Anyone putting their money into a savings account in recent years will have noticed they are getting very little return in the way of interest. Policies aimed at stabilising the economy following the financial crisis changed the landscape for savers and investors. Low interest rates have meant that the value of savings has stagnated and even fallen once inflation is taken into account. This means that the only chance for a better return is to embrace more risk – the main way to do this is to consider the stock market.
Ask a room full of people how they feel about financial risk and most will probably shy away. And for good reason you might think. Between June 2007 and March 2009, the FTSE All-Share Index, a key measure of UK stock market performance, fell nearly 50%. By early 2014, it had more than recovered those losses but has fallen again since. This could be why fewer than a quarter of UK adults invest directly in stocks and shares.
Or, perhaps, the reality is we just know or understand very little about the stock market. We view it as a place where city whizz kids trade, not something we could handle in our spare time. Actually, however, millions of us already invest in shares indirectly through pension schemes – usually without suffering sleepless nights.
How it works
When you buy shares, you are buying a small slice of the company that issued them. You share in the profits the company makes if it pays out dividends and may make a gain by selling the shares at a higher price than you originally paid. But dividends are not guaranteed, and the share price may have fallen when you come to sell so that you lose some of your original money or earlier gains. The company could even go bust in which case you might lose all your money.
Although spreading your money across many different shares helps to reduce these risks, shares are not suitable if you can invest for only a few years or will need your money back at short notice. However, over the long-term – say 10 years or more – shares have consistently beaten the return on savings. According to research by Barclays, taking every ten-year period between 1899 and 2012, the return on savings after inflation has averaged -0.2% a year. By contrast, the return on shares has averaged 5% a year more than inflation. So, shares are on average the better choice if you are setting money aside for the long-term.
Funds, schemes, accounts
There are two main ways to invest: directly yourself or through investment funds. Investment funds are ready-made portfolios, run by professional managers, that automatically spread your money across many shares (or other investments). They can be a good choice if you have a relatively small amount to invest (say, less than £10,000).
Whichever you choose, there are tax advantages to be had if you invest through an Individual Savings Account (ISA) or a pension scheme, such as a Self-Invested Personal Pension (SIPP).
If you belong to a pension scheme through work, in many cases, you will be building up your own pension pot that’s invested in the stock market. Workplace pension schemes have some features that are good pointers for any stock market investor:
You pay in regularly, avoiding impossible decisions about when is the “right” time to invest.
You get a statement just once a year telling you how your investment is doing. This forces you to focus on the longer term and ignore alarming but irrelevant short-term fluctuations in the stock market.
Brokers
If you want to invest other money directly in shares, you have to do this through a stock broker. The easiest way to buy and sell is to open an online trading account with the broker, although some let you trade by phone or post.
Traditionally, there is a charge (called commission) each time you buy or sell. This could be a flat fee (starting at around £10) or a percentage of the value of the shares. Some online brokers levy a regular monthly, quarterly or annual charge either instead of commission or in addition to it. The charging structure that suits you will depend on how frequently you trade. Which? and Investors Chronicle both publish surveys that can help you choose the right broker for you.
Most brokers also let you buy and sell investment funds. Alternatively, you can buy funds from specialist websites called fund platforms, or directly from the management companies that run the funds. The Investment Management Association publishes details about a wide range of these funds.
There’s no commission when you buy and sell funds. But you have to pay for the management and administration of the fund – often representing around 0.75 to 1% a year of the value of your holding. And there can be other charges too.
If you are not sure whether shares are right for you or which to choose, opt for a broker that offers advice or consult a professional financial adviser. If you haven’t considered the stock market, it could be a smart move if you have long-term savings sitting idle in bank and building society accounts where they are potentially losing their value.