If you’re looking to build up your personal wealth for the long-term, one of the most profitable ways to do so is by investing in the stock market. Any newcomer to financial investments will almost certainly feel daunted by purchasing stocks and shares in businesses, but there has to be a reason why almost ten million people aged over 50 own shares, according to Yours. The reason is that investments in the stock market often beat having cash in the bank over the long-term. This article will distil the process of investing in the stock market and the right approach to take for long-term profits.
What is stock?
Stocks, also known as shares and equities, represent part-ownership of a company that’s listed on the stock market. When you purchase a stock or share in a Public Limited Company (PLC) you literally own a small part of the organisation. In the UK, the London Stock Exchange is where all the action unfolds. The most popular share index is the FTSE 100, which lists the 100 biggest firms in the UK, namely Marks & Spencer, Persimmon and British Telecom. When you purchase a stock, you become a shareholder in the company, permitting you to vote on company issues at its Annual General Meeting (AGM) and you’ll also receive a dividend payment in the event the company enjoys a successful financial year. Furthermore, if the company does well, its share price will rise, allowing you to sell your shares for a profit in the future.
Understanding share prices
Share prices are influenced by general supply and demand from investors. If the demand for a share outstrips supply, the value of a share will almost certainly rise. On the flip side, if more people are looking to sell their shares than buy, the price is likely to fall in order to achieve a sale.
The value of stocks and shares can fluctuate depending on a range of issues. The prospects for the national or global economy can raise or lower prospects for future profitability, while news of struggling competitors can also strengthen the market position of a company.
Choosing stocks for your investment portfolio
There are two approaches you can take with your investments in the stock market – short and long-term trades. Short-term investing is generally stocks you hold for no more than a year. These are investments you may look to make if you’re expecting a business to thrive or a piece of legislation passed to enable an organisation to further grow. They can be more speculative trades, in the hope of making a quick return over a period of months rather than years. On the flip side, long-term investments should be a staple of any investment portfolio. You should not worry about short-term fluctuations in price and instead focus on the yearly patterns of growth. For instance, Mr Green experienced a decline in its share price between November 2017 and April 2018, falling from over £60 per share to around £45 per share. This would alarm short-term investors. However, long-term investors that purchased shares back in January 2017, when it was launched on the stock market, were still looking at solid returns from their starting point of £30 per share.
How to purchase shares
You may decide to purchase the shares yourself. The cheapest and simplest way to do this is to find an online share-dealing service which offers execution-only transactions. This means you won’t get the professional advice or guidance of a broker and will generally pay between £5-£10 per purchase. You can also choose to pool your investment funds into a fund, which is managed by professional investors who make all the buying, selling and risk management decisions on your behalf. There are stocks and shares ISAs that offer tax-free returns, for instance.
Hopefully, after reading this article you’ll recognise the potential of taking that extra investment risk in boosting your finances for the future. It’s important to accept that these investments can fall as well as rise, but with careful planning and investment in the right funds, it’s possible to make life-changing returns.