Investing for beginners: how to buy stocks and shares

For anyone new to investing, the stock market can conjure up a frantic image: a mass of trading screens, flashing numbers and unfathomable jargon. It’s about as far removed from the idea of stashing pocket money in a piggy bank as you can get.

If you’re saving for the future – and by future we mean at least five years, preferably a whole lot longer – investing in the stock market provides an opportunity to produce better returns than cash on deposit.

It can also provide a robust defence from the erosive effect of inflation on your finances.

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

NB: stock market investing involves risk and is not suitable for everyone. Before you even consider taking the investing route, you need to work out your financial goals. It’s wise, first of all, to build up a ‘rainy day’ cash fund equal to at least three (preferably six) months of your usual outgoings.

What is investing?

Investing is the process of using your money to produce a profitable return. It involves allocating your money into a range of investments, with the potential for making both gains and losses.

Typical investments

There are four main types of investment, often referred to as ‘asset classes’:

• Cash. Savings typically built up in a bank or building society account.
• Bonds. Also referred to as ‘fixed-interest securities’, these are an IOU that pays interest in exchange for a loan. Known as a ‘gilt’ where the issuer is the UK government, or a ‘Treasury’ where it is the US government. Companies needing cash issue ‘corporate bonds’.
• Property. Returns from bricks and mortar include growth in a building’s value, rental income, or a combination of both.
• Stocks and shares. These are interchangeable terms, also often referred to as equities. Equity investing means buying a stake in a company either directly or via a fund where your money is pooled with potentially thousands of other investors). Shareholders are part-owners of a business who share in both its financial successes and failures.

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

A grouping of assets is referred to as a ‘portfolio’. Investors may concentrate on one type of asset but taking this approach can be risky – akin to putting all your eggs in one basket.

Spreading your cash among different classes, therefore, is the sensible option for most investors. This is known as ‘diversification’.

Risk business

Every investment carries a level of risk. Broadly, the higher an investment’s potential for return, the greater your risk of losing money from it. This is why investing requires plenty of time, helping you to smooth out the ups and downs from your returns as you go.

As you read down the list of asset classes highlighted above so the risk associated with each tends to increase.

For example, with savings accounts, the risk of UK savers losing their money is virtually zero thanks to strict compensation rules that come into play should a provider get into difficulty. You can read more here about the Financial Services Compensation Scheme.

The trade-off, however, is that the returns you can expect from savings are modest at best. Many pay virtually nothing, rising to perhaps a couple of per cent if you’re prepared to lock away your cash for a period of years.

With UK inflation currently standing at over 6%, this means that the real value of money held on deposit decreases year-on-year because of rising prices. Even though your money is safe on deposit, in real terms it’s losing its value because inflation is eroding its worth.

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

Shares and property have the potential to generate far higher returns than either cash or bonds and therefore sit at the top of the risk/return ladder.

Why buy shares?

Going back more than 120 years, the return on equity investments has, according to Credit Suisse, been between 3% and 6% a year, outstripping all other asset classes.

Past performance, however, is no guarantee to the future. Before parting with any cash, it’s worth weighing up whether investing for shares is definitely for you. If the answer is ‘yes’, then it’s worth making sure you do it in a sensible and secure way.

Ride the 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 route you choose (see below), there will also be a cost consideration to factor in. That’s because, to buy shares, you incur charges beyond the cost of owning a piece of the company itself.

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

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

• Should I seek financial advice?
• Am I happy with the level of risk involved and can I afford to lose money?
• Do I understand the investment in question and, if necessary, could I access my money 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. Ultimately, your decision will be determined by your goals and how actively involved you’d like to be in managing your portfolio. The main options are:

• Buy individual shares. Probably the most time-intensive option. Can require plenty of research and you’ll end up ‘owning’ your decisions.
• 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.
• Invest in share-based exchange-traded funds (ETFs). Think of ETFs as a half-way house between buying shares directly and buying funds. ETFs invest in a range of individual shares to track an underlying stock index such as the UK’s FT-SE 100. ETFs are traded on exchanges in the same way as companies, but offer greater diversification.

Funds focus on specific countries or regions (such as the UK, or Far East) or sectors (such as mining). They can be ‘actively’ managed, where managers decide which companies to include in their portfolio, or managed ‘passively’ by algorithms which track the performance of a particular stock market index.

How can I start investing?

1) Open an investment account

DIY investors need access to a dealing account, such as the ones offered by online investment platforms and, increasingly, a dedicated array of trading apps. Both offer would-be investors a range of share dealing services.

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 AJ Bell. Several providers have created a choice of ready-made portfolios featuring a range of investments based on a customer’s risk tolerance.

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

No single investment platform or app will suit all types of user. Personal preference, look, and feel will all influence choice.

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

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

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

2) Choose a robo-adviser

If you have a sizeable, say, five-figure sum to invest, but you’re put off by the prospect of having to carry out all your own trades, one option would be to opt for a robo-adviser.

Robo-advisers are a simple, relatively inexpensive way to invest in shares. Think of them as a half-way house between a DIY approach (above) and full-blown investment advice (below). The idea is that you provide information to an automated system about why you want to invest, how much you earn, your financial goals, plus your attitude to risk. In return, you are given a ready-made investment portfolio.

Once you are up and running, the robo-adviser provides updates on your investment performance. The approach is relatively cheap, typically charging customers in the region of a few hundred pounds to get started. It’s also quick. You could have a live portfolio up and running within a few hours.

Because the process is automated and uses information supplied 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 investment options on offer.

3) Choose a financial adviser or wealth manager

If you have a larger amount to invest, from a windfall, say, or an inheritance, you could pay for the services of a financial adviser.

You’ll still need to decide what kind of advice you need and the goals you’re working towards. For example, whether you’re looking to invest with a particular event in mind, such as retirement.

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

When you meet an adviser, you should find out or receive the following information:

• Whether the advice is independent or restricted. The latter means an adviser is limited to the number of providers he/she can recommend. Independent advisers can recommend from the whole market.
• Level of advice. Are you looking for information to help with 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 vary so it’s worth shopping around.
• How your adviser is regulated. The firm should appear on a register published by 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.