When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
How to invest in stocks: UK edition
If you live in the UK, then it makes sense to look beyond Wall Street to stocks listed in London, especially those on the FTSE 100 - BUT good investing practices are global!
Here we have aimed to make a special UK edition of how to invest in stocks.
Here we have aimed to make a special UK edition of how to invest in stocks.
QUOTE
The individual investor should act consistently as an investor and not as a speculator.
Big ideas
- Investing in UK stocks can help diversify your portfolio and help towards building wealth, but it is not without risk.
- UK stock investment has been made a lot easier due to fractional shares, ETFs, financial technology, and other innovations. But increased market access does not equate to increased wealth.
- Mastering stock investment requires patience, caution, and emotional resiliency. Most new investors lose money due to a failure to understand the core principles.
UK stock investment has never been easier. Account setup is generally quick, and you typically have full autonomy to experiment with your portfolio as you see fit. But while market access is critical to building wealth, it does not mean you will build wealth. Keep in mind that investing comes with a certain amount of risk of losing money.
Understanding how to invest in stocks within the UK requires more than filling in your details in an online form and funding your account. You’ll need to learn all about portfolio theory, risk tolerance levels, asset allocation mechanisms, and investment psychology. But don’t worry; we’re here to help!
Understanding how to invest in stocks within the UK requires more than filling in your details in an online form and funding your account. You’ll need to learn all about portfolio theory, risk tolerance levels, asset allocation mechanisms, and investment psychology. But don’t worry; we’re here to help!
How to invest in stocks: Starting with dividends
When you buy a stock, you become a shareholder in the company. That gives you an official claim on a portion of its assets and any profits it makes. Many companies also pay dividends on stocks, like miniature rewards for holding a given stock or ETF (Exchange-Traded Fund).
One of the hardest choices for any investor, especially if you’re new to it, is choosing which stocks to invest in. A natural first step for many is choosing high-quality stocks that pay dividends. These types of stocks are what many investors rely on to generate long-term wealth and can act as the foundation for your portfolio.
Investors such as Warren Buffett and Benjamin Graham are advocates of picking high-quality companies and reinvesting dividends to benefit from the effects of compound interest.
WhIle these investors have been successful with their various strategies, there is still risk that money can be lost when trying to use this strategy
One of the hardest choices for any investor, especially if you’re new to it, is choosing which stocks to invest in. A natural first step for many is choosing high-quality stocks that pay dividends. These types of stocks are what many investors rely on to generate long-term wealth and can act as the foundation for your portfolio.
Investors such as Warren Buffett and Benjamin Graham are advocates of picking high-quality companies and reinvesting dividends to benefit from the effects of compound interest.
WhIle these investors have been successful with their various strategies, there is still risk that money can be lost when trying to use this strategy
Simple Interest vs Compound Interest Growth Comparison
Compound interest is like a magical snowball effect for your money, where your interest earns interest, creating exponential growth over time. It turns small sums into powerful wealth-building tools, making dreams achievable and future horizons brighter!
The amount earned on dividends is typically more than the interest that can be earned in a savings account. Thus as long as the value of the dividend-paying stock remains stable, you stand to earn more over time by compounding.
This requires longer time horizons (10 years+) to observe the effects of compounding interest, which can test your patience, but it is well worth it in the end!
The amount earned on dividends is typically more than the interest that can be earned in a savings account. Thus as long as the value of the dividend-paying stock remains stable, you stand to earn more over time by compounding.
This requires longer time horizons (10 years+) to observe the effects of compounding interest, which can test your patience, but it is well worth it in the end!
Picking the best UK online stock trading platform
Online platforms make it very easy to gain access to stocks. After undergoing KYC and AML procedures (providing your identification, picture, date of birth, address, identity number, etc), you will fund the account and pick stock tickers representing companies.
The online platform/brokerage will hopefully have an intuitive trading interface so you can observe your overall portfolio and investigate what sectors and stocks you might invest in. Fees should also clearly be displayed. You should be able to check out your portfolio profit and losses over specific time periods - 3 months, 6 months, 12 months, etc.
The online platform/brokerage will hopefully have an intuitive trading interface so you can observe your overall portfolio and investigate what sectors and stocks you might invest in. Fees should also clearly be displayed. You should be able to check out your portfolio profit and losses over specific time periods - 3 months, 6 months, 12 months, etc.
Trading 212 offers zero-commission investing, an auto-invest feature and a large variety of stocks and ETFs to choose from. Other fees may apply.
Stock investment for those with little money
Two innovations have made stock investment easy for those with little money - fractional shares and ETFs.
Fractional shares let you purchase a fraction of a share. This is a very useful feature when you consider some shares are worth hundreds of thousands of dollars. Or, perhaps you have £99 to invest, but the cost of a high-quality stock is £250. Fractional shares opened the markets up to those with a smaller budget to help them get up and running investing sooner.
The Exchange-Traded Fund also served to democratise the investment landscape in a big way. The concept is similar to a mutual fund, but it usually tracks an index, making it low-cost. An ETF is a simple way to diversify because this asset can track as many as hundreds of securities. As a perfect example, there are ETFs that follow the FTSE 100, the largest 100 companies traded on the London Stock Exchange (LSE).
Here are the five largest ETFs and their ticker symbols that you can use to find them on the Trading 212 app.
Fractional shares let you purchase a fraction of a share. This is a very useful feature when you consider some shares are worth hundreds of thousands of dollars. Or, perhaps you have £99 to invest, but the cost of a high-quality stock is £250. Fractional shares opened the markets up to those with a smaller budget to help them get up and running investing sooner.
The Exchange-Traded Fund also served to democratise the investment landscape in a big way. The concept is similar to a mutual fund, but it usually tracks an index, making it low-cost. An ETF is a simple way to diversify because this asset can track as many as hundreds of securities. As a perfect example, there are ETFs that follow the FTSE 100, the largest 100 companies traded on the London Stock Exchange (LSE).
Here are the five largest ETFs and their ticker symbols that you can use to find them on the Trading 212 app.
ETF Name |
You also can put money into fractional stocks of ETFs. In other words, there are no real barriers to entry for those with little money. Thanks to ETFs, you can access a lot of the same funds as institutional investors with the benefit of diversification. And thanks to fractional shares, you can invest for as little as £1, or perhaps even lower.
The basics of UK stock investment
It is generally accepted that to become a successful stock investor, you will need to diversify over a range of stocks. Typically, you will need 20 to 25 stocks to say your portfolio is diversified.
Since nobody can predict the market, diversification ensures that your entire portfolio does not move up and down simultaneously. Investing in different things means some stocks should always rise to offset some falling.
Since nobody can predict the market, diversification ensures that your entire portfolio does not move up and down simultaneously. Investing in different things means some stocks should always rise to offset some falling.
Comparative performance of companies X, Y, and Z over two years
Diversification usually reduces returns versus a concentrated portfolio in a type of investment that is performing well. The idea is that returns will be more stable than a concentrated portfolio that might go through periods of large losses when the investment type it focuses on goes out of favour.
QUOTE
I don’t think there is any other quality so essential to success of any kind as the quality of perseverance. It overcomes almost everything, even nature.
The 100 largest UK stocks listed on the FTSE 100 should be the hunting ground for the stocks in your portfolio that you plan to invest in for the long term. These are known as large caps because they have the highest market value. You can choose mid-sized companies from the FTSE 250 index for the more speculative part of your portfolio. Investing in much smaller companies, such as those listed on the FTSE AIM All-Share can produce high returns but is much risker because these companies are at a higher risk of going bust.
The UK High Yield Dividend Aristocrats are a collection of stocks known for their impressive dividend yields. Below is a list of the top 10 stocks in this index, ranked by their respective weightings based on dividend yield. These top 10 stocks collectively account for approximately 46.3% of the UK High Yield Dividend Aristocrats.
The UK High Yield Dividend Aristocrats are a collection of stocks known for their impressive dividend yields. Below is a list of the top 10 stocks in this index, ranked by their respective weightings based on dividend yield. These top 10 stocks collectively account for approximately 46.3% of the UK High Yield Dividend Aristocrats.
Stock | Weighting (%) |
5 | |
4.98 | |
4.9 | |
4.45 | |
4.01 | |
3.84 | |
3.66 | |
5.46 | |
3.41 | |
4.19 |
Source: S&P UK High Yield Dividend Aristocrats Index and SPDR S&P 500 UK Dividend Aristocrats UCITS ETF. Past performance doesn’t guarantee future results.
Selecting an ETF is a great way to ensure the automatic diversification of stocks. Or you can have an all-ETF portfolio that covers stocks and other assets, such as fixed income (bonds) and commodities. Generally, younger investors should have more stocks (above 70%), with the remainder (under 30%) allocated towards fixed-income products and cash. Fixed-income products such as bonds generate a low return but are safer than stocks.
To maximise returns, you can research individual stocks over time and gradually add them to your portfolio. You might also want to focus on high-quality stocks that pay dividends, which can be automatically reinvested into your portfolio.
Selecting an ETF is a great way to ensure the automatic diversification of stocks. Or you can have an all-ETF portfolio that covers stocks and other assets, such as fixed income (bonds) and commodities. Generally, younger investors should have more stocks (above 70%), with the remainder (under 30%) allocated towards fixed-income products and cash. Fixed-income products such as bonds generate a low return but are safer than stocks.
To maximise returns, you can research individual stocks over time and gradually add them to your portfolio. You might also want to focus on high-quality stocks that pay dividends, which can be automatically reinvested into your portfolio.
A Stocks and Shares ISA (Individual Savings Account) is a tax-efficient investment account that allows UK residents to invest in a range of assets, including stocks, shares, funds, and other types of investments.
Tax treatment depends on the individual circumstances of each client and may be subject to change in future.
Investors can contribute up to a certain amount each year (known as the annual ISA allowance), which is set by the UK government. The current annual allowance for the tax year 2022/23 is £20,000.
One of the main benefits of a Stocks and Shares ISA is that any income or capital gains generated by the investments held within the ISA are tax-free.
Here are the general steps for investing in stocks and shares ISA:
Tax treatment depends on the individual circumstances of each client and may be subject to change in future.
Investors can contribute up to a certain amount each year (known as the annual ISA allowance), which is set by the UK government. The current annual allowance for the tax year 2022/23 is £20,000.
One of the main benefits of a Stocks and Shares ISA is that any income or capital gains generated by the investments held within the ISA are tax-free.
Here are the general steps for investing in stocks and shares ISA:
- Choose a provider - Stocks and shares ISA providers are available from many providers, so make sure to choose one that suits your investment goals and budget. Trading 212 offers an investment ISA for UK customers with a wide range of investment choices, competitive fees, and good customer service.
- Open an account - You can normally open an account online or by phone. This involves providing some personal and financial information, such as your name, address, and National Insurance number.
- Choose what to invest in - Use this guide as well as all the research you can do to help decide which stocks, bonds, funds, and other investment vehicles you want to invest in.
- Monitor your investments - The story doesn’t end with choosing the investment, you have to ensure they are performing as expected and to make adjustments as needed. You can check your Trading 212 account online via the app.
- Make regular contributions - to maximise the potential returns from your ISA, it's a good idea to add more funds to your account over time. By using Pies in the Trading 212 app, you can set up automatic contributions
The different ways to invest (UK)
Traditionally, an investor would work with a full-service financial advisor and possibly invest in a recommended fund. In recent years, however, much has changed. Modern UK investors want more authority over their own investments.
With this in mind, there are two primary ways to invest in stocks within the UK. These are online brokerage firms and robo-advisory services, both of which could be termed "discount brokerages".
An online brokerage does not offer advise and lets you, as the client, choose your own investments. This gives you full autonomy over your assets, buying and selling as you wish - and usually paying lower fees to do so.
Robo advisors are automated wealth platforms where you invest a specific amount at given intervals. Your risk tolerance levels are gauged via a questionnaire, and your financial contributions are placed towards a portfolio based on your response.
Portfolios can also be designed for optimal tax rewards. Robo-advisor platforms make heavy use of ETFs due to their low cost and high diversification. The downside is there is less flexibility to cash out and make changes to your portfolio once the initial allocation has been made.
Alternative investments such as hedge funds, futures & options, cryptocurrencies, real estate, and collectables are much more volatile and require extensive expertise before you can expect any kind of reliable returns.
Trading212 offers zero-commission investing on over 12,000 stocks and ETFs. You can build your own “pie” portfolio and take advantage of fractional shares from as little as £1. *Other fees may apply.
With this in mind, there are two primary ways to invest in stocks within the UK. These are online brokerage firms and robo-advisory services, both of which could be termed "discount brokerages".
An online brokerage does not offer advise and lets you, as the client, choose your own investments. This gives you full autonomy over your assets, buying and selling as you wish - and usually paying lower fees to do so.
Robo advisors are automated wealth platforms where you invest a specific amount at given intervals. Your risk tolerance levels are gauged via a questionnaire, and your financial contributions are placed towards a portfolio based on your response.
Portfolios can also be designed for optimal tax rewards. Robo-advisor platforms make heavy use of ETFs due to their low cost and high diversification. The downside is there is less flexibility to cash out and make changes to your portfolio once the initial allocation has been made.
Alternative investments such as hedge funds, futures & options, cryptocurrencies, real estate, and collectables are much more volatile and require extensive expertise before you can expect any kind of reliable returns.
Trading212 offers zero-commission investing on over 12,000 stocks and ETFs. You can build your own “pie” portfolio and take advantage of fractional shares from as little as £1. *Other fees may apply.
What are the main risks of investing?
Understanding the risks of investing is essential to long-term growth. Some of the main risks associated with investment include:
- Market risk - the value of investments can fluctuate due to changes in market conditions such as interest rates, inflation, and economic growth. Market risk can affect all types of investments.
- Credit risk - this is the risk that a company (or even government) may default on a bond you invested in, leading to a loss.
- Inflation risk - inflation erodes the purchasing power of money over time, which can affect the value of investments.
- Liquidity risk - this measures how easy/difficult it is to sell an investment when needed. It is particularly important in unfavourable market conditions when people are less likely to be buying what you have to sell.
- Currency risk - investing in foreign securities or funds can expose you to currency risk, which arises from fluctuations in exchange rates between the currency in which the investment is denominated and your home currency.
- Concentration risk - concentrating investments in a particular sector, company, or asset class can expose investors to risk if there is a downturn in that area.
- Geopolitical risk - political instability, wars, or natural disasters can have a significant impact on the value of investments in affected regions.
Recap
Investing in UK stocks is not rocket science. Fractional shares, ETFs, and AutoInvest features have made it much simpler.
On the other hand, user error and emotional investment remain serious problems for most, even when all technical resources are made available. Ease of market access means that investors can too easily and quickly liquidate their otherwise healthy portfolios based on mainstream or even social media headlines.
Technology can make your life easier, but only if you put it to good use. Despite all the advances in financial technology, the underlying principles of investment and human nature remain the same. These need to be understood to ensure long-term wealth is created.
On the other hand, user error and emotional investment remain serious problems for most, even when all technical resources are made available. Ease of market access means that investors can too easily and quickly liquidate their otherwise healthy portfolios based on mainstream or even social media headlines.
Technology can make your life easier, but only if you put it to good use. Despite all the advances in financial technology, the underlying principles of investment and human nature remain the same. These need to be understood to ensure long-term wealth is created.
FAQ
Q: What is an investment bond?
An investment bond is a type of debt security issued by a company, government, or other entity to raise capital. When you invest in a bond, you are essentially lending money in return for the initial amount plus interest at a specified future date. Bonds can be corporate, government, or even junk bonds.
Investment bonds are typically issued with a fixed interest rate, and the interest payments are made periodically (usually annually or semi-annually) until the bond reaches maturity. At maturity, the issuer returns the principal to the bondholder. Bonds are generally considered lower-risk investments than stocks, but they also typically offer lower potential returns.
Investment bonds are typically issued with a fixed interest rate, and the interest payments are made periodically (usually annually or semi-annually) until the bond reaches maturity. At maturity, the issuer returns the principal to the bondholder. Bonds are generally considered lower-risk investments than stocks, but they also typically offer lower potential returns.
Q: What is investment yield?
Investment yield, in simple terms, is like the reward you get for being a smart investor. It's the fancy percentage that tells you how much money your investment made over a certain period. Think of it as the juicy profits or income you score by putting your money to work.
Calculating investment yield depends on the type of investment you're dealing with. For bonds, it's the interest rate you earn every year divided by the bond's market price. If you're into stocks, it's the annual dividend payment divided by the stock price. You can crunch these numbers on a daily, monthly, or yearly basis, and it can be a regular old percentage or a fancier compounded rate.
Calculating investment yield depends on the type of investment you're dealing with. For bonds, it's the interest rate you earn every year divided by the bond's market price. If you're into stocks, it's the annual dividend payment divided by the stock price. You can crunch these numbers on a daily, monthly, or yearly basis, and it can be a regular old percentage or a fancier compounded rate.
Q: How to invest in stocks online?
To begin, conduct thorough research on the stock market to understand the risks and rewards associated with investing in stocks. Then, select an online broker after carefully reviewing available options and examining online reviews.
Once you have chosen a broker, proceed to open an account and fund it with an amount you are comfortable investing. Be aware of any minimum deposit requirements set by the broker.
With a funded account, you can start trading stocks online. Conduct diligent research on the stocks you are interested in, considering their financial information, stock price history, and analyst recommendations. When you are ready to invest, execute your orders through your chosen broker's platform.
Once you have chosen a broker, proceed to open an account and fund it with an amount you are comfortable investing. Be aware of any minimum deposit requirements set by the broker.
With a funded account, you can start trading stocks online. Conduct diligent research on the stocks you are interested in, considering their financial information, stock price history, and analyst recommendations. When you are ready to invest, execute your orders through your chosen broker's platform.
Q: How many investment accounts should I have?
This depends on a number of factors should as your tax situation, total capital, areas of investment, and fees. Generally, however, it is probably a better idea to stick to as few investment accounts as possible. This will reduce the levels of complexity and give you a single, unified account from which to manage your affairs.
You can have multiple accounts with the same provider. You may wish to set up a retirement account and a trading/investment account with the same provider, and this can also streamline how you manage your investments. For best results, it might also be a good option to consult a financial advisor.
You can have multiple accounts with the same provider. You may wish to set up a retirement account and a trading/investment account with the same provider, and this can also streamline how you manage your investments. For best results, it might also be a good option to consult a financial advisor.
Q: How to decide your investment budget?
To decide on an investment budget, consider your financial goals, income, expenses, and risk tolerance. Assess your current financial situation to determine how much you can realistically invest each month, taking into account your other financial obligations.
Consider the potential returns and risks of different types of investments and seek the advice of a financial professional if necessary. Remember to regularly review your investments and adjust your budget as needed.
Consider the potential returns and risks of different types of investments and seek the advice of a financial professional if necessary. Remember to regularly review your investments and adjust your budget as needed.
- KYC (Know Your Customer): A mandatory process through which financial institutions verify and document the identities of their clients, helping to prevent fraud and other illegal activities.
- AML (Anti-Money Laundering): A set of rules and procedures designed to detect, report, and block activities aimed at disguising the origins of criminally obtained funds.
- Hedge Funds: Investment funds that use advanced strategies, such as short selling and leverage, to maximise returns. They are typically available only to high-net-worth individuals and institutional investors.
- Robo-Advisors: Automated investment platforms that use algorithms to manage and allocate investments based on an investor’s risk tolerance and goals.
- AutoInvest: A feature that enables you to schedule regular, automatic contributions into your portfolio, helping to maintain consistent investment habits over time.
