First steps in share investing
1. The easiest way to play the stock market is to buy shares. Each share is a tiny piece of a company and allows its owner to receive a part (again, tiny) of any profits the company makes. This is usually paid out as a dividend. So, if you own five shares in Party Pants plc and the dividend is one penny per share, you’ll receive five pence in total. Don’t spend it all at once!
2. The shares of companies are listed on stock exchanges around the world such as the London Stock Exchange. Their price constantly changes during trading hours depending on the outlook for the company and how many people are buying or selling. You can follow the movements up and down online.
3. Sometimes shares are bundled into groups for ease of reference. For example, the FTSE 100 index (Footsie for short) contains the hundred largest listed UK companies. An average of their share price increases (or decreases) is stated as the index’s movement. If the Footsie has gone up, there may be few more Ferraris on the road. Remember though, the index can also go down ...
4. So, only invest what you can afford to lose and DON’T pile all your cash into a single company. There is a greater chance of you losing all or most of your money. You can reduce the risk by spreading your cash between lots of different firms and investing for the long term. For most people, especially beginners, it is more sensible to put money in a pooled fund and let the professionals handle it. See our guide to which Isa is nicer here.
5. If you want to go it alone, do some research. If you can read company accounts, brilliant. If you can’t, get a book on it and working through the basics. Find the latest company reports online along with loads of information from financial firms and dedicated websites. Newspapers and money magazines often have share tips too.
6. Don’t forget fear and greed. Share prices are driven by sentiment as much as financial figures. If a cold summer is predicted, the share price of We Scream Ice-cream plc is going to drop in anticipation of poor sales. Similarly, cheaper fuel might encourage people to buy more cars and shares in Jaguar Land Rover could therefore rise.
7. Warning klaxon: if anything looks too good to be true, it probably is. If anyone rings up to let you know about a sure bet in diamond mines in Afghanistan, it’s most likely a ‘boiler room’ scam. If in doubt, don’t invest, especially if you’re being pressurised to seal the deal.
8. To buy shares, you’ll need an account with a stockbroker or a financial services firm. These are normally operated online by companies such as Charles Stanley, Hargreaves Lansdown and Interactive Investor. You will pay a small fee, perhaps a couple of pounds to a tenner, for each deal you make: the more often you trade, the cheaper the cost, usually.
9. Knowing when to sell is as important as knowing when to buy. It might be useful to set price targets (both upper and lower). So if Party Pants doubles from when you bought it, ask yourself if it can double again. If not, consider taking the profits. Alternatively, if you’re down on the deal, question whether the company really can recover. If not, perhaps you should cut your losses and get out.
10. You will make more money over time if you reinvest your dividends rather than blowing them.
- A veritable cornucopia of guides to shares and investment can be found at thisismoney.co.uk.
- Get a steer on shares at Money Observer.
- To get someone else to invest in shares for you, see the SMM guide to investing in funds here.
Last updated 22 August 2018.