Stock Market Essentials for Beginners
This video covers 10 Stock Market Essentials I tell beginners in the stock market. Stock market for beginners can be confusing but I hope this these stock market tips can help you as a beginner in the stock market.
Brief Introduction to Trading Stocks & Shares
The stock market can appear a rather daunting experience. But in reality, with dismal returns on offer from banks and building societies, investing in shares provides an opportunity to achieve greater returns.
In the UK, the main stock market is the London Stock Exchange, where public limited companies and other financial instruments such as government bonds and derivatives can be bought and sold.
The stock market is split into different indices – the most famous in the UK being the FTSE 100, comprised of the largest 100 companies. The most well-known indices come from the Footsie group – the FTSE 100, the FTSE 250, the FTSE Fledgling and the alternative investment market (AIM), which lists small and venture capital-backed companies.
Unlike cash, the stock market is not a risk-free investment; it has its ups and downs. In the 20 years between December 1996 and December 2016, you would have enjoyed returns of 65.3%.
The ten years between December 2006 and 2016, meanwhile, would have seen returns of 13.6%, and the five years between December 2011 and December 2016 would see you repeating returns of 26.9%.
There are two ways to access the stock market: directly, and indirectly. Although ‘directly’ is a misnomer – investing in the stock market is always done through a third-party broker – direct investment means buying the shares in a single company, and becoming a shareholder.
These are online platforms through which a client can buy and sell shares independently through a share dealing account, without being offered advice.
An indirect approach through investing in pooled investment funds is a more common way of accessing shares, as it spreads risk by investing in a number of companies.
This can be done via an open-ended fund, such as an open-ended investment company (OEIC) or unit trust, which is made up of shares typically from between 50 and 100 companies, and can be sector, country or theme specific.
Money in these funds is ring-fenced away from the fund provider, so if the firm defaults, the money is still safe.
An investment trust is another pooled investment, but it is structured in the same way as a limited company. Investors buy shares in the closed-end company, and it is listed on an index in the same way as a company such as Apple, Microsoft, Tesco or RBS. Trusts are less numerous than funds, but often cheaper.
Many investment funds and the majority of trusts are actively managed products, run by a fund manager who handpicks stocks and has some direction over the performance of the fund. In contrast, some funds invest passively, which means they just try to replicate the performance of a major stock market index. These are called tracker funds.
An exchange traded fund (ETF) is another type of passive product. ETFs are vehicles that simply track an index such as the FTSE 250. As index-linked products, they can access almost every area of the market.
ETFs are far cheaper than funds or trusts, as there is no active manager to pay for. However, as they simply track an index, if the index falls spectacularly, so will your investment.