Keeping It Simple Stupid - The Stock Market

What is the stock market?

I'm sure you've heard of the stock market before, but maybe you don't know what it is or it seemed too complicated for you to understand. The reality is, to get a general grasp, it isn't that hard.

Essentially companies 'float' on the stock market selling shares in their companies for people to buy and sell. This means when you buy a share you essentially own a part of that company, albeit a small fraction. A share is basically a unit to show how much of a company you own, more shares equals a bigger ownership of a company.

How do stock prices change?

Companies float on the stock market to raise capital to build their business, the opportunity to increase their businesses profile and motivate staff through the introduction of share option schemes.

Many factors change the price of a stock but ultimately it's the supply and demand which changes the price. The more people there are buying it and less selling, the price goes up. The more people there are selling it and less buying, the price goes down.

What stocks should you buy?

When you first get on a trading platform it's easy to think, "Oh, I'm going to buy shares in Disney, Amazon, Johnson & Johnson, Tesla and Netflix", and while those companies may be great investments, there is an element of what is known as volatility. At any point, a stock price could drop and you could end up making a loss. This is the risk with investing in the stock market but when you get it right, the rewards can be great.

Until you've learnt how to analyse companies and the risks they present, you can invest in ETFs. An ETF in simple terms is a collection of securities, so more than one. For example, the Vanguard S&P 500 ETF is a stock representing the top 500 largest US companies. So when you buy a share in the Vanguard S&P 500, you essentially own a small percentage of the top 500 companies in the US.

Only invest what you can afford to lose

It goes without saying that you should only ever invest in the stock market what you're willing to lose. There is less risk with an ETF due to multiple stocks/companies being involved but it doesn't completely mitigate risk if there's a stock market crash or a recession. It is something to consider when deciding how much you invest.

The stock market is also not a place for gambling, unless you make it that way. The stock market is about making educated decisions based on factors of risk which you have analysed. If you invest without analysing, then you run the risk of losing money.

Strategy & potential from investing

Strategy

There are many strategies when it comes to trading on the stock market but with ETF's you're generally in it for the long run due to the lower chances of volatility meaning the price won't change as drastically.

You can hold the ETF stocks as long as you like depending on the level of return you want but the longer you leave them, the bigger return you should hopefully see.

Potential from investing

For example, here's the rate of return for the Vanguard S&P 500.

As you can see, it differs vastly each year due to how well each of the companies that are part of the ETF do as well as the stock market in general, among other factors. Notably 2018 was a bad year due to a number of factors including President Trumps trade war with China etc. But currently, in the last year, you would have seen a return of around 9.8% which is around the average return for the stock market on stocks with a low volatility.

What return should I expect on my money?

Well, if you invested an initial single payment of £1000 then £200 each month with an average return of 8% you would have:

10 years - £38,416 return with £25,000 total contribution - £13,416 gained
20 years - £119,193 return with £49,000 total contribution - £70,193 gained
30 years - £293,575 return with £73,000 total contribution - £220,585 gained

For those that are extremely frugal, have a steady mid-high income and have patience for their return investing £1000 each month with an average return of 8%:

30 years - £1,427,676 return with £361,000 total contribution - £1,066,676 gained

While the above last example will only be achievable by few people and probably unrealistic, there is nothing to say you couldn't get close (or invest more) depending on how much you are willing to sacrifice. No matter how much you choose to invest, any amount will be helpful in years to come.

The real point here is, with regular investing and time, your money will grow steadily. The bonus with an ETF is, you can sell your stocks and withdraw the money whenever you wish (some platforms charge fees, some don't like Trading212).

How do I get started?

There are many platforms which you can choose to invest on. A common one in the UK is Trading212, which is what I use. You can also invest directly with Vanguard. Below I'll show you how to buy shares in the Vanguard S&P 500 (you don't have to buy this stock, but it's a good way to dip your feet into the stock market in my opinion) on the Trading212 platform.

Go to Trading212's website
Using the above link to sign up will get you a free share worth up to £100 with a minimum deposit of £1.
Sign up and create an account
This can take a while to do as they have to verify who you are so requires details.
Also, for ETFs you will want an 'Invest' account. A 'CFD' account is for forex, indices etc. (cryptocurrency is no longer available on Trading212 as the FCA banned it, you can still buy crypto on Gemini, Coinbase etc.). CFD has a lot more risk, make sure you research before investing.
Search for S&P 500
First search for the S&P 500 by clicking on the 'Search' button at the bottom.

4. Click on the blue 'Buy' button

5. Select how many shares you want
You can slide the bar or enter the number of shares you want. You can choose to buy a fraction of a share, so you don't have to buy a full share. You're able to enter the number of shares you want and then add funds.

The white text (£53.399 in this case) at the top shows the price you're buying a share at and the grey text below the blue number of shares text '~£27.22' shows you the price for the number of shares you've selected.

Once you've selected how many shares you want, click on the blue 'Review Order' button.

6. Review the order
You can now review the order showing you the cost and number of shares you're getting.

7. Order has been executed
If you've successfully purchased shares it will come up with the following.

8. Now you can check your investments
In the bottom menu hit the 'pie' icon and it will show you your investments.

Below shows the value of my shares in S&P 500 ETF on Trading212 and the return I've gained so far.

Final pointers

Hopefully you have gained a better understanding of the stock market, and if you thought it was too difficult, a scam or gambling before, your mind will hopefully have been swayed to see the potential.

It goes without saying that I'm not a financial advisor so the above is only from my personal experience from reading, listening and watching about the stock market and my experience of trading. The reason I wanted to write this article was because before I jumped into the tock market I had sat on the idea of investing for years but was too scared. The reality is, you only invest as much as you want and with the knowledge I've gained I can now measure up the risk involved.

With ETFs, they are more secure than individual stocks which is why it's a good place for starting. You can choose to invest in individual companies if you wish.

The link above for Trading212 is an affiliate link which means we both get a share valued up to £100 when you deposit the minimum amount (£1) to your account. If you want to use the link, it would be much appreciated - www.trading212.com/invite/FMcBRxbw

If you want to read more about the stock market, Investopedia is a very good resource which I've used many times - https://www.investopedia.com/trading-skills-and-essentials-4689654

If you have any questions about the stock market then don't hesitate to ask and I'll help the best I can. And remember, buy low, sell high.