You’ll probably know that the stock market is where investors buy and sell shares, but it can be difficult to get to grips with exactly how it works.
However, it’s typically seen as one of the best places to grow your money over the long term, so it’s important to understand what the stock market is if you’re learning how to invest.
In this article, we’ll cover what the stock market is, and how you can get started as an investor.
What are shares and do all companies have them?
Shares are essentially units of ownership in a company, which can be bought and sold on the stock market.
If a company is publicly-traded, then that means their shares can be bought and sold by investors in the stock market. Private companies, on the other hand, may also have shares, but these will not be traded publicly.
Shares can go up and down in value depending on a variety of factors. Their value is typically mainly impacted by how well a company performs, but their price can also be affected by world events (such as the coronavirus pandemic), economic changes, or a company’s reputation – for example, a big controversy can cause a company’s shares to fall in value.
You might have heard the phrase “buy low, sell high” – this is the basic principle behind stock trading, where you buy shares as cheap as possible and hope the company does well, so that you will eventually be able to resell them for a profit. Of course, there is no way of knowing for certain how a company will perform, meaning that stock trading – like any form of investment – carries some inherent risk. Read more in our article What’s your attitude to risk?
That said, as an investor, you can choose to invest in shares on the safer or riskier end of the stock market spectrum. For example, buying shares in an industry or large company that has historically performed well is generally considered a safe bet (though always bear in mind that past performance is not a guarantee of future results). On the other hand, buying shares in a new, smaller company selling an innovative idea or product could produce significant gains if the company takes off – or just as easily lose you all your money if they go bust.
Some companies may also pay out a regular income to shareholders, known as dividends, which are essentially a portion of their profits. You can learn more about dividends and how they work in our article How are dividends taxed?
What is a stock market?
A stock market is a term that encompasses all the stocks that trade in a particular region or country, such as the UK or US.
A stock exchange, by contrast, is essentially the marketplace through which investors can buy and sell shares on the stock market. Most stock exchanges have a physical location, such as the London Stock Exchange in Paternoster Square, or the New York Stock Exchange in Manhattan. However, most trading in the stock market is now done online via trading platforms.
When is a company listed on the stock market?
A company has to meet certain requirements in order to be listed with its shares publicly traded for investors to buy and sell. For the London stock exchange, a company must be a certain size, and have a certain percentage of its shares available to investors. A company must also follow strict rules after being listed such as having to make announcements on things that could affect its share price. Buying or selling shares using information that hasn’t been announced or made public is known as insider trading, which is illegal in the UK.
Companies may occasionally be listed on multiple stock exchanges, for example if they operate in multiple countries. This is known as dual-listing.
What is a stock market index?
An index measures the performance of the share price of a group of companies according to a particular category. For example, the FTSE 100 index (pronounced “Footsie”) tracks what’s happening to the share price of the 100 biggest companies on the London Stock Exchange, while the FTSE All-Share index covers the 1,000 biggest companies. Indexes are used by investment experts to track and analyse the stock market, and put together investment funds.
What is an IPO?
An Initial Public Offering (IPO), also known as a stock launch or flotation, is when a company first makes its shares available to the public to buy. It issues shares to raise capital, which it can use to grow and invest in its future.
A company may make its shares available for individual investors and large institutional funds, or it may make its shares available to institutional investors only.
How do you buy and sell shares?
The most common way to buy shares these days is via online investment platforms. Generally, all you need to do is set up an account on your chosen platform’s website or app, and buy shares or/and funds to get started. Some examples of popular online brokers include Interactive Investor, AJ Bell and Fidelity, but there are hundreds of options out there, so do your research and compare platforms to see which you like best.
Different platforms charge different fees for trading so compare these carefully before you get started – some will charge you a flat fee for unlimited trading, for example, which can be more suitable for investors with larger sums to initially invest, while others may charge you every time you buy or sell.
If you want personal recommendations about how to invest, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor* or Unbiased*, or for more information, check out our guide on How to find the right financial advisor for you.
Tips for trading
If you are interested in trading, here are a few key things to remember:
- Do your research – you should never invest in something that you don’t understand.
- Any investment should be held for the long-term – this means a minimum of five years and, ideally, far longer.
- No investment is without risk – even if a company has always done well, there’s no guarantee that its share prices won’t go down.
- If something looks too good to be true, it probably is.
- Learn about diversification – this means investing in a range of investments to reduce risk so you’re not putting all your eggs in one basket
If you want more tips for riding out periods of stock market uncertainty, our guide Four ways to weather stock market storms may help.
You can learn more about investing and whether it might suit you in our article Is investing right for you?
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