Stocks and Shares

Investing 101

In blog #5 I discussed the basics of investing. I followed the steps below first:

  1. Start by clearing debt
  2. Make sure you have an emergency savings pot
  3. Look to invest

 

What are investments

Financial investments involve putting capital (money) aside in the hope that it returns future gains or income on top of the capital invested. Investing comes with the element of risk; you might not get your original capital back. 

Investments can include wine, property, pensions, stocks and shares, bonds, investing in start ups etc. 

Lets talk about stocks and shares...

 

Lowdown

Companies are comprised of shares; for "public listed companies" these shares can be bought and sold on the stock market. Investing in stocks and shares involves buying small parts of a company. 

There are many stock markets around the world; some of the most famous ones include the New York Stock Exchange, London Stock Exchange, NASDAQ and EuroNext. 

You can make money in key ways from stocks and shares:

  • Gains: buying shares in a company when the price is low, and selling them when the price is high creates a financial gain
  • Dividends: many companies pay dividends to investors. If a company has a profit at the end of the year, it may decide to redistribute some of the profit back to shareholders. This is termed dividends; the amount you get depends on how many shares you hold, and the type of shares you hold.  

 

Accessing Stocks and Shares

THIS IS NOT HARD.

Many people see the world of stocks and shares as confusing, particularly the accessing of the stock market. 

You can set up a stocks and shares account with many financial institutions, from your own bank through to designated platforms. 

Investing in stocks and shares can fall under your UK ISA allowance; the gains and dividends made are tax free (although capped at the ISA limit). 

You can either pick individual shares in companies, or invest in a diversified portfolio (different companies and / or geographies and / or  stock markets). 

The type of investing you do will then determine which platform you decide to pick.

 

Investing in Individual Stocks

If you follow my Instagram, I mentioned that you can pick individual stocks and shares by noticing trends. At the moment, I personally perceive environmentally positive technology, electric cars and batteries are good investments. This is just my opinion though, and I may be wrong. 

To purchase individual stocks in companies you can set up a stocks and shares account with a financial institution (detailed below).

I pick shares if it's a company I really back, trust and love. I enjoy picking shares as I feel more emotionally engaged with my investments. 

HOWEVER...there are problems with picking specific stocks and shares:

  • Bias; we, the human race, descend from the caveman, club wielding years. Even if you have done a mountain of economical research, you have subconscious bias that means, instead of picking one company, you pick another, because the logo is blue, or because Ryan Reynolds stars in their adverts...not that I've done that. 
  • Time; you need to spend an amount of time researching companies you want to invest in, although the above may derail your best efforts. 
  • Risk; choosing one investment concentrates all your risk in one company.

 

SO...

Diversified portfolios...and even better...passive diversified portfolios.

 

Diversified Porffolios

A diversified portfolio involves investing across a number of companies, geographies, currencies, exchanges, assets etc. You attempt to minimise losses by having your money spread through different markets.  

You can pick the portfolio you wish to invest in, OR, you go to a broker, who will invest your money for you. 

You typically tell the broker your risk appetite; if you have aggressive risk appetite your broker might invest your money in more volatile shares, which could return big returns, but which could also go bust. 

Some funds are actively managed, where the broker keeps moving your investments around based on economic research performed at their company, or based on market trends. You can request that your funds funds are left unless you request changes to be made. 

 

Passive investing

Passive investing is even better (for me). This is the lazy person's investing. Passive investing can also be known as index investing.

You invest your money on a platform, and the platform will purchase a tiny amount of shares in all the companies on the market you choose. This means that if one company is performing very well it will counter another, on the same market, that is under-performing. It provides you with a diversified portfolio that tracks the market. Typically, the market tends to increase over time. 

 

A common platform used for passive investing is Vanguard. This is a fantastic platform as:

  • the fees are super low,
  • the customer support is very high, and
  • there are a wide range of funds to invest in. 

 

The Platform

I mentioned you need to engage with a platform to access stocks and shares. Consider the following when deciding your platform:

  • what fees are the financial institutions / platforms charging me; any more than 1% of your portfolio without any significant financial advice is a massive no no. 
  • do I get a level of service associated with the platform (i.e is there a good customer support team, do they have a strong research team performing analysis on companies)
  • does this platform / financial institution offer the service as part of my ISA allowance. 

Most money comparison sites offer a breakdown of the stocks and shares ISA providers. A clear and concise comparison website is Money.co.uk

Some of the well known platforms for investing in stocks and shares include:

  • Halifax,
  • Barclays,
  • Best Invest,
  • Fidelity, and
  • Hargreaves Landsdown. 

 

Tips

A couple of tips on stocks and shares:

  • leave your stocks and shares in there for a period of time. Selling shares and investing in new shares incurs costs. Furthermore, economical gains tend to be made over the longer cycles of time rather than shorter cycles of time. 
  • don't panic and sell your shares when the stock market is crashing. As above, try and let your investments weather through storms; investing is inherently risky. You will loose some money and you will gain some money. The idea is to sell when your shares are close to peaking, so leave them be even if everything around you appears to be going to s**t. With a low point invariably comes a high point at a future date. 
  • I'm not a fan of active management platforms where brokers are constantly buying and selling my shares. Per the point above about us being cave men, trying to guess the market economically has been proven to be flawed. You may also incur costs on the shares sold by your portfolio manager. Leave your money in one place and try to cash out when you think the shares are on the rise. 

Photo from the beautiful unsplash.com

Wee Scot Finance