need to separate the money from your investment fund and your everyday spending account.

An emergency fund should equal at least three times the monthly living expenses. You won’t be able to tap into your investments in the event of a major financial crisis such as a job or health loss. You should keep your emergency fund in a high return, accessible cash savings account, such as a cash ISA.

Also, you want an everyday spending fund, so you don’t feel the urge to cash out your investments when you need to buy groceries and hang out with friends.

Importantly, you should consider your overall financial situation before investing in stocks. This may include paying off any outstanding bills. For example, if you have PS4,000 of outstanding credit card interest at 19%, you’ll need to pay PS760 each year to repay the debt. It is unlikely that your investments will match this return, so it might be a good idea to pay off your credit card debt and other costly debts before you start investing.

Once you have your finances in order, you can invest as much as you want. Most investment platforms allow you to start investing as low as PS25 per month. Some even accept PS1 per month. You can invest small amounts every month, also known as drip-feeding, into your investment pot. This is often more efficient than investing a large lump sum.

How to get started investing in stocks in the UK

This video shows you how to invest (ETFs) in the stock market.

  1. Decide where you want your investments to go: The first step is to decide which type of investment you would like to make – bonds, stocks, funds, commodities or properties. Funds are the first choice of most beginners. Funds can be used to avoid buying shares or other assets and save you time in building a portfolio. Because you share the risks with other investors, funds are safer and more cost-effective than investing in individual shares.
  1. Choose an Investment Platform: You have the option to invest in banks, building societies or stockbrokers. Your goals, investment savvy and personal circumstances will influence the provider you choose. Scroll to for information on choosing investment platforms.
  1. Use a tax wrapping agent: A tax wrapping agent reduces the tax you have to pay on your investments. Individual Savings Accounts, ISAs and pensions are examples of tax wrappers in Britain. Here are some examples.
  • Stocks & Shares ISA –A Stocks & Shares ISA allows tax-free ISA allocation in qualified investments such as shares and corporate bonds, government bonds or (gilts) funds. Your ISA allowance this tax year is PS20,000. This means that you have the option to invest up to PS20,000 into a Stock and Shares ISA and will not be taxed for any money earned. An Investment ISA also has the Stocks & Shares ISA.
  • The Lifetime Investment Account: An ISA allows adults over 40 to save up for their first home or retirement. You will receive a 25% bonus on your savings each year, up to PS1,000 per year.
  • Pensions: The government offers tax relief when you contribute to a retirement plan. You cannot access the money until the age of 55. After that, you can receive 25% in a lump sum exempt from taxes.
  • SIPPs: SIPPs (self-invested personal retirement plans) offer the same tax advantages and greater flexibility than other pensions.

Also, it is worth mentioning if you don’t want to use a wrapper for tax purposes, maybe because you have used up your ISA allowance, you can invest in a GIA.

The GIA allows you to gain up to PS12,000.00 in tax-free gains. You can also receive tax-free dividends up to PS2,000. You can find more information in our Shares and Stocks ISA Guide.

The Average Investment Fees

Below, we have listed some common investment fees. This is not the fee charged by fund companies. There are no fees for sharing platforms, so don’t worry.

Quick Tip: Fixed fees tend to be cheaper for those investing large amounts of money, while percentage-based fees tend to be more expensive for those with less.

  1. Annual platform fee: This payment is made by the investment provider in exchange for providing you with a platform to invest on.
  2. Annual fund management fee: Also called Ongoing Charge figures (OCF), Total Expense Ratio (TER), This is the fee that you pay directly to your fund manager to manage your funds. When you invest money in funds, you usually choose a few funds. You would need to pay a fund manager fee if you chose three funds.
  3. Market Spread is Also called transaction cost. This is the difference between the purchase and sell prices of an asset.
  4. Annual investment cost: Other providers may display this cost as the annual management fee and market spread.
  5. Dealing Fee: Also called a dealing fee. This is the cost for investing in funds, shares, or any other type of investment on the platform. It typically ranges between PS0 to PS25.
  6. Transfer Out Fee Also known as an exit fee. This fee is charged to transfer your investments between providers. You will have to pay an exit fee to move your investments from AJ Bell into Barclays. However, not every platform charges an exit fee. The ones that charge an exit fee are usually per fund or holding.
  7. Advice Fee (Optional:) This is only charged if you receive personalized financial advice.

7 top tips for investing in the stock market

These are our top tips for investing in the stock market.

  • The higher your risk, the greater your reward (or loss). The more you desire to receive, the greater risk you will need to take. If you are young, you should take on more risks to weather market fluctuations. As you age, you will be more inclined to invest in medium and low-risk assets.
  • Do not put all your eggs in a single basket; Diversifying your investments is crucial. This involves investing in different types of assets (e.g. You can invest in shares and bonds in different sectors (e.g. Technology, food and beverage) and across different geographies. America, Europe, Emerging Markets. This is not always possible in practice. Most investors, including those who are experienced, use funds to invest.
  • Invest in the long-term. It is one of the most rewarding investment habits that you can make. Consider high-interest cash savings account if you are certain you will need your money within the next two to three years. Investing should be done for the long term. At least five years. By doing this, you allow your money to weather any market fluctuations. To calculate your earnings over a certain period, you can use a calculator.
  • You should carefully consider investment charges. These charges can negatively impact your overall returns. If you invest 2% and receive a 5% return on your investment, your gain will be just 3%.
  • Review your portfolio No matter whether you own shares or funds, it is important to regularly review your portfolio to avoid poor-performing funds or dud shares. We don’t advocate selling investments every time there is a market downturn. However, if you feel certain you have invested in a poor fund, you might want to sell it and make money elsewhere. You may also find that your investments are likely to change in value, and not all assets will be suitable for your goals. To keep your investment goals in line, you might need to rebalance the portfolio.
  • It’s not possible to predict the market. Because no formula can accurately predict the behaviour of share prices, it can be difficult to forecast the future. You might sell too soon or buy too late. It is better to keep your investments safe through difficult times than to make panic-driven decisions.
  • Get tax-free accounts: Investing in the UK or elsewhere in the world requires that you always place the maximum amount into the tax-free account. There are two types of pensions and ISAs available in the UK. These accounts can be tax-efficient and reduce your tax liabilities.

Best Investment Platforms to Starters

Kody categorizes investment platforms according to the type of service they provide and their level of guidance or support. These are robo advisors as well trading apps and investment platforms.

Robo Advisors

Robo advisors, technology companies that offer financial planning services with minimal or no supervision from humans, are tech companies. There is ready-made, managed and financial advice products.

Robo advisors are great for novice investors, or anyone who doesn’t want the hassle of picking stocks, shares, or other investments.

Below is a comparison of some of the UK’s best robo-advisors. Our price comparison table will help you understand the costs.

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