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Investing in Stocks and Shares: A Beginner’s Guide

By , September 1st, 2016 | No Comments

Investing in Stocks and Shares

First off, let us answer one very common question before we take a look at the details of investing in these financial instruments: what exactly are stocks and shares? The two names are perhaps a little misleading as we are in fact referring to a single type of investment, namely shares in public limited companies. When you buy shares, you are said to hold stock in the company whose shares you have purchased. Many shares pay a dividend to the holder, either annually, biannually, or quarterly, but the main reason investors acquire them is for speculative reasons, i.e. to take advantage of possible future rises in the price of the shares.

It must be said that, at the time of writing, shares on most major stock markets are not an attractive investment as far as historic P/E ratios are concerned (a common method of valuating shares based on the ratio of the price of a company’s stock to the earnings it makes per share). However, with interest rates in both the UK and the USA at record lows, well below the rate of inflation in each country, keeping your savings in cash will only ensure that your net worth decreases as time passes.

With interest rates on bonds closely linked to cash rates, stocks and shares represent one of the few financial instruments today that give investors a fighting chance of making a net profit over time, which is why, even taking current P/E ratios into account, they are still considered an attractive proposition as far as most investment professionals are concerned.

How to Get Started

One of the biggest barriers to investing in stocks and shares as far as most beginners are concerned is the amount of capital that is needed to put together a well-balanced portfolio. However, if capital is an issue when you are first starting out, you might like to consider mutual funds, which are run by investment companies that pool money from numerous investors and use it to buy shares, bonds, and other financial instruments.

Among the most popular funds available today are index trackers: mutual funds that track stock market indices such as the FTSE and the S&P 500. The reason for the popularity of these funds is the simple fact that year after year, many independent fund managers fail to beat the performance of the major stock market indices. If you want to make sure that you benefit from any large-scale moves in global stock markets that may occur in the future, the best way of doing so is by investing in one of these tracker funds.

For Those with Adequate Capital or a More Adventurous Nature

If you have a high risk profile, you can start investing in individual stocks and shares with a smaller amount of capital than would ordinarily be required. However, you must bear in mind that if you only have enough cash available to invest in the stock of 2 or 3 different companies, you will be exposing yourself to a level of risk that no financial adviser would deem prudent. This type of investing should only be attempted with money that you can easily afford to lose: look on it as more of a practice run than a serious investment portfolio and you can use the experience to learn how global stock markets work, how to evaluate the prospects of individual companies and market sectors, and how to manage your money when investing.

Access to the Markets

Your biggest problem as a small investor, aside from saving enough money to get started, will be finding a stockbroker that is able to give you access to the markets at a reasonable cost. When working with a limited amount of capital, the fees that some of the more expensive brokers charge will make it impossible for you to turn a profit, which is why you need to find a firm that specializes in dealing with smaller investors. If you have friends or relatives who are already actively investing in global stock markets, you can ask them for their personal recommendations.

Alternatively, you can use Thomson Local to search for London Stockbrokers. Once you have made a note of the contact details for a number of local firms, get in touch with each one and ask as many questions as you can think of. At the very least, you need to find out how much they charge per transaction as a percentage, what their minimum transaction fee is, whether there are any annual administration charges associated with their accounts, and the level of support they are able to provide to individual clients.

There are a number of UK brokers that provide online platforms for small investors to use nowadays, which make the process of buying shares much more convenient. Instead of having to call your stockbroker, request a price, then wait on the phone while they attempt to execute your order, or wait for them to call back and let you know what they have done on your behalf, you can open an online platform, choose the stock of your choice, check its current price, and click a button to buy the amount of shares you wish to acquire. This type of trading is especially suitable for investors who wish to make their own choices as far as their stock portfolio is concerned; if you want to open a discretionary account with a stockbroker, i.e. one that is managed on your behalf by an experienced investment professional, you will not need to worry about checking share prices and executing deals.

If you would like to learn more, you will find plenty of articles on investing in stocks and shares online, both here on this website and on other sites that specialize in providing free money management advice to individuals in the United Kingdom and across the globe. The more you learn, the more competent an investor you will become.

Photo: Flickr: Pictures of Money

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