Savers know it’s important to make their money work hard. Investing money in the stock market offers opportunity for improved returns that are likely to exceed any interest rate a high street bank can offer. Historically speaking, stock market gains far outweigh cash.
Here are five things you need to know about stock market investing.
1. Be comfortable with risk before investing
If you are to give your money the chance of higher returns – than cash accounts – then make sure you are happy with the level of risk.
Stock market investments can be a bit of a roller coaster which is fine, unless that is out of line with your expectations.
Ideally you should think about what you can afford to lose. Before investing, think about how you would cope if your investments fell by 10%, 30% or 50%, then you can set a limit for yourself.
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2. Choose your investments wisely
You may want to seek advice when it comes to choosing where to place your money if you do not have the time to regularly research and manage investments – or the confidence to navigate the market.
Using a fund supermarket you can put in place a series of investments without the help, or cost, of an adviser. Fund supermarkets, also known as platforms or discount fund brokers, allow you to buy, sell and manage shares and funds from companies and many different providers. You can also use a share dealing service.
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3. Choose the right time to invest
A much-favoured trick by experts is drip-feeding your money into the market, which removes the need to get the timing right.
By saving a monthly amount into your investment portfolio you can cash in regardless of how the market is performing.
It smooths out the highs and lows in share prices. When they go up, the value of your stocks rise, and when they go down your next contribution buys more. This is known as “pound-cost averaging.
Plus, buying stocks at a lower price means you get a higher return when the market swings back up.
Read Annie Shaw's guide to common investment mistakes.
4. Spread the investment risk
The “asset allocation” or in other words, how you divide your money between shares, cash, bonds fixed interest securities or property is crucial.
A common mistake investors make is not diversifying enough: as a result, some have been burnt by having all their eggs in one basket – in other words, all their money in one asset class. The idea of diversification is that if one investment has a bad time you will always have others that will ideally not be suffering, so they act as a counter-balance.
5. Investing in stocks or shares
Being a shareholder is a popular pastime and if you are lucky you could make a substantial gain - but you could equally make losses. This route is riskier than buying a fund which spreads the risk by investing in lots of different companies.
A fund will invest in lots of different companies so if one fails, you don’t lose out to such a large degree.
And here's a top tip for savers:
Keep your money away from the taxman to enhance returns – that way you can keep every penny of the gains. Who wants to give away any more of their hard earned cash than necessary to HM Revenue & Customs?
Savers can shelter a mixture of cash and stocks and shares up to £15,000 in an ISA, which does not need to be declared on a tax return.
How to choose an ISA...
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