Decide if it’s right for you
It is wise to pay off any expensive debts and make sure you have enough cash savings to cover an unforeseen problem before you invest in the stock market.
And it’s never a good idea to invest money you know you will need soon – it’s an inherent part of buying shares that values fall as well as rise. If you are forced to sell at a time when markets are down, you will lose money.
Ed Monk, an associate director at the investment firm Fidelity, says it is wise to consider your attitude to risk-taking.
“Losing money comes with the territory,” he says. “Before you really experience it, it’s hard to know how you will react, but if you think you will panic, then maybe this is not for you.”
Do your research
Buying shares in a company on its way to greatness is the dream – but it’s not easy to find one. Chasing “hot stocks” is likely to be counterproductive, according to Susannah Streeter, the head of money and markets at the investment platform Hargreaves Lansdown. “It can be pure speculation, particularly if it’s prompted by rumours on social media,” she says, adding: “If multiple investors are going after one particular investment, then they are probably buying it at a price higher than it’s worth.”
Instead, she says: “It’s important that an investor fully understands what they are investing in. How a company makes money, for example, and what the threats and opportunities are.”
Monk says you should “get up to speed on the language around investment – things like price to earnings ratio (P/E ratio)”. This measures a company share price relative to its earnings per share, and is one useful way of comparing the value of shares in similar businesses. In general, the higher the number, the more valuable the market thinks the company is. “Also, familiarise yourself with factsheets and the information they contain. These will tell you about dividends, P/E ratio and so on, and are published daily.”
Monk adds: “Look at opinions and views and broker notes, suggesting you buy, sell or hold a share – but understand that no one knows for sure.”
Find a broker
You need a share-dealing account to buy and sell shares. The choice of providers can appear dizzying and includes the big high street banks as well as online brokerage services – eToro, IG, Interactive Investor, Hargreaves Lansdown and Fidelity, for example. All charge fees of some kind, so compare costs.
“Charges usually apply when a deal is placed, and there is often a custody fee to maintain an account,” says Chris Beauchamp, the chief market analyst at IG.
Think long term
“Most if not all investors are better suited to the long-term view rather than attempting to catch every twist and turn in the market,” Beauchamp says. “Generally, it makes sense to avoid trading too often, since each transaction usually comes with a cost, as well as the risk associated with any investment.”
You should be willing to keep your money invested in the same place for – at the very least – three to five years. As well as avoiding the fees, this will make it less likely that you will need to cash in your shares at a time when they are worth less than you paid for them.
Spread the risk
“It is better to accumulate a number of investments in order to spread your risk, or diversify, so that if one investment does poorly, then others may do better,” Beauchamp says.
Monk suggests you have a minimum of 20 companies in your portfolio to provide enough diversification.
Instead of selecting individual shares, you might choose to invest through an exchange traded fund(ETF), an investment fund that can be bought and sold on the market in the same way. ETFs hold a collection of shares, and this can be a useful way to start investing in the stock markets, as it provides diversification without you having to go through the process of stock-picking yourself.
Know what you want
Some investors are looking for growth, and are hoping that share prices will rise so that they get healthy returns when they sell.
Others are more concerned with earning income in the form of dividends: regular profit-related payments made by many (but not all) companies to their shareholders.
If you are looking for dividends, says Monk: “Don’t just find the companies that pay the highest dividend – research the reasons behind that.” And don’t forget that a company’s board can decide to suspend, reduce or stop dividend payments.
Whatever your aim, there are advantages to investing regularly rather than via a one-off lump sum.
“Putting aside a percentage [of your income] each month to invest is often the best method,” Beauchamp says. This way, you can benefit from “pound cost averaging”, allowing you to smooth out the highs and lows of the markets. When share prices fall, you get more for your money, allowing you to benefit all the more when they rise.
Use your Isa allowance
Outside an Isa, when you come to sell, there may be capital gains tax (CGT) to pay on the increase in value of your investments. During the current tax year, you can make £3,000 in profits from the sale of investments without having to pay tax, but beyond that amount, CGT will apply (at 10% for basic-rate taxpayers and 20% for higher- and additional-rate taxpayers). The tax band applies according to your annual earnings plus the profit.
When investments are not sheltered within an Isa, this applies to every sale, even if you are selling to reorganise your portfolio and plan to reinvest the money straight away in different shares. Investing inside a stocks and shares Isa (the Isa allowance now is £20,000 in each tax year) means these taxes do not apply.
Dividends are also taxable outside an Isa, and again, you need to add the dividend income to your other income to work out your band. Basic-rate taxpayers now pay 8.75%, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers 39.35%.
Be aware that there has been speculation that the government could announce changes to CGT and Isas in the budget on 30 October.
Have a get-out plan
Ideally, your shares will grow in value, and one day you will sell at a profit. But when things get stormy, how do you know when to sell, and when to sit tight and wait it out? “This is the classic problem. Generally, most investors throughout the last 100 years have sold too early, missing out on big returns,” Beauchamp says.
It helps to plan ahead. Monk says: “Have a case for buying and a case for selling. When losses come (and they absolutely do – recent decades have seen two major stock market crashes and a pandemic), if you can stay invested, it tends to work out better.”