HOW TO INVEST IN STOCK MARKET FOR BEGINNERS

What is a share?

A share is a divided-up unit of the value of a company. Shares move up and down in value due to various reasons. A share can be further defined as part-ownership of a company. By buying a shares in a company, the investor has a ‘share’ in the company’s business. Buyers gain out of investing in the shares of a company if the company’s business grows and it earns profit out of that business. Investors can buy or sell shares in a company. Companies issues shares to raise money and investors buy shares in business because they believe the company will do well and they want to share in its success.

How to invest in stock market for beginners to become a shareholder?

When an investor buys shares in a company, the investor becomes a shareholder of the company. A shareholder is entitled to certain rights and benefits which may include the right to vote on company matters at the Annual General Meeting and potentially receive additional benefit of receiving dividend payment.

Dividends are additional benefits which some companies may offer to their shareholders. Though dividends are optional and a company may or may not provide dividends to its shareholders. Dividends are also a share of the profits earned by companies. Successful companies may also raise their dividend payment over time as their profits increase. However, the investor should always remember that just like shares, the value of dividends can also fall as well as rise.

How does the stock market work?

Most share trading takes place on stock exchanges which facilitate the buying and selling of shares between different parties. In order to trade shares at the stock exchanges, the investor has to register to trade directly on an exchange, though most investors access stockbrokers in order to gain access to stock markets.

The UK stock market

In the UK, the London Stock Exchange is the main stock market where public limited companies and other financial instruments such as government bonds and derivatives can be bought and sold.

Market indices

Company shares are grouped together to form a market index and their value is combined as a weighted average resulting in a figure. Companies are usually grouped together based on their size and value.

The stock market in the UK is split into different indices with the FTSE 100 being the most famous. It includes 100 largest companies. The most well-known indices come from the Footsie group which includes the FTSE 250, the FTSE Fledgling and the alternative investment market or the AIM which lists small and venture capital-backed companies.

FTSE 100

This is an index involving the 100 biggest companies in the UK. Companies grouped under this category are usually multinationals with international interests.

FTSE 250

This is an index which includes the next largest 250 UK companies. As the companies listed under this category are smaller than those listed in FTSE 100 and more UK-specific, this index usually better reflects the health of the UK economy.

FTSE All-Share

It is an index of shares listed on the LSE’s main market. It includes all shares in the FTSE 100, FTSE 250 and FTSE Small-Cap indices. A market index value gives a good indication of movement within markets based on the industry type or company size an index represents. Therefore, it is a good indicator for the market which is useful in comparing the value of similar shares or particular investments.

What moves stock markets?

Like any other financial market, demand and supply are the driving forces for the stock market, as well.

Supply

The number of shares in a company is always limited, though companies may choose to release more shares or buy some shares back to reduce the supply in the market. Share prices go down if a company releases more shares but the demand does not rise according to the increase in supply. As opposed to this, a company’s share price will increase in case of a buyback without a corresponding drop in demand.

Demand

The supply of shares in the market is controlled by the company, but the demand for shares may vary due to a number of factors.

Factors that can affect the demand for a share include:

The national or global economy: An increase in consumer confidence can lead to extra spending, raising the prospects for future profitability.

Events specific to a sector: Changes in the price of a commodity traded by a company can affect the price of its shares.

Competition

A company’s performance in relation to its competitors can raise or reduce the price of its shares. Shares of a company which is struggling, may drop as its customers will go elsewhere and competitors stand to gain.

Factors specific to the company

These may include management, policy changes or speculation.

Investment modes

There are two ways to invest in the stock market: Direct and Indirect.

Direct investment

This includes trading at the stock exchange directly or by buying the shares in a single company to become its shareholder. There are online platforms where a client can buy and sell shares independently through a share dealing account. Though, investment in the share market is almost always done through a third-party or broker.

Indirect investment

Most investors trade in shares via indirect investment. It is the more common way for buying shares. This can be done via an open-ended fund, such as an Oeic or unit trust, which typically includes shares of 50 to 100 companies. Investment trust is another way for investing in shares. Investors buys shares in the close-end company which is listed on an index in the same way as a company.

These investment vehicles can be accessed through a broker or fund platform, through an asset manager or stocks and shares Isa.

The key takeaway for investment is shares is that investments should be held for at least five years to offset the downturns in the stock market, however, they should be reviewed regularly.