Investing in stocks and shares is likely the most common starting point for a beginner investor looking get exposure to the stock market. We'll cover a little bit of background information on stocks, how they work and where they trade, to help you become a more informed investor. Let's dive in to a beginners guide to stocks and shares.
What is a stock or share?
Shares are a unit of equity that represents ownership of a company. When investors purchase shares, they are buying a portion of that company. Companies issue shares as a means of raising capital to fund their operations, expansion, and other financial needs. They’re often traded on stock exchanges, and their prices can fluctuate based on various factors, including the company's performance, market sentiment, economic conditions, and industry trends. Investing in shares is probably the most common way for individuals to participate in the financial markets, often in an attempt to build long-term wealth.
Stocks vs Shares
Stocks and shares are often used interchangeably, and are largely the same thing, but there is a subtle difference in their meanings. Stocks represent the broader concept of ownership in one or more companies, while the term shares refers to the individual units that make up an investor's specific ownership. In everyday language, people might say they own stocks or shares to mean the same thing. It’s also somewhat common to hear the term stocks related more to US-listed companies, and shares for UK-listed companies.
Where are shares traded?
Most commonly, shares are traded on stock exchanges, which are organised financial markets where buyers and sellers come together to trade shares of publicly listed companies. Some of the most well-known stock exchanges globally include the London Stock Exchange (LSE), the New York Stock Exchange (NYSE), the NASDAQ (also in the US), and the Tokyo Stock Exchange (TSE).
What are the different types of shares?
There are two main types of shares, common and preferred. Preferred shares have no voting rights attached but are paid dividends before common shareholders. Common shareholders on the other hand have voting rights.
Shares can be also categorised according to their industry sector, such as:
Technology: Software and hardware providers like Apple (AAPL), Meta (META), and Microsoft (MSF)
Financial: Banking, insurance, and financial service providers like Barclays (BARC), HSBC (HSBA), and Wells Fargo (WFC)
Healthcare: Healthcare providers, manufacturers, and suppliers like GSK (GSK), Pfizer (PFE) and Moderna (MRNA).
Automotive: Car makers and manufacturers like Tesla (TSLA), Ford (F), and Toyota (TYT)
There's an extensive list of themes and industry sectors as well as the above, including utilities, consumer goods, hotels, aviation, defence, and much more.
How do investors make money from shares?
There are two ways investors can make a return on investment by owning shares. The first is through price appreciation, whereby the share price itself increases in value over time. The second is through dividends, which are cash distributions of company profits, paid out by dividend-paying companies. Reinvesting dividends and investing on a long time horizon helps investors benefit from something called compound interest.
What is compound interest in shares?
Compound interest is the interest earned on both the original investment and the accumulated interest. In the context of investing, compounding is achieved by reinvesting earnings, such as dividends, to increase the overall investment amount and enable further returns over time. For instance, if you invest £1000 with a 6% annual return, the £60 earned in the first year is added to your investment, resulting in a larger pot of £1060. The subsequent interest is then calculated on this new amount, fostering a compounding effect. By continuously reinvesting interest, the investment grows exponentially. In a five-year scenario, the initial £1000 grows to £1338.23, with £338.23 attributed to compounded interest alone.
This compounding gains momentum over time as more earnings are reinvested, illustrating the power of allowing investments to generate returns on both the principal and accumulated interest.
How are share prices determined?
Simply put, share prices are determined by supply and demand. If more people want to buy the share, than the number of shares available, the share price will go up. On the reverse, if more people want to sell their shares, the price of the share will fall.
What factors can impact share prices?
Several factors can impact a share’s price, ultimately by affecting supply and demand.
Financial performance - sometimes referred to as fundamentals, investors tend to look at a company’s financial position both now and forecasts for the future. This includes information like the company’s revenue, and profitability, which are shared publicly in periodic financial reports.
News and press - Investors around the world often keep up to date with the latest news on a company or an industry. Their perception of the information may differ, which will also influence their decisions to buy or sell, thus impacting the demand for a share.
Economic data - GDP figures, boom cycles, and recessions can all have a major impact on investor sentiment - whether they are bullish or bearish about particular markets, geographies, and assets, like shares.
Share prices vs value
Benjamin Graham, often considered the father of value investing, made a crucial distinction between stock price and intrinsic value in his investment philosophy. According to Graham, the stock market can be likened to a voting machine in the short term, where prices are influenced by market sentiment, speculation, and various unpredictable factors. However, in the long run, he viewed the market as a weighing machine, where stock prices tend to reflect the intrinsic value of a company. In essence, while stock prices may fluctuate in the short term, Graham advocated for investors to base their decisions on the intrinsic value of a company. This approach encourages a long-term perspective and aims to minimise the impact of market irrationality on investment decisions.
How much do I need to get started investing in shares?
Almost all investment platforms have a minimum amount you can invest. This is the lowest amount of money an investor can add to their account, and use to buy things like shares. In the UK, this generally ranges anywhere between £1-£50, but can even be as high as £500 or more with certain providers of certain accounts. We’ve created a comparison of investment platforms and their minimum deposits, so you can find this information easily in one place.
How do I get started investing in shares?
You’ll need to research and choose a reliable, secure platform that offers stocks and share investing in the UK. You may want to consider things such as minimum deposit amounts, fees, customer service, and any other things important to you in a prospective broker. You’ll also want to consider the risks of investing before getting started. Don't forget to check out our Stocks and Shares comparison page, where you can compare different providers, read reviews from other Pluto users, and make informed decisions on which providers may suit your needs best.