Investing for Beginners - How to Invest in Stocks in the UK

Contents:

At Koody, we divide investment platforms into three categories based on the type of service and level of support or guidance they offer. The three categories are:

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1. Robo Advisors
2. Trading Apps
3. Investment Platforms

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Robo advisors are technology companies that provide automated financial planning with little or no human supervision. Their products include ready-made investments, managed investments and financial advice.

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Robo advisors are excellent for beginner investors or those who want to avoid the complexities associated with selecting individual stocks, shares, and other investments.

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Please remember that when you invest, your capital is at risk. ISA, pension, and tax rules also apply.

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Here are the best robo advisors for beginners in the UK:

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Trading apps allow you to buy, sell and hold investments such as shares, bonds, funds, ETFs, crypto and CFDs. Unlike robo advisors, they do not provide financial advice or any form of guidance. Their services are aimed at people who are happy making their own investment decisions.
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Please remember that when you trade, your capital is at risk. ISA, pension, and tax rules also apply.
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Here are the best trading apps for beginners in the UK:

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An investment platform, otherwise known as a fund supermarket, allows investors to buy, sell and hold a range of investments in one place, including shares, funds, bonds, commodities, property, CFDs and more.

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You can think of them as a combination of robo advisors, trading apps and much more. They are quite powerful, and you can buy and sell almost any type of investment with them.

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Please remember that when you invest, your capital is at risk. ISA, pension, and tax rules also apply.
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Here are the best investment platforms for beginners in the UK:

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Investing is a way of setting money aside with the expectation that your money will grow in value over time. When you invest, you are essentially putting your money towards assets in the hope that they will appreciate in the future.

As the value of your assets appreciates, you make positive returns on your investments and generate some income along the way. In the same way, the value of your assets could fall, and you could lose some or all of the money you invested.

We all have financial goals. For some, it might be saving towards long-term goals such as living comfortably in retirement. For others, it might be saving towards significant life events such as buying a home or getting married. 

Whatever the goal, investing in stocks and shares can be a great way to grow your money and can offer you higher long-term returns than leaving your money in a savings or current account. 

According to a 2019 Barclays Equity and Gilt survey, shares do better than cash nine times out of ten in any ten-year period. This reduces to seven times out of ten when investing for just five years.

People often ask how much money can be made in the stock market. On average, the value of your investment could rise by about 3 - 12% a year depending on a number of factors, but there are no guarantees.

The success or failure of your investment portfolio will usually depend on several factors, including:

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1. The number of assets in your portfolio.
2. The extent of diversification of your portfolio.
3. The performance of each asset.
4. The length of time you hold each asset.
5. The investment fees.

Apart from the value of your investments appreciating, you can also earn regular income from some of the companies you invest in when they make a profit. This income is called a dividend. A dividend is your share of a company’s profit.

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As you progress in your investment journey, you will come across the phrase, “Past performance is not a reliable indicator of future results”. This is usually to let you know that sometimes your investments can fail and that no human or algorithm can predict how your investments will perform. A company’s past performance cannot guarantee its future success, so the onus is on you to do your own research before investing in the stock market.

The stock market is a marketplace where shares and other assets are bought and sold. There are several stock markets around the world, and in the UK, the main exchange is the London Stock Exchange (LSE). 

The LSE offers trading in shares from big names you’ll have heard of, such as Vodafone on its main market, to smaller companies, such as ASOS listed on the Alternative Investment Market (AIM), its junior market. Anyone can buy shares on the London Stock Exchange, but you need to go through a stockbroker.

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When you start investing in the stock market, you’ll come across market indices. In the UK, the main indices are the FTSE 100 (an index of the 100 largest companies on the LSE), the FTSE 250 (an index of the next 250 largest companies) and the FTSE All-Share (an index of all the shares listed on the LSE’s main market). 

A market index is simply a group of shares of companies representing a particular segment. These companies are usually grouped by size and value.

Indices are used as benchmarks to gauge the movement and performance of market segments. For example, the FTSE 250 can be used to gauge the fortunes of the UK economy.

Beginners can invest in a variety of assets in the stock market. The major types of assets are stocks and shares, funds, bonds, commodities and property.

1. Stocks and Shares: A share is a unit of ownership of a public company. When you buy a share, you own a tiny part of a public company. So, if you bought a share in Apple Inc., for example, you will become a part-owner of Apple. If it performs well, you’ll benefit from its success. If it doesn’t perform well, you may lose some money.
   
   Companies issue shares to raise money to fund their activities. People invest in shares to benefit from the successes of companies they believe in.
   
   You may also come across the word, stock or equity. In most situations, stocks, equities and shares refer to the same thing. Stocks could also mean all your shares in one or more companies.
   
   To fully appreciate how to invest in stocks and shares in the UK, read Best Trading Apps. It explains in great detail ways to trade stocks, how to trade stocks, how to pick stocks and tax on stocks and shares in the UK.

2. Corporate Bonds: When you invest in a corporate bond, you are lending money to a company in return for interest.
   
   
3. Government Bonds: When you invest in a government bond or gilt, you are lending money to a government in return for interest.
   
   
4. Commodities: When you invest in commodities, you are investing in precious metals (gold, silver), oil, agriculture, etc.
   
   
5. Property: When you invest in property, as the name suggests, you are investing in real estate.
   
   
6. Funds: Instead of buying individual shares, bonds, property, commodities or other assets directly, you can choose to invest in a mutual fund.
   
   A mutual fund (or fund) gathers money from you and other investors, and a specialist fund manager invests this money in assets such as shares, bonds, property or commodities, saving you the trouble of buying shares in multiple companies or worrying about building a diversified portfolio.
   
   Investing in funds is safer and cheaper than investing in individual stocks, bonds or commodities since you share the risks and costs with other investors. Funds can be active (actively managed funds), passive (index funds), or traded on a stock exchange (exchange-traded funds (ETFs)).
   
   Most people, including experienced investors, use funds when investing. To fully appreciate how to invest in funds, read our Investing in Funds guide.
   
   ‍Also Read: How to Invest in Your 20s and 30s.

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Before you start investing, it is important to separate the money you want to invest with from your emergency fund and everyday spending pot.

Your emergency fund should be equal to at least three times your monthly living expenses. This will prevent you from dipping into your investments if you find yourself in any form of major financial crisis like a job loss or severe health problem. Try to keep your emergency fund in a high-yield, easily accessible cash savings account like a cash ISA or a standard easy-access savings account.

You also want to have an everyday spending pot so that you do not feel the urge to cash out your investments every time you need to buy groceries or hang out with friends.

More importantly, it is crucial to consider your wider financial position before investing in the stock market. This might include paying off outstanding debts, such as a credit card bill or personal loan. Suppose you have £4,000 outstanding on a credit card charging interest at 19%. It will cost you £760 a year to pay back the debt. Your investments are unlikely to match this return, so it might be wise to pay off the credit card debt and other expensive debts before investing.

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Once your finances are in order, you can invest as much or as little as you feel comfortable with. Most investment platforms and robo advisors will allow you to start investing with as little as £25 a month, and some even accept £1 a month. Investing small amounts regularly is known as “drip-feeding” into your investment pot, and it can sometimes be better than investing a huge lump sum once.

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To invest in stocks in the UK, you need to decide what you want to invest in (e.g. shares, bonds, funds, ETFs, commodities, etc.), pick an investment platform, stockbroker or financial adviser, and choose a tax wrapper.

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Here is a breakdown of how to start investing in the stock market and a handy video on how to invest in funds (ETFs specifically) with InvestEngine:

1. Decide what you want to invest in: First, you need to decide what you want to invest in - stocks and shares, bonds, funds, commodities, or property. Most beginners start with funds (index funds or ETFs). As explained above, funds save you the trouble of buying shares or other assets directly or worrying about building a diversified portfolio. They are also safer and cheaper than investing in individual shares since you share the risks and costs with other investors.
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2. Choose an investment platform: You can buy investments from investment platforms such as banks, building societies, stockbrokers, fund supermarkets, robo advisors, trading apps and other financial institutions. The specific provider you choose will depend on your objectives, investing savviness and personal circumstances. Scroll down to see the best investment platforms for beginners in the UK and to learn more about how to choose one.
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3. ‍Choose a tax wrapper: A tax wrapper reduces the amount of tax you pay on the gains from your savings and investments. Examples of tax wrappers in the UK are Individual Savings Accounts (ISAs) and pensions. Here are some examples:
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• ~~Stocks and Shares ISA: A Stocks and Shares ISA lets you invest your tax-free ISA allowance in qualifying investments such as shares, corporate bonds, government bonds (gilts) and funds. This tax year, your ISA allowance is £20,000. This means you can invest up to £20,000 in a Stock and Shares ISA, and you will not be taxed on any money you make on your investments. A Stocks and Shares ISA is also called an Investment ISA.
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• ~~Lifetime ISA: A Lifetime ISA is open to adults aged 18 and over but under 40 and lets you save up to £4,000 a year towards your first home or retirement. The government will add a 25% bonus to your savings every year up to a maximum of £1,000 per year.
  
  
• ~~Pensions: Tax relief is available from the government when you pay into a pension, but you can’t access the money until you are 55 (increases to 57 in 2028), when you can take 25% as a tax-free lump sum.
  
  
• ~~SIPPs: Self-Invested Personal Pensions, or SIPPs, offer the same tax advantages as other pensions, but you have a greater opportunity to choose the underlying assets.
  
  

It is also worth mentioning that if you do not want to use a tax wrapper, perhaps because you have already used up your ISA allowance for the tax year, you can choose to invest in a general investment account (GIA). 

With the GIA, you are allowed to make up to £12,300 of gains tax-free. Additionally, the first £2,000 you receive in dividends is tax-free. Read our Stocks and Shares ISA guide for more information.

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Here’s a video on how to invest in funds (ETFs specifically) with InvestEngine:

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We’ve outlined some typical investment fees below, focusing only on the fees charged by fund providers. Share-dealing platforms charge pretty similarly, so there is no need to worry about that for now. If you are curious, here is a list of stock trading fees.

Pro Tip: Fixed fees tend to work out cheaper for people investing high amounts, whereas percentage-based fees tend to be less expensive for those with little to invest.

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Here is a breakdown of the typical investment fees:

1. Annual Platform Fee: The annual platform fee is charged by the investment provider for providing a platform for you to invest. It is usually expressed as a percentage of the total value of your portfolio or a fixed fee.
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2. ‍Annual Fund Management Fee: The fund management fee, also known as an Ongoing Charges Figure (OCF) or Total Expense Ratio (TER), is the fee paid directly to the fund manager responsible for managing your funds. When you invest in funds, you typically select a few funds to invest in. If you choose three different funds, for example, you will be required to pay a fund management fee for each fund.
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3. Market Spread: The market spread, also known as transaction cost, is the difference between the buy and sell prices of an asset like an ETF.
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4. ‍Annual Investment Cost: Some providers display this cost as the annual fund management fee plus the market spread.
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5. Trading Fee: The trading fee, also known as a dealing fee or brokerage commission, is the fee for buying and selling funds, shares or other types of investments on the platform. It usually ranges from £0 to £25.
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6. Transfer-Out Fee: The transfer-out fee, also known as an exit fee, is the fee you pay for moving your investments from one fund provider to another. Consider, for example, if you decide to move your investments from AJ Bell to Barclays, you’ll need to pay an exit fee. That said, not all platforms charge an exit fee. But the ones that do typically charge per fund or holding.
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7. Advice Fee: A financial advice fee is only paid if you opt-in for financial advice.

Here are our top ten tips for investing in the stock market:

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1. Risk and reward go hand-in-hand: Keep in mind that higher risk can lead to bigger gains or losses. If you’re young, taking more risks can be beneficial, as you have time to recover from market ups and downs. As you get older, consider less risky investments.

2. Don’t put all your eggs in one basket: Don’t put all your money into one type of investment. Instead, divide your money between different assets (like shares and bonds), industries (like technology and food & beverage), and locations (like America and Europe). In practice, this is usually hard to achieve; that’s why most people, including experienced investors, use funds when investing.

3. Invest for the long term: Investing for the long term is one of the most rewarding habits you can acquire. If you know you’ll need your money in two or three years, for example, you should consider putting your money in a high-interest cash savings account. Investing should always be for the long term, at least five years. This way, you give your money enough time to ride out any fluctuations in the market. You can use a compound interest calculator to estimate your earnings over a specified period.

4. Consider investment charges carefully: Charges are important and can impact your overall returns. If an investment costs 2% and you receive a 5% return, your gain would reduce to just 3%.

5. Check your investments regularly: Whether you hold funds or shares or both, it is vital to review your portfolio regularly so you don’t end up with dud shares or poor-performing funds. While we do not advocate selling your investments every time the market takes a hit, if you are convinced you’ve invested in a rubbish fund, you may want to sell it and invest your money elsewhere. Additionally, your investments will change in value over time, and some assets may not align with your objectives. When this happens, you may need to rebalance your portfolio to keep up with your investment goals.

6. Don’t try to time the market: Since no perfect equation exists to tell us exactly how share prices will behave, trying to time the markets can be painfully futile. You may sell too quickly or buy too late. It is better to hold on to your investments through tough times and avoid making panic-driven decisions.
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7. Take advantage of tax-free accounts: When investing in the UK or other parts of the world, a rule of thumb is to always put the maximum amount in the tax-free account. In the UK, we have ISAs and pensions. These accounts are tax-efficient and help you limit your tax liability.
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8. Stay informed and educate yourself: Knowledge is power in the world of investing. Stay up-to-date with financial news, research companies and industries, and learn from the experts. The more you know, the better decisions you can make when it comes to investing in the stock market.
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9. Set clear financial goals: Before diving into the stock market, determine your financial goals. Are you investing for retirement, a child’s education, or to buy a house? Knowing your goals will help you create an investment strategy that aligns with your specific needs.
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10. Keep emotions in check: The stock market can be volatile, and it’s easy to get caught up in the emotional rollercoaster of ups and downs. Remember that the market will always experience fluctuations, and it’s crucial to avoid making impulsive decisions based on fear or greed. Stick to your long-term investment plan and remain disciplined, even when emotions run high.

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Here are the best investment platforms for beginners in the UK:

1. InvestEngine - Low cost; 500+ Commission-free ETFs
2. eToro - 0% Commission on real stocks; 3,000+ Instruments
3. Freetrade - Low cost; Commission-free trading; Beginner friendly
4. Moneyfarm - Mid-price range; Offers advice and ESG investments
5. Moneybox - 0% Commission on US stocks; Good for beginners
6. Wealthify - Mid-price range; Offers ethical themes; Beginner friendly

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No, you cannot lose more money than you invest in the stock market.

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In the UK, there are protections for retail investors, which means you cannot lose more than you have invested, even when trading on margin. However, it is possible to lose everything you’ve invested.

If you are not trading on margin, the only time you really lose money in the stock market is when you are forced to sell your investments in bad years. However, if you can hold on to your investments even when the market takes a hit, things should improve in the following years, but there are no guarantees.

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You may also lose money if you choose to invest in only one company and that company fails. Investing in just one company is the riskiest thing you could do in the stock market. Ideally, you should invest in a wide range of companies operating in different sectors across different geographies. Creating a diversified investment portfolio like this can be tricky; that’s why most investors, even the most experienced ones, use funds when investing.

Yes, you can make a lot of money from investing in stocks, but you can lose a lot of money too. Always remember that the stock market is not a place to create wealth. It is a place to grow your wealth.

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The best way to create wealth is to build a company or get hired by an existing company. Depending on your circumstances, the business you build may create wealth for you passively or actively. As an employee, you create wealth actively by going to work and earning a wage.

The second-best way to create wealth is to cut your costs. It is the gap between your income and expenses that creates wealth. We cannot stress this enough. Do not let society pressure you into spending unnecessarily. If you need to track your expenses to understand your spending better, use our free budget app, Budget by Koody.

The third-best way to create wealth is to improve your skills. One of our favourite quotes is by best-selling author Hal Elrod. He wrote, “Your level of success will seldom exceed your level of personal development because success is something you attract by the person you become.”

It is when you have created wealth that you may invest and grow your wealth in the stock market. Wealth can be anything from £1 to £1 billion or more, depending on your circumstances. Today, many investment platforms will allow you to start investing with as little as £25 per month. Some even accept £1 per month.

There are many ways to research what to invest in. We recommend the following websites for company news, research and commentary: Motley Fool, ADVFN, Hargreaves Lansdown, Interactive Investor, CNBC, The FT and Reuters. Additionally, have a look at this Spot the Dog guide by Bestinvest - it shows underperforming funds that you probably want to avoid.

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As a beginner investing for the first time, you can invest as much or as little as you feel comfortable with. Most investment platforms and robo advisors will allow you to start investing with as little as £25 a month, and some even accept £1 a month.

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Here are some of the best ways to invest with little money:

1. Robo Investing: Robo investing is automated financial planning offered by robo advisors. It is a simple way to invest in hundreds of stocks, bonds and funds directly from your smartphone without dealing with the hassle of picking individual stocks, shares or other types of investments. You can start robo investing with as little as £1.
   
   
2. Automatic Investing: When you sign up for auto-investing, you give a finance app permission to invest your spare change in the stock market regularly. Automatic investment apps use their technology to estimate how much you can afford to invest and automatically invest it for you.
   
   
3. Direct Debits (Regular Investing Service): Most investment platforms give you the option to invest small amounts regularly using their regular investing service. Tip: Regular investing dealing fees tend to be cheaper than standard dealing fees. Some platforms don’t even charge a fee for regular investing.

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Beginner investors with little money can start by investing for the long term in low-cost global or total-market index funds and ETFs. An index fund is a broad portfolio of stocks or bonds in publicly listed companies that tracks the performance of a market index, whereas an ETF is an investment fund that trades on a stock exchange like an individual stock.

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Both index funds and ETFs offer significant diversification benefits and have very low fees ranging from 0.05% to 1.00% of the total value of your investment portfolio.

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There have been many instances of prominent investors, including Warren Buffet, advising everyday investors to buy index funds and ETFs instead of picking individual stocks and trying to time the market. Some of these seasoned investors have even gone as far as saying, “The single best choice for a lifelong holding is a total stock-market index fund.”

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Investing in passive index tracker funds and ETFs is one of the best ways to start investing in the UK, and the best investment platforms for beginners will offer a wide range of index funds and ETFs.

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Here, you can view the five-year performance of some of the best index funds and ETFs in the UK.

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The best investments for beginners in the UK are:

1. Index tracker funds
2. Individual stocks and shares
3. Exchange-traded funds (ETFs)
4. Exchange-traded commodities (ETCs)
5. Real estate investment trusts (REITs)
6. Government bonds and gilts
7. Corporate bonds
8. Treasury bills

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The best way to invest money in the UK is to implement a low-cost passive investing strategy, which focuses on simplicity, cost-effectiveness, and diversification while taking advantage of tax-efficient investment accounts such as ISAs and pensions. For example, you may buy one or two low-cost index funds or ETFs and store them in a Stocks and Shares ISA or Private Pension.

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This strategy is ideal for young investors who want to build wealth over time without the hassle of constantly monitoring and managing their investments. A key aspect of this strategy is to maximise the use of tax wrappers, such as Individual Savings Accounts (ISAs) and pensions, which provide significant tax advantages for long-term investors and help maximise your investments.

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ISAs, for example, offer tax-free growth on investments held within them, allowing you to avoid paying taxes on capital gains and dividends. Pensions, on the other hand, offer tax relief on contributions, which means that your money grows tax-free until you start withdrawing it in retirement. Utilising these tax wrappers in conjunction with a passive investing strategy can help you to maximise your investment returns and achieve your financial goals more effectively.

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For more information on how to invest, check out these investing books.

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2. MoneyHelper
3. The London Stock Exchange

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