The best beginners guide to start investing in the stock market including shares and funds. No-nonsense and straight to the point. Once you’re done here, we suggest checking out how to invest in shares in under 5 mins and how to invest in funds in under 5 mins!
Minute 1: what & why of shares and funds
Shares (or equities) are a slice of ownership in a company, funds are a collection of shares or other assets such as bonds (loans you provide to a company or government in return for payments back with a bit extra – interest).
Investing in shares or funds means you can profit from the price of your investment increasing (capital growth) and or receive an income from a share of the profits (dividends) or interest payments (known as coupons for bonds).
Saving your money returns you next to nil return since the Financial Crisis. Investing can grow your money massively – a £1000 investment in the FTSE 100 in 1989 would be worth over £25,000 20 years later.
Minute 2: stock exchanges and indices
Companies go ‘public’ to offer you a slice of ownership via shares, in return they receive money to grow.
Stock Exchanges like the London Stock Exchange is the marketplace for shares in companies to be bought and sold. A Company selects a Stock Exchange to be housed on or ‘listed’ on.
A Stock Index is a measure of part of the London Stock Exchange. The Financial Times Stock Exchange 100 Index (FTSE 100) is an Index. It measures the overall value of the 100 biggest companies by value (market capitalization) listed on the London Stock Exchange.
Minute 3: investing is for the long-term
Investing is not Trading. Investing is associated with a minimum duration of 5 years to give opportunity for strong growth and to smooth out the likely dips in value along the way.
Trading is associated with anywhere from seconds to days. Investing is not about the frantic, high-speed scenes you will see in the movies. This is for Trading.
Investing requires a long-term outlook in line with your desired returns and approach to risk. You should monitor your investments, although not on a daily basis! Keep an eye out on when the companies are due to announce market updates and monthly commentary in the fund factsheet.
Minute 4: how to filter shares
There are hundreds of shares listed on the London Stock Exchange and over 30 categories – from Banking through to Food Retailers.
An alternative view is Defensive Shares and Cyclical Shares. Defensive Shares are shares in categories that will perform OK if the economy becomes weak. We will continue to need water and electricity, so Household Utilities should be more in demand.
Cyclical Shares are shares in categories that perform well when the economy is growing. Housebuilder shares are an example of this. When employment is high, more people want houses and this pushes up price of shares. When unemployment is high, the economy is weak and less people want houses and reduces demand and share prices of Housebuilders.
Minute 5: fundamental and technical analysis of shares
Analysing shares is either done by looking at the fundamentals – this could be looking at company reports, its financial statements or ratio analysis to assess if a share is over or undervalued by the wider market. The Price to Earnings Ratio (P/E) is a key ratio – it shows how many pounds you are paying for each pound of profit.
Technical Analysis is done by looking at the technical elements – this is analyzing patterns on stock charts that show the share price movement over a period of time. The idea of Support and Resistance is key – the points at which a share tends not to fall below or go beyond multiple times.
Minute 6: investing in shares via active funds
Investing in Funds is the best and easiest way for beginners to start investing. Active Funds are run by a Fund Manager – someone whose full-time day job it is to generate returns for investors. This is why they are called Active Funds because the Fund Manager is constantly managing the fund – looking for opportunity.
Equity Funds invest in shares. Some can invest in UK-listed shares or Overseas shares (such as Google in the US). They aim to grow your money (or capital).
Income Funds can also invest in shares in companies that pay a good return of profits (dividends).
Funds are generally viewed as less risk than investing in individual shares because a fund can invest in multiple shares (from 30 to 100!). The good performing shares should balance out the poor performing ones. This is the basic principle of Diversification.
Minute 7: investing in shares via passive or tracker funds
Passive Funds or Tracker Funds are an easier way to invest. They don’t have an Active Fund Manager, instead they buy shares in proportions to mirror rather than beat the performance of an index such as the FTSE 100. They are cheaper to invest in.
Like Active funds, Passive Funds can be Open-Ended Investment Companies (OEICs) and Unit Trusts. However, Exchange Traded Funds are mostly associated with Passive Investing – they are bought and sold on a Stock Exchange so you can buy and sell at any time just like a share.
The main difference you will notice is that OEICs and Unit Trusts are priced once per day compared to Exchange Traded Funds that are priced throughout the day.
Minute 8: making a decision with confidence
As a minimum you should read the Key Investor Information Document (KIID). This gives a risk rating from 1-7 (7 is higher risk, higher reward).
The Fund Factsheet is more detailed. You should understand the top 10 investments the fund makes (top 10 holdings) and the top sectors it is invested in (such as Beverages or Media). Other useful information is the performance chart and the objective which summarisies what the fund is investing in.
Minute 9: opening a stocks & shares ISA
A Stocks & Shares ISA should be opened to enable you to buy and sell your investments. A Stocks & Shares ISA is just a home for your investment, not the investment itself (that’s your shares or funds).
The key thing is that your money and income is free of tax within a Stocks & Shares ISA. You can invest up to £20,000 per year.
You can open a Stocks & Shares ISA and buy shares or funds at an Online Broker (also known as Fund Supermarket or Online Platform).
Minute 10: building a portfolio and approaches
Once you have your Stocks & Shares ISA set-up, it is easy to buy your shares or funds. A FTSE 100 Tracker Fund is the easiest and cheapest way to get some exposure to the stock market. In time you should think about building a portfolio.
Investing in a lump sum or regular small amounts is a personal choice to make. Regular smaller investments are arguably best for newcomers – the logic is you you reduce your risk because you buy shares when they fall as well as rise. So in time, you smooth out the price paid for your investment.
This is just the start. We recommend checking out our:
- Quick Start Guides on Investing in Shares
- Quick Start Guides on Investing in Funds
- A-Z of Investing in Shares
- Investing in Funds from A-Z
- Economy Essentials
And of course stop by our community. Happy Investing!