Stocks and Shares for Beginners:
Stocks and shares are two of the most common phrases when it comes to investing and when discussing money in general. They are often seen to be complex, but are they really as daunting as they seem? The short answer is no.
What are stocks and shares?
Although the words 'stocks' and 'shares' are often used interchangeably and are very similar, they have slightly different meanings. The main difference is when you say that you own a 'share', you are saying you have a single unit of ownership in a business, shares can be seen as the unit of a stock. If you say you have 'stocks' in a business, you are saying that you own a fraction of a company, in broader terms).
Why invest in stocks and shares?
Simply put, companies issue out shares to raise money for operations, people buy these shares if they believe a company is going to perform well, believing that there is a chance to be returned more than they initially invested.
Investing correctly can lead to a return on investment. As the value of the company you invested in increases, so does the value of the stocks/shares you own. For example, if a company is worth £200 million, and there are 50 million shares, each share is worth £4. If you wanted 50 shares in this company, it would cost you £200. If this companies value increases, for example to £250 million, then the value of your shares will also increase, meaning the value of your shares has now risen to £250, making you £50. This is the main reason people invest in very basic terms.
If you're lucky enough to invest in a company that offer dividends, then you have another potetnial benefit if you're thinking about investing. Some companies offer dividends to shareholders. Meaning if the company that you invested in has a successful period generating profit, then they will give back to investors. This could be in the form of cash, more shares or other assets. As mentioned, only some companies offer dividends, and the amount given back or the regularity of the dividends will change depending on the company, so don't expect to receive dividends automatically when investing!
How to invest in stocks and shares?
Now you should have an understanding what stocks and shares are, and why people invest in stocks and shares, it's time to understand how you go about investing. There are many ways to invest, however the most common way to invest in stocks and shares is through the stock market.
A stock exchange is a platform for companies to sell their stocks to public investors. There are lots to choose from which operate globally. Some of which include: the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE) (Note that these different exchanges have unique rules and regulations that govern how people can invest).
So if you choose to invest within the London Stock Exchange, you have a choice of over 1,000 companies with an overall value of £3.9 trillion, to invest in.
Once you have decided the LSE is your choice, you need to find a broker (a person or service that provides access to the stock exchange), then you'll need to open a brokerage account (the account that holds your investment funds), once you have the account you can put however much money you feel comfortable investing onto the account, then you have to choose which company/ies to invest in and how many shares you want. Finally you invest the funds and patiently wait and hope that you see a positive return on your investments!
If you think that the stock exchange isn't for you, there are many more ways to invest, so make sure to find the option that suits you the most.
Matt's key tips & rules!
Hopefully now you have a better understanding on Stocks and Shares. If you are contemplating whether to invest, I have some tips and general rules to follow:
1) The greater the reward, the greater the risk. If you want to see crazy returns on your investments than you have to make crazy investment (or be extremely lucky...)
2) Try to diversify your investments. By investing in different companies or industries, you lower the overall risk as you aren't depending on one investment.
3) Know your limits! Never invest more than you're capable of or more than you're comfortable with. You may be persuaded to invest your life savings on a guaranteed win, but nothing is ever guaranteed, so in a second you can lose all your investments!
I have mentioned lots of positives however investing can come with lots of risks. The stock market is complex and always changing, and you can easily lose your hard earned investments, so please do your research and ensure you understand the risks prior to investing if you are planning on doing so.
So to answer the question, 'Are stocks and shares really that scary?'. The answer is no, as long as you have done your research!