Investing For Beginners – How To Buy Stocks And Shares

Stock markets can be scary places for anyone new to investing: a mass of numbers, flashing screens and impenetrable jargon. A far cry from dropping coins into a piggy bank, or paying cash into a high street savings account.

If you’re saving for the future – five years away at the very minimum – investing in the stock market has the potential to produce greater rewards than cash on deposit. And it can also head off the corrosive effect of rising prices.

Here’s a run-through of investing basics, plus a look at the ways beginners can buy stocks and shares.

Note: before you consider going down the investing route, it’s sensible to build up a ‘rainy day’ cash fund worth at least three (and preferably six) months of your usual outgoings.

What is investing?

It’s worth starting with a definition of what investing is, and why people do it. Investing is the process of using your money to generate a profitable return (although it should be noted that investing carries with it the risk of loss, except where holdings are kept as cash).

The investing process involves putting your money into a range of investments.

What are these ‘investments’?

There are four main types, which you’ll hear referred to as ‘asset classes’. They include:

• cash – savings that you build up in a bank or building society account
• bonds – also known as ‘fixed-interest securities’. A bond is an IOU that pays its holder interest in exchange for a loan to the bond issuer. If the issuer is the UK government, the bond is known as a ‘gilt’. Companies also issue IOUs known as ‘corporate bonds’.
• property – an investment in bricks and mortar, either in the hope that a building’s value will rise, or that you’ll benefit from its rental income. Or a combination of both.
• stocks and shares – these are interchangeable terms, and they are also known as equities. Equity investing is where you buy a stake in a company either directly, or via a fund (a form of collective investment, where your money is pooled with that of potentially thousands of other investors). As a shareholder, you are a part-owner of a business, and you’ll share in both its financial successes and failures.

Other asset classes exist such as fine wine, art and classic cars. But mainstream financial products tend to focus on the above list.

An accumulation of assets is often referred to as a ‘portfolio’. There’s nothing to stop an investor focusing on just one asset type, but there’s an ‘all-your-eggs-in-one-basket’ risk associated with doing this.

Spreading your money among different asset classes – known as ‘diversification’ – is a sound investing policy.

Risks attached

Every investment carries a degree of risk, some greater than others. Generally, the higher an investment’s potential return, the higher the risk of losing your money.

In terms of the asset classes outlined above, the risk associated with each tends to increase as you read down the list.

For example, with savings accounts, the risk of UK savers losing their money is virtually zero thanks to strict compensation rules in place should a provider ever get into trouble (see our article on the Financial Services Compensation Scheme). 

The trade-off, however, is that the returns you can expect are modest at best, from virtually nothing up to around 2% a year.

With UK inflation running at well over 5%, this means that the real value of money held on deposit decreases year-on-year because of rising prices.

Bonds are riskier than cash because there’s the chance an issuer will not meet its interest payments and ‘default’. Again, the trade-off comes in the shape of a slightly higher rate of interest than cash, typically in the range 2% to 3%.

Shares and property have the potential to generate better returns and therefore sit at the top of the risk/return ladder. 

Share are often an investor’s first foray into stock markets, so that’s where we’ll focus on for the rest of this article.

Why buy shares?

Historically, the return on equity investments – between 3% and 6% a year going back over 120 years, according to Credit Suisse – has outstripped other asset classes (although past performance is no guarantee for the future).

However, before parting with any cash, it’s worth taking time to weigh up whether investing in shares is definitely for you and to ensure you do it in a sensible and secure way.

Be prepared for ups and downs

With equity investing, you need to keep your ultimate financial goals in mind and be prepared to ride out stock market ups and downs.

Whichever method you choose (see below), there’s also a cost consideration. It doesn’t cost anything to open a deposit account with a high street bank. But, when buying shares, extra charges will be incurred beyond the cost of owning a piece of the company itself.

Investing in shares also means there may be tax considerations, for example, when selling part of your portfolio.

Before taking the plunge with any form of stock market-linked investment, ask yourself five questions:

• Should I get financial advice?
• Am I comfortable with the level of risk and can I afford to lose money?
• Do I understand the investment in question and could I get my money out easily?
• Are my investments regulated?
• Am I protected if an investment provider or my adviser goes out of business?

Types of investment 

There are several ways to invest. You can opt for one, some or all of the following. It boils down to your goals and how actively involved you’d like to be in managing your portfolio. The main options are:

• Buying individual shares. This is probably the most time-intensive option. You’ll need to do plenty of research and ‘own’ your decisions.
• Invest in share-based exchange-traded funds (ETFs). ETFs are a half-way house between buying shares direct (above) and buying funds (below). ETFs invest in a range of individual shares to track an underlying stock index such as the UK’s FT-SE 100. Investing via ETFs is like buying into the companies that are on the same index. ETFs are traded on exchanges in the same way as companies, but offer greater diversification.
• Invest in collective/pooled investment funds. These are run by professional managers, who run portfolios of shares and other asset classes on behalf of investors. Funds focus on specific countries or geographic regions (such as the UK, the Far East) or sectors (such as technology). Actively managed funds are where managers decide which companies to include in their portfolio. Passively managed funds use algorithms to track the performance of a particular stock market index.

How can I start investing?

1) Open an investment account 

DIY investors require access to a dealing account, such as the ones offered by online investment platforms and trading apps. These provide would-be investors with a range of share dealing services.

Investment platforms are represented by some of the biggest names in stock broking and fund management and include the likes of Hargreaves Lansdown, interactive investor and Fidelity. Several providers have created a choice of ready-made portfolios featuring a range of investments based on the investor’s tolerance to risk.

Investors can also choose from an increasing array of dedicated share trading apps.

Some platforms provide users with the chance to practise trading using virtual money before taking the plunge for real.

No single investment platform or app is going to suit all types of user. Personal preference, look and feel, will play a part when making a choice. On top of these considerations, it’s important that a provider offers access to the investments you’re looking for.

It’s also to pay as little as possible for each trade you make and to minimise any other administration charges. Read more here about the charges levied by investment platforms and apps.

If you’re going to opt for the DIY investing route, consider opening a stocks and shares individual savings account (ISA). This is a tax-efficient savings product that acts as a wrapper around your investments, sheltering any profits from three key areas of tax: income tax, dividend tax and capital gains tax.

Most platforms enable investors to run a stocks and shares ISA within their service.

2) Choose a robo-adviser

If you have a sizeable amount to invest (say £10,000) but the prospect of being responsible for all your own trades seems a little daunting, you could opt to use a robo-adviser.

Robo-advisors are a simple, inexpensive way to invest in stocks – a half-way house between a DIY approach (above) and full-blown face-to-face investment advice (below). You provide information on how much you earn, why you want to invest, your financial goals and attitude to risk and are given a ready-made investment portfolio by an automated system.

Once you’re up and running, the robo-adviser provides you with updates on your investment performance. This approach is convenient and relatively cheap – typically charging customers a few hundred pounds to get started. They’re also fast – you could have a live portfolio within an hour or two.

But because the process is automated and uses data provided by the customer, robo-advisers do not make intuitive recommendations. Depending on the provider you choose, there may also be limited choice in terms of the options on offer.

3) Choose a financial adviser or wealth manager

If you have a larger amount to invest, for example a six-figure inheritance or windfall, you could pay for the services of a financial adviser.

But you still need to decide what kind of advice you need and the goals you’re working towards. For example, are you investing with a particular event in mind, such as retirement?

You also need to decide your appetite for risk, how long you want to tie your money up for, and whether you need advice on different types of investment such as ones run according to ethical or environmental principles.

When you meet with an adviser, you should be given information including:

• Whether the advice is independent or restricted – restricted means an adviser is limited to the number of providers s/he can recommend. An independent adviser can access the whole market.
• Level of advice – are you looking for information to help inform a decision, or do you want an adviser to manage your investments?
• How much you’ll be charged – this may include an hourly rate, a set fee, a monthly retainer, or a percentage of the money being invested. Fees can vary so it’s worth shopping around.
• How your adviser is regulated – the firm should appear on a register published by the financial watchdog, the Financial Conduct Authority.

You can find out more information about financial advice from Citizens Advice. For lists of  independent and restricted advisers take a look at the Unbiased, Personal Finance Society and VouchedFor websites.