We know the stock market is where shares are bought and sold, but we may have only a vague idea of how it works.
It is where investment wealth is built, and even if we donโt buy and sell shares ourselves, it is where our pension funds are often invested.
Understanding stock market basics can help us make informed decisions about our money.
What is the stock market?
Markets bring together goods to be traded with buyers and sellers. In the case of the stock market or stock exchange, those things goods are shares or sometimes other financial assets, such as bonds.
Shares represent a portion of ownership in a company. Holding share gives you certain rights, such as voting on company decisions (depending on the type of shares) and the potential to receive dividends, which are a share of the companyโs profits.
You can buy them on the stock market.
You can buy them when the company issues them. This is known as a โflotationโ, โlistingโ or โIPOโ (initial public offering). Raising money from investors by the company is called the โprimary marketโ.
But most stock market activity is on the โsecondary marketโ, where shares are traded after they have been floated, and the issuing company is not involved. Fortunes can be made (or lost) as the prices of shares fluctuate with market forces.
How does the stock market work?
A stock market such as the London Stock Exchange has a system, and regulations developed over centuries to help ensure safe and efficient transfer of shares from one investor to another.
Most actual trading is done by stockbrokers. These act as middlemen, buying and selling on behalf of clients. The price at which the broker will buy a particular stock will be lower than the price he will sell at, so that there is a profit margin. These two prices, called โbidโ and โofferโ are shown on trading apps and the London Stock Exchange website.
Once a sale is agreed, the stock is transferred to its new owner and the money paid by the buyer reaches the seller a few days later. The registrar of the company whose stock was sold is also informed so that the share register can be updated.
You will need an account with a stockbroker if you want to start share investment. These can be set up as a tax-efficient shelter such as a stocks and shares ISA or self-invested private pension (SIPP) or be a plain vanilla account with no protection from tax.
There are other simple ways to invest in the stock market.
You could use the investment service many banks offer. You will be offered a small range of investment funds, with help to identify the one suitable for you.
Similar services are available from online investment platforms with readymade portfolios designed for people with various needs and appetite for risk. These are often called โrobo advisersโ.
If you want to buy or sell individual shares, you will need a stockbroker, or trading app. If you donโt feel comfortable making trading decisions but do want to get the potential of share investment behind your wealth creation plans, you could consider fund investment.
A managed fund run by a professional stock picker gives you a diversified basket of shares, and professional management skills.
Index funds, also called trackers, tracker funds or passive funds, make no attempt to invest in winning stocks or avoid losing ones. Instead, they simply spread your money over a range of stocks found in a particular stock market index.
How can you get started on the stock market?
If stock market investment appeals to you, investing though a fund could be the easiest way to start. You donโt need to be an expert on the outlook for individual shares, and you can even invest on a monthly, rather than lump sum basis.
It means that investment can be as simple as paying into a savings account, but with the potential for rather more exciting returns.
Of course, some expert knowledge could still be valuable. Funds are invested with different objectives, and finding the one that is appropriate for your needs can be a challenge in itself.
For the advice you need, on finding a suitable investment fund or on any other aspect of stock market investment, simply call us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to any suitable investment strategy you should seek independent financial advice before embarking on any course of action.
The value of investments can go down as well as up, and you may not get back the amount you originally invested. Past performance is not a reliable indicator of future results.
When investing your capital is at risk.
Tax treatment depends on individual circumstances and may be subject to change in the future.
