A beginner’s guide to investing in stocks

Savings rates may be at decade highs but you could still be better off taking a bit more risk with your money by investing in stocks.

You could earn a slice of the biggest companies in the world such as Amazon and Microsoft or discover growing or unloved companies by purchasing stocks and shares.

If a company’s share price increases, you will share in the growth, plus some companies may even make extra monthly or quarterly payments to shareholders, known as dividends.

There is, of course, a risk of losing money if the share price of a company you are invested in falls, but research shows that investing in stocks typically outperforms leaving money in cash savings accounts over the long-term, plus the returns tend to be higher than inflation.

Data from Barclays Investment Bank shows that over the past 130 or so years, the probability of equities outperforming cash on any two-year basis was 70 per cent, and this figure rises to 91 per cent over 10 years.

Here is how to get started investing in stocks.

Investors can purchase a portion of publicly listed companies by buying stocks, also known as shares or equities. These are typically companies listed on an index such as the FTSE 100 in the UK or the S&P 500 in the US.

Investors can usually purchase one or more shares, or fractions of a share in some cases.

The value of the stock you hold will increase if the share price rises, but could also fall if it drops. A share price can rise or fall for various reasons such as demand, as well as economic, market and political events.

There are a few different ways to purchase a stock. If you are confident about researching companies, you could do it yourself and build your own portfolio on an investment platform. Alternatively, a wealth manager or financial adviser can help build a portfolio for you based on your attitude to risk and investment goals – for a fee.

Many financial advisers will suggest investing in funds rather than stocks. An investment fund is a portfolio of different stocks that is built, monitored and managed by an asset manager. Rather than focusing on one stock, a fund spreads your money and risk across different companies, regions and sectors.

Another option is robo-wealth managers. Users complete an online questionnaire that determines your attitude to risk, and your money is then invested in a portfolio of exchange traded funds. These are funds that track an index.

Check any investing costs as this will reduce your profits. Platforms may charge an annual fee and there may be costs to buy or sell shares. Investors also have to pay a tax or stamp duty rate of 0.5 per cent on share purchases.

You can choose stocks based on your interests or if you think you can spot the next big thing.

It is important to diversify across a range of sectors though so that if one type of stock is out of fashion or falls in values, others can make up for its poor performance.

Sam North, market analyst at eToro, says: "Ask yourself questions like: What do I enjoy? Which companies are tied to my interests? Who are their competitors? What is their market share? Do I believe their presence will grow in the coming years? However, keep in mind that just because you’re passionate about something doesn’t guarantee its success.

“This is why diversification is so important. For example, if you’re passionate about sports, you might consider investing in companies like Nike, Adidas, and Lululemon, rather than putting all your eggs in one basket.”

Also consider whether a stock matches your attitude to risk. Smaller companies may provide more growth but could also be more risky and lose you money if they crash, while more established firms can pay dividends but may not give you massive profits.

How you buy a stock also has tax implications. Options may vary depending on the platform you are using. Investors can usually hold stocks in a general investment account, but any profits may be taxed when you come to sell a stock.

There is a capital gains tax allowance, currently worth £3,000, which is the amount of profit you can take from selling assets such as shares before owing anything to the taxman.

A more tax-efficient way of holding stocks is through an ISA or pension. All adults in the UK get a £20,000 allowance, which is an amount that can be put into a cash or stocks and shares ISA each tax year. Any returns are tax-free. Similarly, any capital growth from shares held in a pension are tax-free, but the money can only be accessed from age 55.

An ISA is usually best-used to put money away for major long-term milestones such as saving for a mortgage deposit or big event such as a wedding. A pension is used to save for your retirement.

The main risk when investing in stocks is volatility. Stock markets can rise or fall at any time, which means you can lose money if the share price of the stock you hold drops in value.

Volatility will be less concerning if you invest for the long-term, typically a minimum of three to five years as this often gives a stock enough time to recover and grow.

James Igoe, head of the Manchester office at investment management firm Redmayne Bentley, says: “Even traditionally ‘safe’ investments such as government gilts have suffered sharp falls in value in recent years. Therefore, preparation and a solid plan are key.”

He explains that diversifying portfolios across several sectors, such as finance, pharma, energy, and tech, can help to reduce the risk of an industry-wide slump in performance: “Investing in various asset classes, including bonds, gold, cash funds, infrastructure and private equity, will help to provide a more robust package.”

A bigger risk though is not investing at all. Megan Rimmer, chartered financial planner at Quilter Cheviot, says: “Often people think that cash has no risk but there is the inflation risk.

“Cash savings are certainly important to have to fall back on should you need it, but at a time of high inflation they will be rapidly eroded in real terms.

“By investing your money, you can hope to have a better chance of achieving growth over the longer term to try and keep up with or outpace inflation.

“Investing does come with risk though so it’s important that it’s right for you. Where possible, you should seek professional financial advice to ensure you are making the best possible decisions for your circumstances and future goals.”

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.