I’m going to give you a simple explanation of what the stock market is:
The stock market is a place where you can buy and sell financial assets, such as company stocks, bonds and mutual funds
The stock market allows people to buy and sell securities. The place where these transactions happen is known as stock exchange.
What are these securities? They are shares of companies, which are bought and sold every day.
These shares represent small parts of the company.
When you buy a stock you become an owner of the company.
You’re a shareholder 🙂
The stock market is made of companies, and the share price of these companies goes up or down depending on how well the companies do.
If the company makes things properly, its sales go up, its profits go up, and the share price of the company will go up as well.
That’s why the stock market represents the economy. If the economy does well, the stock market will increase its value.
What are the primary and secondary markets?
The primary market is a basic concept of the stock market, but it is also not known by most investors.
When a company decides to start trading in the stock market, it issues its shares for the first time, and these are traded on a financial market.
The market in which these newly created shares are traded is called the primary market.
The issuance of shares on the primary market can be made through a public offering or a private placement, restricted to a particular group of investors
Once these shares have been purchased, they begin to be traded on the secondary market.
From that moment onwards, the trading of these shares is carried out on the secondary market. It is a resale market, in which liquidity is provided to the securities.
If the secondary market did not exist, investors would not buy the securities of the companies on the primary market, since they would have no one to sell these securities to.
The secondary market is what is known as the stock market
In UK the main stock exchange is located in London.
What is the Wall Street stock market?
The best-known stock exchange is located in New York, popularly known by the name Wall Street.
Wall Street stock exchange is the same as the UK stock exchange, it is a place where stocks are bought and sold.
There are many stock exchanges in the world, all developed countries have their own stock market, where companies in that country are quoted and traded.
When you invest, you’re looking to generate income, thus increasing your wealth.
As it happens with any investment product, investing money in the stock market is risky. The value of your investments can go down, and in the end you can get back less capital than you had at the beginning.
But if you know how to invest in the stock market, you can reduce your risk and increase your chances of making money.
In order to do that it is important not to pay attention to the news. It is better to discard all the advises and tips that come from the television and the radio.
I remember late last year, in 2018, I saw a story about all the billions (yes, with b) that Warren Buffett had lost due to Apple’s collapse in the stock market. Apple’s share price had dropped by 25% in 3 months.
Let me explain it to you in detail.
Do not pay attention to financial newsabout stocks
Berkshire Hattaway, the company where Warren Buffett is CEO, held $50 billion in Apple’s shares. Since the stock had dropped by 25%, Warren Buffett had “lost” $12.5 billion.
In the story I read, they said nothing about the fact that the entire U.S. market had fallen 20%, very similar to the variation in the value of Apple’s shares.
Nor did they say anything about the fact that Warren Buffett had achieved an annual return of 20% by investing in stocks for the previous 40 years.
If he is known as the greatest investor of all time, there must be a reason, right? 🙂
What happened next? In 2019 Apple’s shares have gone up 60%. That means Warren Buffett has earned 25 billion (yes, with b).
The person who read the news about all the billions that Warren Buffett had lost got most likely scared, and thought investing money in the stock market was too risky.
That’s normal, I would think the same thing too. From a young age we are taught to stay in a safe zone, to reduce the risks to the minimmum.
The stock market is a place where you can lose a lot of money, therefore it must be bad!
Well, you can lose money investing in stocks, yes, I fully agree. But you can also earn a lot of money investing in the stock market.
It all depends on how you invest in the stock market, your investment strategy, and many other things I’m going to tell you now.
Are you ready? All right, let’s go!
How to invest in stocks
In order to start investing in stocks, you need to have capital (= money) to invest it. In order to accumulate capital, you need to save first.
Saving is critical to be able to invest in stocks. I am not going to go into detail now. The key message is:
You need to save to start investing in stocks. Always get out of debt first, and stay away from credit cards.
Some years ago you had to go physically to the stock exchange to buy and sell shares.
Good thing internet has come to make our lives easier!
Today the brokers offer their services online, where you have access to all the investment products of the stock market.
You might be wondering now: how can I invest in stocks without a brokerage account?
The answer is you can’t. To trade on the stock exchange you need a license from the Financial Conduct Authority (FCA).
You can bypass the broker by using a transfer agent, but it will also have its costs.
The best option is to use a broker that gives you a good service and charges you low fees, like Degiro does.
Can I start investing in stocks with little money?
This is a question we all ask ourselves when we start reading about investing in stocks and shares.
When you don’t know anything about the stock market, it’s very common to think that to make money with stocks you need to invest a lot of capital.
Well, I’m glad to be able to tell you that you don’t need a minimum capital to invest in the stock market. You can start investing in stocks with as little as 5 pounds. Yes, with 5 pounds!
However, it is important to keep the fees in mind. When you buy shares you normally pay a fixed commission, plus a fee proportional to the capital you invest.
Because of this, if you invest a very low amount of money (such as 5 pounds), it may not be worth it.
Depending on the investment product, the recommended minimum will be a little more or a little less.
You only need 50 pounds to start investing in stocks if you follow one of the strategies that I recommend
Finally, I would like you to repeat the idea that anyone can make money investing in stocks.
If you follow a good investment strategy -like the ones I explain you below- and you invest for the long run, you’re likely to get a good return on your investments.
How to learn on investing in stocks
Once you know the basics about the stock market, it’s time to learn how to invest in stocks and shares.
It’s not easy to know where to invest your money, especially when you are starting out in the wonderful (and confusing) world of the stock market
I remember the first months I spent looking online for information about stocks, it wasn’t easy.
There was too much information, and a lot of it was contradictory. That’s what frustrated me the most.
I am a person with ease to follow an established plan. I knew I just needed a strategy to invest in stocks that really worked.
At that time I spent some time reading websites about investing in the short term, in the long term, in fixed income, in equities, based on technical analysis or fundamental analysis, in index funds and mutual funds, etc…
I also dived into forums, and read about economics and investments in the newspapers.
After a few weeks I was still confused, I didn’t quite know what strategy to follow. That’s when I started reading a book about the stock market, and everything changed.
Books to learn how to invest in the stock market
The best advice I can give you is the following:
To learn how to invest in stocks you must read books of the best investors of all time
You don’t need to take a course named “how to invest in the stock market for beginners”.
Believe me, you just need to read the right books.
The books I recommend to educate yourself on the stock market are the following ones:
The intelligent investor – Benjamin Graham
One up on Wall Street – Peter Lynch
Beating the street – Peter Lynch
If you read these three books, your view on the stock market will change forever.
You’ll be convinced that making money on the stock market is easy if you take the right steps.
Please take your time to read them thoroughly. They are dense, with a lot of information and market data.
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities
In summary, your money is added to the money of other investors, and the capital is managed by a team of professional investors that run the mutual fund.
One of the great advantages of investment funds is their taxation.
Taxes on investing in stocks: capital gains
First the good news: if you invest in mutual funds through your Stocks and Shares ISA accounts you will not have to pay taxes. Yujuuu!
If the capital gains are obtained outside of ISA accounts, you will be liable for taxes. On year 2019-2020 the annual tax-free allowance for capital gains is 12,000£.
This means that you can have up to 12,000£ in capital gains on non-ISA accounts, and you will not pay any tax on them.
The capital gains taxes on UK are wonderful! 🙂
If you have more than 12,000£s in capital gains on non-ISA accounts, the mutual funds have even more advantages to offer you.
Taxes on mutual funds
You can use your stocks and shares ISA account to invest in mutual funds, so you can get the tax-free benefits of the ISAs accounts.
The taxation of investment funds is very attractive to the investor. As it happens with all the investment products in the stock market, you only pay taxes when you have capital gains (let’s forget about the dividends for now).
But mutual funds have an additional advantage, which is that you can transfer your capital from one fund to another without having to pay taxes.
You only pay taxes when you decide to sell the fund and get your money back.
This is an advantage over stocks, because when you want to sell one stock to buy another, you can’t transfer the stock.
You have to sell company A and buy company B. If you made a profit by selling Company A, you’ll have to pay tax on it.
If we want to sell fund A and buy the fund B, instead of selling and buying it (if we do this we would pay taxes), we can transfer fund A to B. By transferring the funds we are delaying the payment of income taxes.
Delaying the payment of taxes allows the capital to generate more profits, thanks to our friend the compound interest.
As you can see, the taxation on mutual funds is very good, since taxes are delayed.
Not bad at all right? 🙂
Things like this make mutual funds the most popular investing products.
Types of mutual funds
There are three main types of mutual funds:
When you are going to start investing in mutual funds, it is important to have a clear idea about the following things:
Risk you’re willing to take
Time you want to leave the money invested
Fees the fund charges you
Answering above questions will help you choosing the best funds to invest in.
Fixed income mutual funds
Fixed income is a type of investment that consists of financial assets where the issuer is required to make payments in a pre-established amount and time period.
Both the amount and the time period are fixed, that’s why it is called fixed income.
Due to the low interest rates we have in all the world economies, fixed income mutual funds currently do not give returns above 2%.
If we take into account that the annual fee is usually 1%, the net return we get is 1%.
I believe that when you think about making money investing in stocks, 1% annual return isn’t exactly what you had in mind, is it?
Don’t worry, there are better things to come 🙂
Guaranteed mutual funds
There are other funds that are also quite popular. One of them are guaranteed funds.
I imagine you’re asking yourself this question: what is a guaranteed investment fund?
Guaranteed mutual funds are the funds that guarantee fully or partially the invested capital, as well as a minimum return, for a period agreed when contracting the fund.
This is the expected performance based on certain conditions, such as the behaviour of a stock index, for example the FTSE100.
As a guaranteed investment, the risk is lower, but the return is also lower.
A typical return on a guaranteed investment fund is 2-3%. If we take into account that fees are usually 1.5%, we have a net return of roughly 1%.
The returns are again too low, right? Don’t worry, now comes the good stuff!
Equity mutual funds
Equities are a type of investment where the return is uncertain. Profitability is not guaranteed, neither is the return of invested capital.
In equities, neither returns nor capital are ensured.
It is important to note that the yield you can get on equities is much higher than on fixed income assets.
For example, let’s look at the S&P500 index returns. This index contains the 500 largest companies in the United States. It’s been operating for 150 years.
Can you try to guess the annual return it has achieved during this time?
The S&P500 has achieved an annual return of 9%!
Can you imagine what you could do with a 9% return per year? Let me tell you: many things!!
Mutual funds can be Open-end funds and Closed-end funds. Closed-end funds are also known as investment trusts.
The main difference between Open-end funds and investment trusts is that the investment trusts have a fix number of shares. If an investor wants to buy shares of an investment trust, it needs to find someone willing to sell a share of that investment trust.
On the Open-end funds, which are the most common funds, the investor can always buy shares of the fund. The fund manager will use that money to buy more financial assets.
Among the equity investment funds, there is a type of funds that are my favourites: the index funds.
I’m sure you’ve heard of index funds, but you’re not quite sure what they are. Don’t worry, read on and you’ll find out!
There are many ways to invest in the stock market, almost as many as days has the year (or even more).
The most common are:
Intra-day trading: buy and sell shares in very short periods of time, always within the same day.
Long-term investing: the investor invests not expecting to recover the capital soon.
Technical analysis: predict future price movements of financial assets based on trend graphs and mathematical indicators.
Fundamental analysis: try to find out the value of the company and compare it with its share price to know if it is a good purchase. It focuses on the asset value.
If you want to read more about these strategies, go to this article where I cover them in detail.
Depending on the strategy you prefer and your circumstances, there are many investment products that you can buy:
As you can see, there are many options.
I recommend investing in mutual funds, index funds and individual stocks.
Let’s take a closer look at them.
Best stocks to invest in
To know which stock market investment product is best for you, it’s important to know its advantages and disadvantages.
I believe that the most important points to take into acount are the risk, the time needed and the fees.
When you invest in stocks, you have to know that the price will fluctuate, going up and down. I always recommend investing in the stock market for long term, because you reduce the risks associated with volatility and increase the likelihood of having higher returns.
Index funds contain many companies. They usually represent the economy of an entire sector or country. There are even funds containing companies from all the countries of the world.
With so many companies, the risk of a big drop in value is low, since if a company goes bankrupt, it will have a small impact on the value of the fund.
Investment funds have fewer companies, typically around 20-30. This increases your risk, but also increases the chances of obtaining higher returns.
If you buy your own shares, say 5 companies, you’re taking a lot of risk. If one of them has problems your portfolio value will be highly impacted.
But if your companies do well, your profitability will be very high.
Effort and time required
It is important to take into account the time and effort that must be devoted to each investment product.
Index funds are very comfortable, since you only have to put money into them periodically, and that’s it.
Investment funds require more effort. You have to do an analysis of which ones have had the best results in recent years, and you also have to periodically review their behavior.
Picking individual stocks on your own is the most complex task, and therefore you need to spend a lot of time on it. Share dealing is not an easy task, and it has bigger risks than investing in index funds and mutual funds.
You need to review companies, analyse their financial status, review their annual financial reports, and see their expectations for the future.
To carry out this study you need to educate yourself properly, and you need time, a lot of time to do the analysis well.
Fees on the stock market
It is important to know the costs of each investment product.
Index funds usually have the lowest fees.
For example, the Vanguard S&P500 fund has a commission of 0.10% per year..
Mutual funds have higher fees, so it’s important to review their annual cost well, and the returns we expect to get.
Picking individual stocks does not have an additional cost, since you are the professional investor who selects the companies whose price you expect to go up in the future.
The only costs you have are the costs of buying and selling the shares.
To succeed on the stock market, following always your strategy is just as important as the strategy itself.
It’s no use having an investment strategy, if you’re not able to apply it and follow its guidelines correctly.
Of all the stock market investment strategies, the Dollar-Cost Averaging is the one I like the most.
I can imagine what you’re thinking, Gonzalo, what does that mean?
Don’t worry, I’ll tell you 🙂
Dollar-cost averaging strategy
The dollar-cost averaging strategy is also known by DCA.
The strategy consists of dividing the amount of money you will spend over a period of time in periodic purchases of the investment product.
Investment purchases must be made periodically, regardless of the price variation.
The aim of this strategy is to reduce the volatility in the price, and to avoid falling into the attempt to time the market.
Timing the market (or market timing) means investing when the price is the most suitable. And it’s very dangerous.
By always trying to invest when the price is the best, we can delay the time of purchase, no longer profiting from market rises.
Dollar-Cost averaging strategy removes the emotion from the equation, turning investing into something mechanical that needs to be done periodically.
An example of this strategy would be to invest 1000 pounds every month in an Index Fund that mirrors the S&P500.
This is a strategy that I recommend, since it should obtain a 10% annual return.
There must be a reason why this strategy is recommended by large investors like Warren Buffett and Benjamin Graham.
Another very popular method is the dividend strategy. Let’s see what it is about!
One of the most famous strategies for investing in stocks is the dividend strategy. But do you know what dividends are?
Dividends are a part of the profits of the company that are payed to the shareholders
If you have shares of companies that pay dividends, you will receive part of the profits of that company.
There are companies that pay dividends and there are others that don’t. Some companies pay every year up to 15% dividends on the share price.
This means you can get a 15% return each year just by owning that stock
The dividend strategy is to buy shares of companies that have been paying dividends for many years.
Since they have been paying dividends for a long time, they will most likely continue to do so in the future.
The goal of the dividend strategy is to have passive income periodically.