The Stock Market Explained

Thanks to trading apps, Elon Musk and the rise and fall of GameStop, it feels like everyone is talking about the stock market right now. If you’re not completely sure how it all works and you’re too afraid to ask, we’ve got your back. The investing industry can be intimidating to say the least but the good news is, it’s not half as complicated as it may appear from the outside. Here’s a beginner’s guide to the stock market. We hope this will inspire you to do a little more research before getting stuck in yourself. 

How does the stock market work?

The stock market works like any other market only instead of exchanging your money for products, you exchange it for a piece of ownership in a company.

The value of a stock is largely based on supply and demand. If more people want to buy a particular stock, its value will increase. If a large number of investors decide they want to sell it, its value may fall. These fluctuations are completely normal and anyone investing in stocks needs to prepare for volatility and be willing to ride out the waves.

How risky is the stock market?

If you invest sensibly, your portfolio should recover from routine fluctuations and go on to increase in value over time, but investing does carry an element of risk and there’s a chance you could lose all the money you put in.

Thankfully there are ways to mitigate this risk such as carrying out plenty of research, diversifying your investments, and making sure most of your portfolio is invested in index funds and ETFs rather than individual stocks you’ve picked yourself. There’s nothing wrong with stock picking if that’s what you want to do, but many investing experts advise against a DIY approach - particularly if you’re a beginner.

How do I know if I should invest in the stock market?

There are no hard and fast rules dictating when you should start investing. Many people procrastinate because they assume they don’t have enough money or they don’t have enough knowledge. But this mentality could see you missing out on thousands of pounds worth of profit over the course of your life. The sooner you start investing, the longer your money has to grow, so it makes sense to get started as soon as possible. It’s inevitable that you’ll learn along the way and uncover smarter investing practices over time.

However, it’s important that you’re reasonably financially secure before putting your money at risk. If you have a lot of high-interest debt, for example, you might want to postpone buying stocks until you’re out of the red. Investing before you’ve paid off expensive debts isn’t just risky, it’s counter-productive. The interest you owe might end up cancelling out your investment profits. 

It’s also wise to wait until you’ve got a solid emergency fund too. After all, the last thing you want is to panic-sell your stocks at a loss if you’re made redundant, your car fails its MOT, or your boiler breaks. If you’re planning to buy a house, go on a big holiday or get married in the next few years, avoid putting this money in the stock market. There’s no guarantee it’ll be worth the same amount when you need it. 

Can the stock market make me a millionaire?

It certainly can! It also comes with a lot of risk. Overnight success is extremely unlikely and anyone who promises quick-wins or guaranteed gains is probably trying to sell you something.

The most successful stock market investors are those who are in it for the long haul. Think of your investing journey like trying to get fit. Some people might promote extreme and unsustainable sacrifices as the key to getting ripped quickly, but the ones who get the best results tend to take their time and focus on consistency and determination. Successful investing is a marathon, not a sprint.

Can the stock market generate a passive income?

If you’re hoping to generate a passive income, the stock market is worth exploring providing you’re willing to put in the time and perseverance. To create an extra income stream through stocks, look to dividend-paying stocks.

Companies tend to pay dividends to their investors as a ‘thank you’ for their support and as an incentive to keep hold of their stocks. It’s up to you whether you withdraw your dividends and use them to fund your lifestyle or reinvest them so you can grow your portfolio even more.

How can I get started?

If you’d like to get going, here are 3 steps for beginners.

Research fees and charges

Although you certainly don’t need to be an expert before you start investing, it’s important that you’re aware of any fees and charges before parting with your cash. Some platforms charge transaction fees every time you make a purchase or trade a stock. Some charge management fees too. In recent years there’s been a rise in fee-free trading apps which claim to make it easier for beginner investors to get started, but this doesn’t necessarily make them the best option for everyone.

Spend a little bit of time researching the tax implications of different investment accounts. Thanks to stocks and shares ISAs and pensions, there are tax-efficient ways of investing for the future.

It’s wise to compare a few different platforms before making a decision. You don’t have to stick with that particular account forever. It’s normal to open new accounts based on new information, particularly as you gain more investing experience.

Open an investment account

Once you’ve chosen an investment platform, it’s time to open your account. Opening an account isn’t as daunting as it may sound and it can sometimes be done within a matter of minutes. 

Automate your investments

If you only have a small amount to invest, you might choose to drip feed a bit of money into your account whenever you have some going spare. Whereas if you’re able to commit a particular amount each month, it can be smart to automate your investments so you don’t have to think about it. As a beginner investor, a passive approach is likely to be more rewarding than trying to pick stocks yourself and placing regular trades. Leaving it to the experts can also give you more time to spend on other things and focus on your strengths. 

 

Jenni Hill
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