Cliffsnotes - Investing in the Stock Market (cliffsnotes.com)
Investing in the stock market
Why invest in stocks and shares?
If you have some money to spare and want to save up for the future,one option you could think about is investing in the stockmarket.
You can make more money investing in the stockmarket than by saving in a bank or building society account, but it’s also much riskier.
With a bank or building society account, you are guaranteed to get back at least the money you put in. If the bank or building society goes out of business, you are guaranteed to get back all the money you put in, up to a maximum limit of £85,000.
However, with stockmarket investments, it’s possible to lose money as well as make it if the value of your stocks and shares goes down.
It’s usually only worth thinking about investing in the stockmarket if you’re willing to invest for a period of five years or more. This is because the longer you invest for, the more likely you are to make money on your investment.
Investing in stocks and shares also means that you won’t be able to get at your money as easily as if you had saved it in a bank or building society account. You will need to think about whether you can get at money in other ways if you need to in an emergency.
For more information about saving for emergencies, see Why do I need to save?
For more information about other ways to save your money, see What’s the best way to save?
What are stocks and shares?
Stocks and shares are bought and sold on the stockmarket. This is also called trading.
The most well-known stockmarket listing (or index) in the UK is the FTSE100 which lists the UK’s top 100 performing companies.
When you buyshares, the company takes your money and invests it. If the company does well, you both make some money. This is called a return. If the company does badly, you risk losing money. The value of your shares can also be affected by world economic and political events.
Investing in stocks and shares is a riskier way to save because it’s possible to lose money rather than make it. But shares can go up quickly in value too. So the longer you invest for, the more likely you are to earn more money than if you had saved with a bank or building society. This is called giving you a higher return.
Ways to invest in the stockmarket
There are many ways to invest in the stockmarket. The most risky way can be to buy and sell shares directly. If the company you choose does badly, you may lose a lot of money.
However, you can reduce that risk by putting your money into a pooled investment fund. This spreads your money between shares and lots of safer investments to lower the risk of losing money if one of them does badly.
These safer investments are usually a mix of government-backed investments called gilts, cash, property and bonds.
Gilts and bonds are basically loans of money to a company or the government. They are considered to be safer than shares because you have more guarantees that you will get your money back. You will get paid interest too.