Made famous by the stereotypes of Wall Street and high-flying suits, the stock exchange is an ever-popular way of investing at a range of potential price points, and is historically one of the most popular asset classes to invest in.
Stocks, which can also be referred to as equity, are a security which represents the fraction of ownership of a company. Units of stocks are called shares, and you are entitled to a proportion of the company’s profits and assets based on how many shares are in that company you own.
You primarily buy shares on stock exchanges, and there are government regulations which stock trades must abide by to protect investors.
Companies will issue stocks to raise money, and by buying a fraction of ownership through stocks, an investor will be able to claim an equal fraction of the company’s earnings.
If a company had 1000 shares and an investor owned 100 of them, then that investor would own 10% of the company, and be entitled to 10% of the company’s profits, for example.
Stocks will rise and fall in value based on the performance of the company. If a company does well and achieves significant profits, then the price of the stock in that company will increase. If a company starts to struggle, then expect to see the value of that company’s stocks fall.
Investors can manipulate the stock market by buying or selling large amounts of stocks all at once. Selling lots of stock can cause its value to plummet, whereas buying lots of stock causes its value to rise.
A good example of this kind of practice is how short sellers bet on Gamestop’s stock crashing in 2021 and so dumped large numbers of the stock to cause it to crash. However, the actions of day traders who communicated through sites like Reddit caused Gamestop’s stock to shoot up in value by buying large numbers of stock for cheap due to the drop in value.
Because it is much quicker to buy and sell stocks than other investment options like property, they make for a great short-term investment strategy. You can buy stocks when they are low in value, and then sell them when they are high to achieve a profit.
This way of investing in stocks can be risky, though, and is more like spinning on a roulette wheel than long-term investment strategies like buy-to-let property. If a stock you buy ends up not rising in value as you expect, you may find yourself losing money on a risky investment.
Another popular method is to hold onto stocks for a long time. So long as the shares continue to rise in value, you will receive a dividend from the company you are investing in.
A dividend stock comes in the form of additional shares in the company, meaning you will have a larger stake and be able to make more profit. This investment strategy is best done with companies that have secure financial futures so you will see growth over time.
Thanks to the wide array of companies which operate on the stock market, there are thousands of options for investors looking to invest in stocks, from major corporations to small companies just starting out.
Some of the best stocks to invest in if you are looking for security are large companies that consistently perform well, such as Google or Amazon. These stocks may be more expensive due to how well they perform, but they come with the security that you cannot get from smaller companies.
Alternatively, you could invest in higher growth stocks which may be less stable but offer you a better chance of winning it big. You need to keep a careful eye on stocks of this nature though, as they can dip in value fast.
Beginners investing in stocks are generally recommended to diversify their portfolios. Diversification means spreading out your investment by buying stocks in multiple companies. That way, you avoid the risk of losing all your money if the stock you invest in crashes.
As Warren Buffett once said: “Do not put all eggs in one basket.”
For investors with fewer funds who want to diversify, mutual funds are an alternate method of having a diverse portfolio without breaking the bank. These are group investments made by multiple investors, which hold stocks and shares in several different companies across a range of sectors.
In this way, you can have all the benefits of diversification without having to buy each stock individually.
Another way of diversifying your investment portfolio is to invest in exchange-traded funds or ETFs. These operate similarly to mutual funds except you can buy and sell these on the stock exchange like regular shares.
The prices of ETFs fluctuate throughout the day but are generally less expensive than regular stocks.
A diversified portfolio is a good way of avoiding risk, but the stock market does rise and fall at rapid rates.
One of the most popular stocks to trade is Tesla, Elon Musk’s automotive company. Due to various factors, Tesla has seen its stock crash by 65% in the past year alone, showing just how quickly the tables can turn with a liquid asset like stocks.
Current industry predictions for 2023 indicate we will remain in a bear market. This means there is a prolonged drop in investment prices, meaning you might not be able to make as much from stocks as you would have done in the past.
For investors, this means potentially looking for safer investment strategies such as property, as stocks likely are not one of the best things to invest in right now in the UK.
