Important Disclosure: The content provided does not consider your particular circumstances and does not constitute personal advice. Some of the products promoted are from our affiliate partners from whom we receive compensation.
If you require any personal advice, please seek such advice from an independently qualified financial advisor. While we aim to feature some of the best products available, this does not include all available products from across the market. Although the information provided is believed to be accurate at the date of publication, you should always check with the product provider to ensure that information provided is the most up to date.
Capital at Risk. All investments carry a varying degree of risk and it’s important you understand the nature of the risks involved. The value of your investments can go down as well as up and you may get back less than you put in.
Where we promote an affiliate partner that provides investment products, our promotion is limited to that of their listed stocks & shares investment platform. We do not promote or encourage any other products such as contract for difference, spread betting or forex. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
Table of Contents
Many financial experts agree that investing in stocks and shares (or equities) for a sustained period is one of the keys to investing money and potentially building long-term wealth.
‘Sustained’ refers to a significant timeframe – well beyond a few months or even a couple of years. Various research documents, such as the Barclays Equity Gilt Study, show that, over extended time periods, shares tend to significantly outperform other asset classes such as cash and bonds.
This is the extra reward an investor can hope to receive for choosing a riskier investment. In terms of risk and reward, shares sit on a higher rung compared with, say, bonds, which in turn sit on a higher rung than cash.
One of the more challenging aspects about investing in equities, however, is that it’s nigh-on impossible to predict their price movements day-to-day with any guaranteed accuracy.
But by sticking to proven practices and demonstrating patience, there are several mainstream strategies that can prove their worth. Here’s a look at four of them.
Buy and hold
Assemble a group of investment or wealth managers and the phrase that will ring out is that “time in the market beats timing the market”.
In other words, staying invested throughout a range of market conditions by adopting a ‘buy-and-hold’ strategy, rather than attempting to ‘time’ markets by continually moving money in and out of holdings, is usually the best course of action.
This makes extra sense for investors who are charged a fee whenever they adjust their portfolio by buying or selling stock. Trading and admin charges inevitably bite into returns, so it makes sense to avoid them where possible.
To confirm why a buy-and-hold strategy makes sense, consider the effect of having a continued presence in the market.
According to Putnam Investments, the US stock market returned 9.9% annually for those who remained fully invested over a 15-year period to 2017. But investors who dipped in and out of the market over this timeframe jeopardised their chance of enjoying such returns.
According to the company:
- investors who missed out on the 10 best trading days in that period experienced annual returns of only 5%
- the annual return dipped to 2% for those who missed the 20 best days
- missing the 30 best days produced losses of, on average, 0.4% per annum.
Consider choosing funds over individual stocks
Seasoned investors are aware that an investing practice known as ‘diversification’ is crucial when it comes to reducing risk and, potentially, boosting returns over time.
Diversification was once described by Harry Markowitz, the Nobel Prize laureate and economist, as “the only free lunch”. It says that, if one holding within a portfolio of shares underperforms, then the overall effect won’t be to sink the whole ship.
Most retail investors channel their money into two types of investment: holding individual stocks directly or buying into collective funds.
The latter includes unit trusts and OEICs and, looking a little deeper, embraces a variety of products – from index trackers and exchange-traded funds to specialist portfolios focusing on particular regions and/or sectors (US, global, technology, for example).
To provide maximum diversification, experts recommend that investors buy funds instead of individual stocks. The thinking is that, although individual investors are free to buy a diversified array of stocks to create their own share portfolio, the process is typically time-consuming, requires research and expertise as well as a sizeable cash commitment to carry out successfully. A single share in some companies can cost hundreds, if not thousands, of pounds.
In contrast, funds provide retail investors with immediate exposure to hundreds or thousands of individual shares, usually for a modest outlay, with lump sum investments available from £500. Another option to consider is for investors to channel money into funds that passively track major stock indices such as the FTSE 100 or the S&P 500. Products of this nature enable investors to buy the market return relatively cheaply – the fees on tracker funds usually cost just a fraction of a percentage point.
Consider reinvesting dividends
Many publicly-listed companies pay their shareholders a dividend – a regular sum linked to a business’s earnings in any one year.
The amounts shareholders receive in dividends – typically equating to returns of between 3% and 4% – may seem relatively negligible, especially at the start of an investment journey. But dividends are actually responsible for a large proportion of the stock market’s historic growth.
For example, for the years between September 1921 and September 2021, the S&P 500 experienced average annual returns of 6.7%. With dividends reinvested, however, the performance jumps to nearly 11%. That’s because each reinvested dividend helps to buy more shares which in turn help boost the return on the overall investment.
Many financial advisors recommend that long-term investors reinvest their dividends rather than receiving the payments as cash. Most trading platforms provide customers with the option to reinvest dividends automatically.
Choosing the right investment account
Investment choices are undeniably important to long-term investing success. But regardless of whether a portfolio is tilted towards either funds or stocks, another crucial decision relates to the nature of the investment account where the holdings are kept.
For example, individual savings accounts (ISAs) are tax-efficient wrappers that savers and investors can use each tax year to shelter a certain amount – known as the ISA allowance and currently worth £20,000 – from income tax, dividends tax and capital gains tax.
The bottom line
To make money from equities, there’s no obligation for investors to spend days speculating on which individual company shares will go up or down.
Even the most successful investors, such as Berkshire Hathaway’s Warren Buffet, recommend that people invest in low-cost index funds and hold on to them for years or decades until they need their money.
In many cases, investors simply need enough patience so that a diversified basket of investments can pay off over the long term. This is in stark contrast with the need to chase the latest investing trend or hot stock.
Frequently Asked Questions
How can beginners potentially make money in the stock market?
Whether you’re new to investing, or a seasoned stock market participant, a crucial caveat to bear in mind is that there are no guarantees when it comes to investment returns.
That said, it’s been demonstrated time and again that, investing for the long term in stocks and shares is potentially a way to produce superior returns compared with, say, leaving cash on deposit, or turning to other asset classes such as bonds.
When it comes to investing, a useful rule of thumb to remember is the higher potential risk from an asset, the higher the potential return. If an investor is not comfortable with the first part of that maxim, then for a peaceful night’s sleep, there’s little point adopting that investment approach.
What does make sense is to start an investment journey early. This is because returns will benefit from the element of ‘compounding’, where returns are generated on already-accrued investment growth and, where relevant, dividend income.
Beginners with financial targets that are many years off into the future should also be able ride out the inevitable volatility from short-term dips that inevitably crop up in share investing.
The question may also arise of whether to invest via a lump sum, or through a steady drip-feed of money. Opting for the latter means an investor can potentially benefit from the process known as ‘pound-cost averaging’.
Pound cost averaging refers to investing smaller amounts of money regularly, say on a monthly basis. Money is paid in no matter what’s the prevailing state of the market.
Because of the regular basis, the process means investors capture the average return of the market. In other words, when prices are high, low and anything in between. Over time, investors can potentially end up with a larger investment position compared with someone who’s relied on just one or two lump sum investments during the course of the year.
Can you make a lot of money in stocks?
It depends what is meant by ‘a lot of money’ here. It’s true for example that, in recent times, some of the world’s largest technology stocks have produced eye-catching returns, of the order of several hundred per cent over relatively short time periods, five years say.
That said, investing in individual stocks remains inherently risky and, in the long history of stock market investing, these sorts of returns tend to be the exception rather than the rule.
What’s more, they don’t take into account all the corporate failures that have taken place along the way when investors would have lost their cash.
In addition, there’s no guarantee going forward that, just because a company produces a stellar run of returns, they will go on indefinitely. Practically speaking, a portfolio of investments which consistently manages to produce a high single figure or low double-digit percentage return each year can probably be categorised fairly as a success.
Do I have to pay taxes on the money I earn from stocks?
Profits made from investments are subject to tax. There are some notable exceptions in the UK, however, such as investments held in tax-efficient individual savings accounts (ISAs), or self-invested personal pensions.
When it comes to other investments, the amount of tax an investor pays depends on several factors including one’s personal tax situation, and the amount of profit made.
For example, if you hold investments outside of an ISA and receive money from share dividends, then an annual tax-free dividend allowance applies which stands at £500 for the 2024/25 tax year.
Exceed these allowances and the tax rates apply as follows: 8.75% (basic rate tax payers), 33.75% (higher rate), and 39.35% (additional rate).
If your only income is from investments, then you can use the tax-free personal allowance of £12,570 (that applies in both the 2023/24 and 2024/25 tax years), to offset the bill.
Similarly, capital gains tax (CGT) is payable on the profit (or gains) an investor makes when he or she sells investments that have increased in value over time.
Again, there are allowances to factor in before tax becomes due. In the 2024/25 tax year, the CGT allowance stands at £3,000. Investors do not pay CGT on gains that have accrued within an ISA.
The amount of CGT that is due on stocks and shares depends on an individual’s tax bracket. To work out how much could be due, add capital gains to income within a particular tax year. If the total remains within the basic rate income tax band, then the level is paid at 10%. If it falls within the higher rate tax band, the level rises to 20%.
Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form oftax advice.
Is stock investing safe for beginners?
It’s important to reiterate that investing comes with risk and no guarantees. It’s possible that investors who choose to buy individual stocks could hit on winners. Then again, they may end up with a portfolio full of duds. Before committing any cash, it’s important to carry out plenty of research and understand the potential risks.
If this sounds too off-putting, in terms of the time spent researching stocks against any potential gains (or losses), then buying funds with exposure to numerous businesses could be the more comfortable route for some investors to take. Buying stocks or funds through providers that are approved by the UK’s Financial Conduct Authority, affords an investor financial protection – up to £85,000 in potential compensation – in the event that something goes wrong with the said company. This will depend on what regulated activity the firm was carrying out for you and whether any exceptions apply.
Note that lousy investment returns in and of their own right, however, would not qualify for compensation.
When should you cash out of stocks?
Investing involves realising a profit from a particular asset class such as shares or property. As such, there are no hard and fast rules when it comes to selling shares. But it makes sense to establish a set of indicators that can be used to trigger the need to review the performance of an investment portfolio.
For example, if a stock that you’ve held has met your objectives, for example, having reached a pre-agreed target price, then it could be time to cash out and reinvest the proceeds elsewhere – even if the stock price continues to climb.
It also makes sense to review your financial goals periodically, say, annually. Doing this can help re-fashion investing strategies which, in turn, may alter your attitude to selling – or holding on to – a particular stock or fund.
Your personal financial circumstances can also change and this might impact on your investment philosophy as well. For example, as a younger investor with a time horizon stretching out decades, you may be happy to retain a high risk tolerance in your portfolio.
As you move into middle or even old age, however, this attitude to risk can change. By this stage, there may be more of an argument to move assets steadily into safer havens such as bonds or cash.
Looking at the other end of the telescope, there can be times when it may not be wise for an investor to sell his or her shares. For example, although it can be difficult to do so, it’s sometimes important to blank out short-term ‘noise’ about a particular company’s performance. One bad set of results might not mean curtains for a business. But it’s certainly worth bearing in mind, in case a trend emerges.
In addition, when markets turn bumpy and share prices start to dip, making a snap decision to sell at a loss means that money won’t ever be recouped. In this sort of scenario, it’s important to put emotions to one side, not follow the herd, and review whether ditching a stock in this situation actually makes sense.
