So you’ve finally made it far enough down the personal finance rabbit hole that you want to start investing. Congratulations, it’s exciting to make that first jump into the stock market. In this article, we are going to take you through everything you need to know about investing in the stock market in the UK.
I still remember purchasing my first stock over 8 years ago. The first time can be a daunting process but hopefully, after reading this guide, you will understand the basics of investing and make your first investment.
What is Investing
At its core, investing is the act of putting your money to work for you. Rather than letting it sit idle in a bank account, you’re allocating it to assets that can potentially grow in value over time.
In the context of the stock market, investing means buying shares (or “stocks”) in companies. By owning these shares, you’re essentially buying a small piece of that company, and as the company performs well and grows, so does the value of your piece.
Imagine you and your friends decide to open a lemonade stand. Instead of doing all the work yourself, you put up some of the money to buy the lemons, sugar, and cups, while your friends handle the making and selling of the lemonade.
Your money helps get the business off the ground, and in return, you get a portion of the profits. If the lemonade stand does well, the return on your contribution (investment) increases. If the lemonade stand does poorly, the value of your contribution might decrease.
Similarly, when you invest in the stock market, you’re buying a ‘slice’ of a company (or multiple companies). If the company does well, your slice becomes more valuable, and if it doesn’t, its value may decrease.
Why You Should Invest
Historically, investing in the S&P 500 Index (500 of the largest publicly traded companies in the US) has produced average returns of approximately 10% per year. Since the S&P 500’s inception in 1957 through Dec 31 2022 it has returned an average of 10.15% per year.
That may not sound that impressive. 10% in a single year probably won’t make much of a difference in your life. However, over a long period of time, 10% yearly returns will compound massively.
Take a look at the chart below. This chart shows the returns that just £300 per month invested at 10% can generate over 35 years.
After 35 years you would have over £1,012,991 while only having deposited £129,600 of your own money. Over £1 Million comes from your investing returns. So, if you start investing at 25 years old, you would become a millionaire by 60, simply investing £300 per month.
That right there, is the reason I diligently invest every single month into the stock market. Use our compound interest calculator to calculate how much your monthly contributions could turn into.
Now, it’s important to note that these indexes do go down as well as up. While the average returns have been 10% per year, some years are massive down years. For example, during the 2008 financial crisis, the S&P 500 dropped 46.13% from October 2007 to March 2009. However, after just a few years it returned to all-time highs and continued to climb more than 250% from 2009 to 2019.
If you can stomach the ups and downs of the market, it’s an amazing vehicle for generating long-term wealth.
What Is The Stock Market
The stock market is like a giant marketplace, but instead of buying and selling things like fruits or clothes, people buy and sell pieces of companies, known as “shares” or “stocks”. When you buy a stock, you own a small part of that company. If the company does well, the value of your stock might go up, and if it doesn’t, the value might go down.
Just like a regular market, prices can change based on supply and demand. If lots of people want a particular stock, its price will likely go up. If many people are trying to sell a stock, its price might go down. In essence, the stock market is where investors come together to buy and sell their shares, aiming to make money from the businesses they believe in.
How Much Money Do You Need To Start Investing
Many people think you need a large amount of money to start investing. This simply isn’t true. While it won’t get you far, many investment platforms have deposit minimums of £1. So, technically anyone can get started investing. Certain platforms will have higher minimums required for your first deposit.
You may think you need thousands to get started but that’s just not true. Getting into the habit of investing at an early age is extremely valuable even if it is only in small amounts.
For example, if you start investing £100 per month at 18, your portfolio would be worth £12,095 at 25 and £27,643 at 30 years old based on a 10% return. If you continue investing only £100 per month until you are 65, you will have over £1.2M for retirement. Over your lifetime, you only had to invest £56,400 of your own money.
Compare this to someone who starts investing at 35 years old. They would have to deposit £550 per month to reach £1.2M by 65 years old at a 10% return. They would also have contributed £198,000 of their own money.
That’s why investing early even with small amounts of money is so important.
Ensure You’re In A Solid Financial Position Before Investing
Before you start investing, you should have a solid financial base. This means you should have no debts apart from a mortgage and possibly a small car loan. You should also have an emergency fund worth 6 months of necessary expenses in a high-interest savings account.
I would recommend reading our article on the 7 Steps to Financial Freedom to learn more about each of these steps. Once you have the basics covered you can start investing monthly.
What Platform Should You Use To Invest
When it comes to investing there are a lot of platforms out there on the market. There are really two main types of platforms.
Self Managed Platforms
Self-managed apps allow you to invest in a wide range of stocks, ETFs and more. You have full control over where your money is invested and you are making your own investment choices. Trading 212 and Hargreaves Lansdown are two of the best options for this. They have a very large range of assets available to invest in.
If you plan to manage your own portfolio and invest in individual companies, you will need to use a self-managed app.
Managed Platforms
Managed apps are fairly new to the market. They are sometimes referred to as “Digital Wealth Advisors” or “Robo-advisors“. These apps have managed portfolios which are managed by their investment experts. Usually when signing up to the app you will be asked a series of questions to determine your level of risk. You will then be assigned a portfolio that fits your risk tolerance.
Once you choose a portfolio, investing becomes passive. You don’t have active decisions on which stocks to buy or sell or how to reallocate assets. This makes it the perfect solution for someone who knows they should be investing but doesn’t want to spend hours per week trying to choose their own stocks.
Managed apps usually have slightly higher fees but that’s the premium you pay to have someone else manage your money. Moneyfarm and Invest Engine are two great platforms that have managed portfolio options. This is the route I would take if I wasn’t confident picking my own stocks but wanted to get started with investing.
Best Investing App For Beginners
Below are 5 apps we highly recommend for beginners. For more information check out our full breakdown on the 5 Best Investment apps.
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Best Zero Commission Platform
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Best Managed Platform
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Most Trustworthy Platform
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Cheapest Provider For ETF Investing
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Best For Trading
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Type:
Self Managed
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Type:
Managed
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Type:
Self Managed
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Type:
Self Managed/Managed
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Type:
Self Managed
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4.8
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4.0
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4.5
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5.0
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3.5
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Minimum Deposit:
£1
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Minimum Deposit:
£500
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Minimum Deposit:
£1
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Minimum Deposit:
£100
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Minimum Deposit:
$10
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What Type Of Investment Account Should Beginners Use
When setting up an account with any of the brokers above, you will have a choice of account types to choose from. The main account types are ISAs, Pensions (SIPP) and General Investment accounts.
Each of these accounts has its own benefits and drawbacks for certain situations.
General Investment Account
This is a general investment account with no tax benefits. You can buy and sell shares as you please but will have to pay capital gains tax on any profit over your yearly allowance of £6,000.
ISA
This account allows you to invest up to £20,000 per year without paying any tax on your profits, even when you withdraw. You pay no tax on capital gains, income, or dividends. Remember you can only have £20,000 spread across multiple ISAs in a single year. You can access this money at any time without any penalties.
Pension
You can manage your Private Pension through a SIPP. Any money added to your pension will get a 25% bonus from the government, potentially more if you’re a higher-rate taxpayer. You can then manage your own pension investments.
What Should You Choose?
For most people, an ISA will be the best option as it allows you to invest for the long term tax-free while also having the flexibility of withdrawing your money if you need it. If your ISA is maxed out for the year you can continue to invest in a General Investment Account.
If you don’t plan on needing the money until retirement a pension account may be a good option. The government will top up any contributions you make with a 20% tax-relief bonus. If you need to withdraw from your pension early you could face paying 55% tax on the withdrawals.
In my opinion, one of the best options is to max out your workplace pension to the matched bonus from your employer and then invest the rest in an ISA.
What Should Beginners Invest In
While I can’t give financial advice, I can tell you what my opinion is. For most people investing in individual stocks will underperform investing in a simple index fund. For example, you can use an S&P 500 tracker fund to invest in the S&P 500. These funds have much lower fees than an actively managed fund. Another shocking statistic is that 84% of fund managers underperform benchmark indexes within 5 years.
If people who spend their lives trying to beat the market can’t do it, who am I to think I can? That’s why for most people I believe the best strategy is simply investing in diversified index funds rather than picking individual stocks.
Some low-cost Index Funds are:
- Fidelity Index World (Accumulation)
- iShare Core S&P 500
- Vanguard Total Stock Market ETF (VTI)
Personally, I have around 70% of my portfolio in index funds and the rest in individual stocks. I spend a lot of time researching companies and stocks and enjoy doing it. Most people don’t. It also adds volatility to your portfolio which you may not like if you’re a passive investor.
That’s why I like the Robo-advisor market for investors who want to be extremely passive with their investing. These platforms will help you find a risk level that is right for you and invest for you.
How To Invest In Stocks In The UK
If you’re ready to start investing, you can follow the steps below to get started:
- Decide on your investment style – Are you going to be completely passive and let a Robo-advisor manage your money or do you want to invest in individual stocks and ETF’s. Most beginners will want to invest in index funds or ETFs to get some level of diversification in their portfolio without having to build it themselves. If you want to invest completely passively you may just want to invest with a Robo-advisor who manages your investments for you.
- Choose an Investment Platform – You now need to choose an investment platform to sign up to. Here are my recommendations below:
- Individual Stocks – Trading 212
- Funds Only – Invest Engine
- Robo-advisor Managed Portfolio – Moneyfarm
- Choose an investment account type – When you sign up for a platform, you will need to choose an account type. I have outlined each of the different account types above. This will include Stocks and Shares ISAs, General Investment accounts, and pensions. While everyone’s situation is different an ISA is a great tax-free investment vehicle for a lot of investors.
- Choose Your Investments – Now your account is set up, it’s time to make your first investment. You can choose what you want to invest in depending on the platform of your choice. This may be buying your first share of Apple or investing in the Fidelity World Index.
Congratulations, you have now successfully made your first investment. Hopefully, it is the first of a long rewarding process. Remember, investing is a long-term process and stocks can go down as well as up.
Investing Fees
When you are investing through a broker there will be fees involved. In the modern investing era, we now have many zero-commission trading platforms that make investing much more affordable and accessible to the masses.
There are a number of different fees you may face when investing:
Trading Charge – Some platforms will charge you every time you make a trade. For example, Hargreaves Lansdown charges £11.95 for each trade. Many platforms such as Trading 212 now have zero trading charges.
Platform Fees – Some platforms will charge an annual platform fee for using their service. This is usually charged as a percentage of your portfolio ranging from 0.2% to 1% depending on the broker. You will find platform fees on a lot of legacy brokers and robo-advisor platforms.
Annual Fund Management Fees – These fees are also known as an Ongoing Charges Figure (OCF) or Total Expense Ratio (TER). This is the fee paid directly to fund managers who manage your funds. If you invest in a fund it will have its own charges separate from the platform you invest with. The fee is usually automatically deducted from your investment holdings.
FX Fees – If you are in the UK and invest in US stocks, you will have to pay exchange fees when you buy and sell. When buying US stocks you have to first convert your GBP to USD and then make the purchase (automatically done by the brokerage). The same happens when you sell. Brokers will do this automatically but charge you a fee ranging from 0.15% to 0.65% on some platforms. Trading 212 has some of the cheapest FX rates at 0.15%.
Market Spread – This is also known as a transaction cost. It’s the difference between the buy and sell prices of an asset such as a fund or ETF.
Is Investing Guaranteed To Make Money?
Investing is not guaranteed to make money. While you can make money, you can also lose money. You have probably seen the disclaimer: “Past returns are not indicative of future results”.
When investing you should be thinking with a long-term mindset, especially when investing in broad-market index funds. Below you can see the returns for the past 27 years of the S&P 500 with Dividends re-invested. As you can see, some years produced 37% returns while others dropped 36%. However, over this 28-year period, the average return was 9.84% per year.
| Year | Annual Returns With Dividends |
|---|---|
| 1995 | 37.20% |
| 1996 | 22.68% |
| 1997 | 33.10% |
| 1998 | 28.34% |
| 1999 | 20.89% |
| 2000 | -9.03% |
| 2001 | -11.85% |
| 2002 | -21.97% |
| 2003 | 28.36% |
| 2004 | 10.74% |
| 2005 | 4.83% |
| 2006 | 15.61% |
| 2007 | 5.48% |
| 2008 | -36.55 |
| 2009 | 25.94% |
| 2010 | 14.82% |
| 2011 | 2.10% |
| 2012 | 15.89% |
| 2013 | 32.15% |
| 2014 | 13.52% |
| 2015 | 1.38% |
| 2016 | 11.77 |
| 2017 | 21.61 |
| 2018 | -4.23 |
| 2019 | 31.21% |
| 2020 | 18.02% |
| 2021 | 28.47% |
| 2022 | -18.01% |
So, even though some years will perform poorly, others will massively outperform. Investing monthly into the market over long periods of time has historically generated great returns.
Tips For Investing In The Stock Market
Below are some simple tips to keep in mind when you are investing in the stock market:
- Start Early and Invest Regularly: The power of compounding can make a big difference over time. Even small amounts invested regularly can grow substantially.
- Set Clear Goals: Understand why you’re investing. Whether it’s for retirement, buying a home, or other financial goals, having a clear vision helps in making informed decisions.
- Diversify: Don’t put all your eggs in one basket. Spread your investments across different asset classes and sectors.
- Educate Yourself: Stay informed about the financial world, investment strategies, and changes in regulations. Consider reading financial news, books, or taking online courses.
- Understand Your Risk Tolerance: Everyone has a different appetite for risk. Evaluate yours and choose investments accordingly.
- Avoid Emotional Decisions: The stock market can be volatile. Resist the urge to panic-sell during downturns or chase highs impulsively.
- Use Tax-Efficient Investment Vehicles: Make use of ISAs (Individual Savings Accounts) and SIPPs (Self-Invested Personal Pensions) to shield your investments from taxes.
- Review Regularly: Revisit your investment portfolio at least once a year to ensure it aligns with your goals and risk tolerance.
- Watch the Fees: Be aware of transaction fees, management fees, and other charges that can eat into your returns. Always read the fine print.
- Stay Patient and Think Long-Term: Investing is not about getting rich quick. It’s about building wealth over time. Stick to your strategy and avoid frequent trading.
- Emergency Savings First: Before diving deep into investments, ensure you have an emergency fund in place, typically 3-6 months of expenses.
- Beware of ‘Too Good to Be True’: If something sounds too good to be true, it probably is. Always research and think critically about investment opportunities presented to you.
Final Thoughts
Investing can be a powerful way to build wealth over long periods of time. However, many people approach investing as more of a gamble rather than investing in a business. If you’re willing to be patient, you can invest in low-risk index funds for long periods of time and generate massive returns through the power of compound interest. For most people, this is the best way to start investing. Avoid “hyped-up penny stocks” and other high-risk assets that have a high chance of going to zero.
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