Demystifying Stock Investing: A Beginner’s Guide

Despite being an important aspect of every person’s life, not everyone knows how to manage their finances or even how to make their funds grow. In fact, 9 out of 10 UK consumers admit that they lack comprehension when it comes to financial matters, according to a survey by Israel-based bank Leumi. What’s more, as much as 72% of the respondents divulged that they don’t have an investment of any sort.

These numbers are alarming, as investments are one way to ensure financial security in the future. With that being said, we’ve drafted up a quick guide on one of the most popular investment vehicles available on the market: stocks.

Stocks Defined

Stocks, commonly known as ‘shares’ here in the UK, are units of part-ownership in a company. A stock has a monetary value dictated by movement in the market, and you can choose to buy and sell stocks depending on its current price. Companies that choose to offer stocks to the general public are under the Public Limited Company (PLC) business structure. This simply means that PLC companies have limited liability, and this excludes their shareholders from any debts they might incur in case they fail. Companies that are publicly listed often offer stocks, so they can raise funds for growth or regain an investment.

If you own a stock in a PLC, you become a shareholder of that company which gives you certain rights and benefits, like being able to vote on company decisions. Shareholders are also sometimes entitled to dividends, which is the distribution or share of company profits to those invested.

How Does the Stock Market Work?

The stock market is where people buy and sell stocks. Here in the UK, we have the London Stock exchange where you can find PLCs and other investment vehicles that can help you grow your money. The prices of individual stocks and the market as a whole are followed by market indices ⁠— showing the average performance of a group of companies at any given time. The main indices we have here in the UK are the FTSE 100 and FTSE 250, and these indices provide a rundown of how the country’s top 350 companies are currently performing.

How to Invest in Stocks

There are many ways to invest in stocks, and the most popular one is to directly buy a share in a single company and become a shareholder. This is usually done through a third-party broker who facilitates the transaction. Choosing to invest directly as a shareholder gives you access to benefits like dividends, but despite these perks, it can be incredibly risky too. Betting on a single company magnifies the risk of losing your investment in the event that the company folds.

Thankfully, you can spread out the risk by pooling your money with other people in a fund. Funds allow you to invest indirectly in stocks as these have small shares in multiple companies ⁠— something that would be too expensive if done through direct investing. However, you don’t get the usual benefits stockholders have. A lesser-known option for indirect investing is a contract for differences (CFD). Trading share CFDs allow you to trade on the price of a stock and how it changes between two points in time. This means that like investment funds and trusts, you won’t actually own the underlying stocks when investing in them, but for CFDs, you have the added benefit of leverage or margin, which allows you to trade with just a fraction of the actual stock’s value.

Investing in stocks is one way to not let your finances remain stagnant. But of course, you need to do your due diligence before you dip your toes into the world of stock investing in order to understand all the risks. So, try to talk about your finances with a loved one who has experience in the field or a trusted financial advisor. Doing so can ensure your investment’s success and help you attain financial security in the future.

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