Stocks and Shares; a great way to make money or a stupid way to lose all your savings?
Certainly a good question; we all want to make money, so should we put our savings under the bed, in a cash ISA or should we invest it?
Personally, when I think of the Stock Market, I think of the “Rogue Trader” film, with Ewan McGregor playing Nick Leeson, the man whose trading caused the collapse of Britain’s oldest investment Bank.
Perhaps it’s sensational news stories such as these that immediately prevent most people from researching the potential profits that can be made from “stocks and shares”.
In my, un-educated mind at least, it seems like far too much of a gamble to invest thousands of pounds in what seems to be a glamorised white-collar casino. But is it really such a gamble? If not, where do you begin?
What can you afford to lose?
Bit of a negative start to a guide I know, but considering what you can afford to lose is still an essential element of investing. What amount are you prepared to risk losing?
Remember that higher returns tend to be associated with higher risk investments and shares. Many people choose to create a mixed portfolio of low risk and higher risk investments.
You can buy shares from a stock broker or from online “Fund Supermarkets”. Do a Google search for “HSBC stock brokers” or “Barclays Stock Brokers” and you’ll see that every high street bank has a website that allows you to buy shares.
In theory you can buy shares direct from the companies that are issuing them. This would save you having to pay commission but would require you to have a fair amount of financial knowledge (meaning you probably wouldn’t read a beginner’s guide like this!).
Stock Brokers come in two general types – discount and full service brokers. A discount broker provides a no-frills service, purchasing whatever shares you decide you want. You can deal over the phone or sometimes online. A full service broker provides recommendations on what to invest in. This extra service will equate to extra commission for the Broker.
Fund supermarkets are basically brokerage firms that provide access to funds from a variety of ‘fund families’.
These are convenient for investors as they provide access, in one place, to an extensive range of funds and investment opportunities and they can provide a consolidated statement of the performance of all their investments; freeing up time that the investor would have otherwise spent tracking the performance of each individual investment.
It is also possible to invest in a “Managed Fund”. Rather than following the market and investing in specific shares yourself, you can invest your money in a fund; which is a mix of assets. Most professionals would advise somebody to invest in more than one fund if possible; this makes it more likely than you will make an overall profit.
Managed funds work by pooling together money from several or many investors; giving it extra buying power and granting access to certain markets that might be closed to individual investors with smaller amounts of money.
Remember to examine the fees for the fund managers. Fees may include management fees, charge entry and exit fees. It is also a good idea to look at a fund’s past performance; but don’t mistake this for a guarantee of future profits.
Trusts and Guaranteed Equity Bonds (GEBs) are other investment options. Investment Trusts are similar to funds, but have a more complicated structure and are referred to as “close end funds”; meaning that there is a fixed number of shares in circulation and the price of those shares is determined by supply and demand.
The nature of GEBs can vary slightly depending on the provider. All GEBs however, should be linked to the stock market and your investment, to some extent should be protected.
Remember however, that even if you are guaranteed to get all of your money back, after, let’s say, a three-year investment; taking into account inflation, your money is still going to be worth less that it was originally.
This can mean a significant loss of money, if you are investing large sums that could have been kept in an ISA for example.
That brings me along nicely to the topic of stocks and shares ISAs. Stocks and shares ISAs are generally recommended for those who are looking to invest for at least five years. They are higher risk than normal ISA’s as their value can actually drop and you can lose money.
The advantage of a Stocks and Shares ISA is that you can invest within the ‘wrapper’ of an ISA and therefore not pay tax on any returns. MoneySupermarket.com has a comparison of stocks and shares ISAs and some helpful advice covering the topic if you are interested in learning a bit more about this option.
Whatever investment option you choose there is some general advice and unwritten rules that you should always adhere to:
Don’t Put All your Eggs in one Proverbial Basket
Distribute your investments across different markets. This helps to reduce the risk of completely losing your money.
If for example, somebody invested £20,000 in a plastic bag company five years ago, and nothing else, it’s likely that there ‘portfolio’ has made a loss.
A similar scenario may have been experience by somebody who put all their funds in a company based in Greece on in Greek government bonds.
If somebody however, had invested in businesses in China, India, and Germany, as well as Greece; then his or her portfolio might not have been devalued as much. Although, with a global recession, the portfolio could well have devalued to some extent.
Pay off your Credit Card First
Make sure that you clear any debt that you have before you start investing. Credit card interest rates for example, do vary, but it is unlikely that your investments will accrue returns that outweigh your annual credit card interest rate.
Decide if you want to invest long term or not
Stocks and shares billionaire Warren Buffett once said “The stock market is a means for transferring money from the impatient to the patient”.
If you don’t fancy waiting several years to make money from your investments then you may want to learn about stock charts and technical analysis. These will help you to predict when is the right time to buy and when is the right time to sell shares. You can find these online at places like Yahoo Finance.
Look into putting a “Stop-Loss” on your Investments
You may also want to research “Stop-Losses”. These are designed to prevent you losing too much, or all of your money. You can set a point at which you will sell at a loss when the stock reaches a pre-determined price. Usually after you’ve lost about 5%, you’ll want to sell and settle for the relatively small loss rather than to hold on and potentially lose everything.