Stocks and Shares: Where to Start if You Want to Become an Investor

From assessing your risk tolerance to understanding the tax implications of investing

Before jumping into the stock market, it’s essential to evaluate whether it’s the right move for you. Consider paying off any high-interest debt and ensure you have enough cash savings for emergencies. Investing money that you might need in the near future is not advisable, as stock values can fluctuate, and you may need to sell at a loss if markets dip.

Decide If Investing Is Right for You

Investing comes with the risk of losing money, and it’s important to understand your own attitude toward risk. If the idea of losing money makes you anxious or likely to panic, investing in stocks might not be for you. It’s difficult to predict how you’ll react to losses until you’ve experienced them.

Do Your Research

Everyone dreams of picking the next great company, but identifying a successful stock isn’t easy. Chasing trends or so-called “hot stocks” can be risky, especially if the decision is based on rumors or social media hype. Often, if many investors are pursuing the same stock, it may already be overvalued.

Instead, focus on understanding the fundamentals of any company you’re considering investing in. Learn how the company generates income and what risks and opportunities it faces. Familiarize yourself with investment terms such as the price-to-earnings (P/E) ratio, which compares a company’s share price to its earnings per share. A higher P/E ratio often indicates that the market values the company more highly.

It’s also helpful to read investment factsheets, which provide key information such as dividend yields and P/E ratios. Additionally, look at expert opinions and broker recommendations, but remember that no one can predict the market with certainty.

Find a Broker

To buy and sell shares, you’ll need a share-dealing account. There are many options available, including both traditional financial institutions and online brokerage services. Each provider will charge fees, so it’s important to compare costs. There are usually fees for executing trades, as well as account maintenance fees.

Think Long Term

Investing with a long-term mindset generally works better than trying to profit from short-term market movements. Frequent trading can incur higher fees, and every transaction carries its own risks. To increase your chances of success, it’s wise to plan to keep your investments for at least three to five years. This reduces the likelihood of needing to sell your shares when their value is down.

Spread the Risk

Diversifying your portfolio—spreading your investments across different companies—can help manage risk. This way, if one company underperforms, gains in other investments may offset those losses. A common strategy is to hold at least 20 different companies in your portfolio for adequate diversification.

If picking individual stocks feels daunting, you might consider investing through an exchange-traded fund (ETF). ETFs hold a variety of stocks and offer a way to gain exposure to multiple companies without having to select each one individually.

Know Your Goals

When investing, it’s important to know what you’re aiming for. Some investors seek growth, hoping for a rise in share prices to sell at a profit. Others focus on income, investing in companies that pay dividends—regular payments made to shareholders from the company’s profits.

If you’re interested in dividend-paying stocks, don’t simply chase the companies with the highest dividends. Investigate why the dividend is high and whether it’s sustainable, as companies can suspend or reduce their dividend payments at any time.

Regularly investing a portion of your income rather than a one-off lump sum can also be beneficial. This strategy, called “pound cost averaging,” allows you to buy more shares when prices are low, helping smooth out market volatility over time.

Understand the Tax Implications

When you sell your shares, you may be liable to pay capital gains tax (CGT) on the profit. There is a tax-free allowance, but anything above that may be subject to tax. The rate depends on your total earnings and profit from the sale.

If your investments are not held within a tax-free account, such as a specific tax-sheltered investment account, every sale may trigger CGT, even if you’re reinvesting the funds. Additionally, dividend income is taxable once it exceeds a certain threshold, and the rate of tax depends on your income bracket.

It’s also worth noting that tax policies can change, so it’s important to stay informed about any potential adjustments that could impact your investments.

Have an Exit Strategy

Ideally, your investments will grow, and you’ll sell for a profit. However, market downturns can cause investors to panic and sell too soon, missing out on potential future gains. Historically, many investors have sold at the wrong time and missed out on recoveries.

To avoid this, it’s helpful to have a clear strategy for both buying and selling. Understand why you’re investing in a particular company and what conditions would prompt you to sell. While market downturns are inevitable, those who can remain patient and stay invested often see better long-term outcomes.

By taking these steps, you can make informed decisions, manage risks, and develop a solid investment strategy that aligns with your financial goals.

Founded in 2017, Fintuity has fast become one of the only digital Independent Financial Advisers (IFA) in the United Kingdom.  Fintuity offers a wide range of financial advisory services including pensions, protection, investments and mortgage advice. The key difference is that as an exclusively digital service, we can offer significant savings and a service that is direct to you and on demand.