In simple terms, the stock market (of which there are many around the world) is a place where buyers can buy shares, and sellers can sell shares of companies.
Key points on investing in the stock market are:
- Higher risk / higher reward. Investing in the stock market presents a higher risk than the guarantees provided with a cash ISA or savings account, but also provides the opportunity to gain more money from your investment. The value of your cash ISA or savings account will never drop (unless you withdraw the money), and you will be guaranteed to receive the amount of interest the account provides (be it fixed, variable or a tracker rate). When investing in the stock market, you could lose money. In extreme cases, you could lose all of the money you invested.
- How to invest. You can invest in the stock market through a bank or building society, but there are cheaper options to do it through an investment platform - an online service that allows you to buy and hold shares, bonds and funds in one place. Examples of such platforms are IG and AJ Bell.
- Fees and costs. Consider the costs associated with buying stocks and shares and investing in funds - this will be made clear on the providers website. As an example, if you buy UK shares on IG, you will pay 0.5% stamp duty (see below) and an £8 dealing charge (set rate for IG if you don't trade often). To buy £1000 worth of shares would cost you £13 (£5 stamp duty and an £8 dealing charge). To sell them will cost you another £8, so if you sold the shares for the same price you bought them, you would have £21 less than you started with. You also have to pay a fee for the platform holding your investments - some charge a set rate (such as £24 per quarter with IG if you make no transactions in that quarter) or take a percentage of your investments (for example, 0.5% with AJ Bell). You can see how the charges add up! The dealing charge for investing in funds is normally less than shares, but check the conditions of the providers you are interested in.
- Stamp duty reserve tax (SDRT). When you buy most UK shares online, you will pay a 0.5% tax. It doesn't apply when you buy unit trusts, mutual funds, ETFs or OEICS (more on all of these to follow), or for shares listed on London's Alternative Investment Market (AIM). It does apply when you by into a UK investment trust, however. The majority of investment platforms you use will make the charge clear to you, add it to the cost of your investment and pay it to HM Revenue and Customs (HMRC).
- Investing for the long term. Historically, in the long run, stocks and shares (and the funds, trusts etc) you can use to invest in the stock market have outperformed money in cash savings accounts, but there is no guarantee they will in the future. In times of volatility, you can see significant fluctuations in the value of your investments on a daily basis. The general advice is that investing over a time period of at least five years will help your investments ride out the market fluctuations.
- Protection scheme. Ensure your provider is protected by the Financial Service Compensation Scheme (FSCS). The £85,000 of protection is protecting you against the provider of the platform, not the companies or funds you have invested in. For example, if you have £25,000 of investments held with an Acne Investments Inc (made up name) and they go bust, your £25,000 is protected. If you had bought £25,000 of shares in Acne Investments Inc and they went bust, your shares aren't protected.
- Tax. A stocks and shares ISA provides the most tax efficient way to invest in the stock market. If you invest outside of an ISA, and if you exceed the tax free allowances, you could be liable to pay tax on any capital gains you make on your investments, or on any dividend payments you receive. You do not have to pay taxes on capital gains or on dividends received when you invest through a stocks and shares ISA.
Through your investment platform, you can get exposure to the
stock market in a number of different ways. Common options are:
- Stocks and shares.
- Mutual funds.
- Exchange-traded funds (ETFs).
- Unit trusts and investment trusts.
- Corporate and government bonds.
- Open Ended Investment Companies (OEICs).
Common to funds, trusts and OEICs are the terms
income and
accumulation:
- Income. Any dividend or interest earned from the trust or fund is paid to the investor as income. The fund, trust or OEIC will have Inc in it's name.
- Accumulation. Dividends or interest earned is reinvested into the fund automatically. The overall stake in the fund, trust or OEIC therefore grows. The fund, trust or OEIC will have Acc in its name.
You can learn more about each of these options by following the links below.
