The past year has seen saving rates tumble to their lowest levels on record, leaving many savers struggling to get a good rate of interest on their savings deposits. As a result, many are now considering investments for the first time in a hope that they will offer better returns on their investments.
One of the most popular investment options is investing in the stock market and, although it can offer much higher returns on investments than current savings rates, it is a much riskier option and can result in investors not making any returns, or worse, losing their initial deposits as well.
As such, those considering investing in the stock market should speak to an independent financial adviser, who will be able to provide specific advice and information based on their individual circumstances.
For those who are curious about investing in the stock market and want some basic information before speaking to a financial adviser, here we’ve looked at how consumers can get started investing in the stock market.
Although investing in the stock market has a reputation as only for the super wealthy, it is in fact an option available to all. Saying this, the high risks involved in stock market investment means that investors should only invest amounts that they are prepared to lose. As well as this, the volatile nature of the stock markets means that it is also usually only suited to long-term investments of five years or more.
Those who cannot afford to lose their deposit, who want quick access to their money, or who only want to invest for a short period of time, would probably be more suited with a savings account or cash ISA.
It is also important to keep in mind that, as with savings, money invested is taxable, so those looking to invest and avoid paying tax should consider a stocks and shares ISA, which has the same tax-free allowance of £20,000 for the 2021/22 tax year as cash ISAs.
The tax-free allowance on stocks and shares ISA often makes these a good option for ISA savers looking to use their ISA savings to invest in the stock market. Money held in a cash ISA is usually transferable to a stocks and shares ISA, although it is important to remember that the tax-free allowance covers both cash ISAs and stocks and shares ISAs, so a maximum of £20,000 can only be paid into one for the tax year.
There are many stocks and shares ISA platforms available, which investors can compare on our stocks and shares ISA chart. Looking at our chart, investors will see that some need a small or no lump sum investment and often require a small minimum monthly investment. For example, BMO Asset Management Ltd has a minimum lump sum initial investment of £500, a monthly investment from a minimum of £10 and offers 10 funds from which investors can choose to invest.
Although an investment adviser or stockbroker can be hired to manage investments, many investors now choose to manage their investments themselves, which has been made easier with the growth of online investment platforms. These platforms often charge a fee, but in return they make it easier for investors to choose from a wide range of investments, which allows them to diversify their investment portfolio.
When choosing which stocks to invest in, investors should consider their appetite for risk. Investments that are considered high risk usually offer the potential of earning the best returns, but also have a higher possibility of the investor losing some or all their money. An investment that is considered low risk still carries a possibility of the investor losing some or all their money, although this risk is considerably smaller, as is usually the potential return. Normally, those looking to invest for a shorter period of time, for example five to 10 years, would opt for investments that have lower risks.
In addition to taking into account an investor’s appetite for risk, investors should also look to diversify their portfolio by investing in several different types of stocks. Doing this should help to mitigate the risks, so if one stock performs badly another stock might perform better than expected.
Some investment platforms, such as interactive investor, will help investors narrow down their investment choices by asking questions such as how much they are planning to invest, the type of investment they want to make and their appetite for risk, when setting up their portfolio of investments.
When investing in stocks, it is a good idea to have a basic understanding of the UK stock market indices, the main ones of which are the FTSE 100, FTSE 250 and FTSE All-Share.
The FTSE 100 is the most well-known to UK investors and is made up of the 100 largest companies in the UK that are traded on the London Stock Exchange (LSE). Often, these companies sell products or services internationally, so they can offer global diversification as a result.
The FTSE 250 is made up of the next 250 largest companies in the UK after the initial 100. These companies are smaller than those that make up the FTSE 100 and tend to be more UK-focused. In addition to this, these companies often have the potential for bigger growth than those in the FTSE 100, but it is considered riskier as it is more volatile.
FTSE All-Share is made up of the FTSE 100, FTSE 250 and FTSE Small Cap. This means that the FTSE All-Share is not only made up of the largest companies in the UK, but also much smaller companies that are the 351st to 619th largest companies trading on the LSE. The inclusion of these smaller companies offers greater diversification and the FTSE All-Share captures around 98% of the UK’s market.
For those considering investing but who are uncertain that investing in stocks and shares is the right option for them, there are other ways to invest that may be a more suited alternative, such as investing in gold or property. For more information about the different types of investments available, visit our investment page.
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