How to Invest in The UK Stock Market

Invest in The UK Stock Market | WHY and How To Invest?

So you have made a decision to invest in the UK Stock Market? It’s quite good. But do you have any prior experience or know anything about the stock market? Well, whether you are a beginner or intermediate at investing, this UK stock market investing guide is for you.

Investing means that you put money aside, hoping that it will increase in value over time. You are investing your money in assets with the expectation that they will appreciate over time. You can make income and get positive returns as your assets increase in value. The value of your assets can also decline, which could mean that you lose the money you have invested.

Nevertheless, before investing, you should know your WHY and some basic information about the UK stock market.

How to Invest in The UK Stock Market?

What is the Stock Market?

Stock markets are where assets and shares can be bought and sold. There are many stock exchanges around the globe, but the London Stock Exchange (LSE) is the most popular.

Trading in shares is available at the LSE from large companies like Vodafone, which it has on its main market, and smaller companies like ASOS, which is listed on the Alternative Investment Market (AIM), it’s junior. You can purchase shares on the London Stock Exchange from anyone, but you must go through a stockbroker.

Market indices are important for investors who want to invest in the stock market. The FTSE 100 (an indicator of 100 of the largest companies on LSE), FTSE 250 (an indicator of the next 250 largest companies on LSE) and FTSE All-Share are the most popular indices in the UK.

A market index simply refers to a collection of shares owned by companies that represent a specific segment. These companies are often grouped according to their size and/or value.

Indices can measure the performance and movement of specific market segments. The FTSE 250 is an example of a benchmark that can measure the fortunes and performance of market segments in the UK.

Also Read: These are the Top Crypto Exchanges in Britain in 2022

Why Should You Invest in Stocks and Shares?

All of us have financial goals. Some people have long-term financial goals. For others, they might be saving for retirement. Others might save for major life events like buying a house or getting married.

No matter your goal, investing in stocks and shares can help you grow your money. It can provide higher long-term returns that are saving or current accounts.

A 2019 Barclays Equity and Gilt survey found that shares outperform cash nine times out ten over ten years. 

This is seven times less than the tenth percentile if you invest for five years.

Many people ask what amount of money you can make in the stock market. Depending on many factors, your investment’s value could increase by 3 to 12% per year. However, there are no guarantees.

Your investment portfolio’s success or failure will depend on many factors.

  • Your portfolio’s number of assets.
  • How diversifying your portfolio is.
  • Each asset’s performance.
  • How long you have held each asset.
  • The investment fees

You can earn income from certain companies that make profits, in addition to the appreciation of their investments. This income is known as a dividend. A dividend is your share in a company’s profits.

As you move along your investment journey, you’ll come across the phrase “past performance cannot be a reliable indicator for future results”. This is often to inform you that investments can sometimes fail and that no algorithm or human can predict how they will perform. 

The past performance of a company does not guarantee its future success. It is up to you to research the stock market before making any investments.

How to Invest in Stocks in the UK

Here’s a guide on how to get started investing in stock markets and a video showing how to invest in ETFs with InvestEngine.

  1. Choose what you want: First, decide what you want. Do you want to buy shares, bonds or funds? Funds are the most popular choice for beginners. Funds are a great way to save time and avoid the hassle of purchasing shares or other assets or worrying about how you will diversify your portfolio. Funds are safer than individual shares and more affordable than investing in them. You share the risk and costs of other investors.
  2. Select an investment platform: You can purchase investments from banks, building societies and stockbrokers. Your investment goals, your investing skills and your personal circumstances will determine which provider you choose. Scroll down for more information about investing platforms.
  3. Select a tax wrapper. A tax wrapper lowers the taxes you pay on investments. Individual Savings Accounts (ISAs) and pensions are two examples of tax wrappers available in the UK. Here are some examples.
  4. Shares and Stocks ISA: A Shares and Stocks ISA allows you to invest your tax-free ISA allowance into qualifying investments like shares, corporate bonds and government bonds (gilts), and other investment options. Your ISA allowance for this tax year is PS20,000. This means that you can invest as much as PS20,000 in a Stock and Shares ISA, and you won’t be subject to any tax on the money you make. An Investment ISA is also known as a Stocks & Shares ISA.
  5. Lifetime-ISA: This ISA is available to all adults 18 years and older but not to those under 40. It allows you to save up to PS4,000 per year towards your first home and retirement. Your savings will be boosted by 25% every year, up to a maximum of PS1,000 per annum.
  6. Pensions: You can get tax relief from the government if you contribute to a pension. However, you cannot access the money until 55.
  7. SIPPs: SIPPs are self-invested personal pensions. They offer the same tax benefits as other pensions but allow you to select the underlying assets.

You can also choose to invest in a general account (GIA) if you don’t want to use a tax wrapper.

You can make as much as PS12,300 in gains with the GIA tax-free. The first PS2,000 of dividends you receive is exempt from tax. For more information, please refer to our Stocks & Shares ISA guide.

What Should a Beginner Invest in?

Stock market investors can start investing in many assets. Stocks, shares, bonds, funds, commodities, and properties are the most common types of assets.

  1. Shares and Stocks: A stock is a unit of ownership in a public company. A share is a small part of a publicly-traded company. If you buy a share of Apple Inc., you become part-owner. You’ll reap the benefits of its performance if it does well. You may lose money if it fails to perform well.
  • To raise funds for their operations, companies issue shares. Shareholders invest in shares to reap the benefits of the success of companies they trust.
  • Stock or equity may also be used. In most cases, stocks, equities, and shares all refer to the same thing. Stocks could also refer to all of your shares in one or several companies.
  • By investing in a corporate bond, you are lending money to a business in return for interest.
  1. Government Bonds, You lend money to the government by investing in a bond or gilt.
  2. Property: Investing in properties is, as its name implies, investing in real estate.
  3. Mutual Funds: Rather than buying individual shares, bonds or properties directly, you may invest in mutual funds.
  • A mutual fund or fund collects money from you or other investors. A specialist fund manager then invests the money in assets like shares, bonds or properties. This saves you the hassle of purchasing shares in multiple companies and helps you build a portfolio.
  • Because you share the risk and costs of investing in funds, it is safer than investing in individual stocks or bonds. You can trade funds on a stock exchange or inactive funds (actively managed funds), as well as passive funds (index funds).
  • Most investors, even experienced ones, use funds. Our Investing In Funds guide will help you understand how to properly invest in funds.

6 Tips to Invest in Stock Markets

These are our top seven tips for investing in stocks.

  • The greater the risk, the greater the reward (or loss). You will have to take on more risks if you want to get the best return. When you’re young and have many years to weather market fluctuations, it is a good idea to take on more risk. As you get older, your preference will be for low-risk and medium-risk investments.
  • Diversify your investments. Diversifying your investments means diversifying in asset types, such as bonds and shares. Shares, bonds) across a variety of sectors (e.g. Technology, food & drink and across different geographies (e.g. America, Europe and Emerging Markets. This is often difficult to do in practice. That’s why many people, even experienced investors, use funds for investing.
  • Invest long-term: Long-term investing is one of your most rewarding and rewarding choices. You should think about putting your money into a high-interest savings account that pays high interest. 

Investing should be long-term, at least five year. You give your money enough time for market fluctuations to pass. To estimate your earnings for a specific period, you can use the compound interest calculator.

  • Be aware of investment charges. They can have a significant impact on your overall returns. Your gain would be reduced to 3% if an investment costs 2% but you get a return of 5%.
  • Check your portfolio regularly: It doesn’t matter if you have shares, funds, or both. You need to make sure you don’t have any dud shares, or poorly performing funds. Although we don’t recommend selling your investments if the market is down, it’s a good idea to get rid of any funds that aren’t performing well. 

Your investments may change over time and assets might not be aligned with your investment goals. You may have to rebalance your portfolio in order to meet your investment goals.

  • Take advantage of tax-free accounts When investing in the UK and other parts of the globe, it is a good rule of thumb to put as much money in the tax-free account. We have ISAs in the UK and pensions. These accounts are tax-efficient, and can help you reduce your tax liability.

What Amount of Money Should a Beginner Have Before They Invest?

It is crucial to make sure you separate your emergency fund from your everyday spending pot before you invest.

At least three times your monthly living costs should be enough to cover an emergency fund. If you are in a financial emergency, such as a job loss or serious health condition, you will not be able to dip into your investments. Keep your emergency fund in a high yield, easy-access cash savings account such as a cash ISA.

A daily spending account is also important to ensure that you don’t need to cash out your investments whenever you have to buy groceries or spend time with friends.

It is important to assess your financial situation before investing in the stock market. This could include paying off any outstanding loans. Imagine having PS4,000 in outstanding credit card debt at 19% interest. 

To repay the debt, you will need to spend PS760 per year. This return is unlikely to match your investments, so it may be wise to pay off credit card debt before you invest.

After your finances are in order, you can start investing as much or as little you like. Many investment platforms and Robo-advisors allow you to invest as little as PS25 per month. Some even allow for PS1 per month. It is called “drip-feeding” and can be more profitable than investing large lump sums at once.

Common Investment Fees

Below are some examples of typical fees for investing. We will not be focusing on fees charged by fund providers. You don’t need to be concerned about the fees charged by share-dealing platforms.

Quick Tip: Fixed fees are generally cheaper for high-end investors, while percentage-based fees tend not to be as expensive for those who have less to invest.

  1. Annual Platform Fee This fee is charged by an investment provider to provide a platform that you can invest in.
  2. Annual Fund Manager Fee: Also known by Ongoing Charge Figures, (OCF), or Total Expense Ratio, (TER). This fee is paid directly to the fund manager who manages your funds. You typically choose a few funds to invest when you invest in funds. For example, if you choose three funds, you will need to pay a fund management charge for each one.
  3. Market Spread Also known as transaction cost. This is the difference in the price at which an asset can be bought or sold.
  4. Annual Investment Fee: Some providers show this cost as an annual fund management fee and the market spread.
  5. Trading Fee Knew as dealing fee. This fee is charged for the purchase and sale of shares, funds, or other investments on the platform. It is usually between PS0 and PS25.
  6. Transfer out Fee: Also called an exit fee. You pay this fee to move your investments from one provider into another. For example, if your investment moves from AJ Bell (or Barclays), you will need to pay an exit fee. Fortunately, not all platforms require you to pay an exit fee. However, most platforms charge per holding or fund.
  7. Optional Advice Fee: This fee is only payable if you sign up for personalized financial advice.

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