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Some investors buy shares in companies that typically pay high dividends in order to create an income, even if they do not expect the shares to rise rapidly in value. Reinvesting dividends in shares can dramatically increase returns over the longer term. Just so long as the shares go up. The Barclays Equity Gilt Study , which looks at long-term results from investing, shows that over a ten-year period the average annual investment return from shares adjusted for inflation is 5 per cent.
One of the big winners for those investing over the long-term is reinvested dividends, which allows you to benefit from compounding. The Barclays study, which uses data stretching back to the nineteenth century, highlights the importance of reinvesting income. But low-priced shares are not necessarily better value.
In fact, companies whose shares cost just a few pence are often involved in risky industries, such as mining exploration or technology. What matters most is whether or not you believe a firm is going to do well. If you want to value shares, then you need to do so using one of the typical valuation methods. This compares a company's share price to the profits it makes per share.
This maybe because it is judged to have poor growth prospects or because the market has overlooked it. Always compare share valuations to the kind of company that it is, its peers and the market as a whole. Over the long term, the single most important factor is rising profits, or the expectation of them. Several other factors influence price, though. If the overall stock market is rising, many shares will be dragged up in its wake and if stockbrokers are optimistic about a particular sector — property for example — then shares in companies in the property sector will benefit.
Remember that the market looks at the future, not the past, so brokers and big investors are far more interested in how a company is expected to do in the years ahead than how it performed last year. Sentiment is a key driver when it comes to share prices. If the market doesn't like a company for whatever reason, its share price can remain depressed even as it continues to grow profits. In contrast, the market may have decided that it loves a company - these are often called story stocks - and rate it more highly than you would expect.
These anomalies in valuation can provide opportunities for investors. Picking individual shares is not for everyone. A report by specialist magazine Investors Chronicle said the ideal number of shares for a portfolio is 15, spread across different sectors. A simple way around this is to invest in either active funds or investment trusts, where a fund manager chooses a basket of shares for you, or in passive tracker funds or exchange traded funds, which follow an index up or down.
Fund managers will tell you that the advantage of an active fund is their expertise but you actually have to choose the right manager to benefit from this. Many consistently fail to beat their benchmark and still levy their fees - a handful do actually outperform year after year.
Of course, investing in shares and funds does not have to be mutually exclusive. One investing idea is to build a core portfolio of funds and use a smaller part of your portfolio to add some spice by dabbling in picking individual shares. When a company first floats on the stock market, such as Royal Mail did, it is sometimes possible to apply for shares directly from that firm.
Generally, however, shares are bought through a stockbroker or a financial services firm. Many of these firms allow investors to buy and sell shares online simply by filling out an online form. Investors can also buy and sell shares over the phone by ringing a stockbroker or a financial adviser.
The best bet for a DIY investor is one of the many investing platforms available, ranging from those that offer funds only, to those that allow you to invest across shares, funds, investment trusts, bonds and more. These will allow you to set up an account online and then pay in a lump sum to invest how you choose, or sign up for regular direct debit monthly payments into a selection of investments - or do both.
Most platforms are very simple to use and easy to get used to. They will offer varying degrees of tips, analysis, tools and service. This is Money's best DIY investing platforms round-up , highlights some of our favoured platforms and explains how their charging works. Costs vary according to the service you need. The more trades you do, the cheaper each one is. Stamp duty of 0. Some investors like to seek help from their brokers. The more advice you take, the more it costs.
Large, established companies are listed on this market and they have to satisfy certain regulations before they are allowed to join it. Also part of the London Stock Exchange, it is designed for smaller companies. The regulations are less strict than for the Main Market, but companies still have to satisfy certain criteria before joining.
Income Stock: Shares that pay generous dividends are known as income stocks because they provide shareholders with an annual income. They rarely pay a dividend. Yield: If you buy a share at p and the company pays a dividend of 5p, that share is offering a 5 per cent yield. The yield is calculated by dividing the dividend by the share price and multiplying by Capital Gain: If you buy a share at p and sell it at p, the 20p that you have made is referred to as a capital gain.
This depends on what service you want. Investors who just want to trade online may be tempted to seek out the cheapest provider. That is fine, as long as the firm is regulated by the Financial Conduct Authority. Some investors may prefer dealing with a firm whose name they recognise and websites differ too, so it is important to find one that is easy to navigate.
Investors who are looking for advice as well as trading services should talk to a range of brokers before making any firm decision. Look for a broker that you trust and respect. Shareholders can be divided into traders and investors. Traders buy and sell shares frequently, hoping to make quick profits. Investors hold on to their shares for at least five years and generally a lot longer. Long-term investment in shares should prove rewarding, particularly when investors reinvest their dividends to acquire more shares.
Sometimes, however, if a share has risen significantly, investors might choose to sell some of their stock. This is known as top-slicing. The first point to consider is whether you can afford to lose the money. Shares are not risk-free investments, so if you need the cash to pay the mortgage or school fees, tread very carefully.
It is also useful to do your own research. Make a list of things you want. For example, what lifestyle do you want to have once you retire? Do you enjoy traveling, nice cars, or fine dining? Do you have only modest needs? Use this list to help you set your goals in the next step. For example, do you want to send your children to a private school or college?
Do you want to buy them cars? Would you prefer public schools and using the extra money for something else? Having a clear idea of what you value will help you establish goals for savings and investment. Set your financial goals. In order to structure an investment plan, you must first understand why you are investing. In other words, where would you like to be financially, and how much do you have to invest to get there?
Remember that costs vary widely depending on the location and type of school public, private, etc. Also remember that college expenses include not only tuition, but also fees, room and board, transportation, books and supplies. This is especially true for long-term projects such as retirement funds. Make sure you consider both your short-term and long-term goals.
Determine your risk tolerance. Acting against your need for returns is the risk required to earn them. Your risk tolerance is a function of two variables: your ability to take risks and your willingness to do so. There are several important questions you should ask yourself during this step, such as:  X Research source What stage of life are you in? In other words, are you near the low end or closer to the peak of your income-earning potential?
Are you willing to accept more risk to earn greater returns? What are the time horizons of your investment goals? How much liquidity i. Don't invest in stocks until you have at least six to twelve months of living expenses in a savings account as an emergency fund in case you lose your job. If you have to liquidate stocks after holding them less than a year, you're merely speculating, not investing.
If the risk profile of a potential investment does not conform to your tolerance level, it's not a suitable option. Discard it. Your asset allocation should vary based on your stage of life. For example, you might have a much higher percentage of your investment portfolio in stocks when you are younger. Also, if you have a stable, well-paying career, your job is like a bond: you can depend on it for steady, long-term income. This allows you to allocate more of your portfolio to stocks.
Conversely, if you have a "stock-like" job with unpredictable income such as investment broker or stock trader, you should allocate less to stocks and more to the stability of bonds. While stocks allow your portfolio to grow faster, they also pose more risks.
As you get older, you can transition into more stable investments, such as bonds. Learn about the market. Spend as much time as you can reading about the stock market and the larger economy. Listen to the insights and predictions of experts to develop a sense of the state of the economy and what types of stocks are performing well. There are several classic investment books that will give you a good start: The Intelligent Investor and Security Analysis by Benjamin Graham are excellent starter texts on investing.
This is a short and concise treatise on reading financial statements. This highly readable book provides a new perspective on security analysis and is a good complement to Graham's books. Warren Buffett once said he was 85 percent Graham and 15 percent Fisher, and that is probably understating the influence of Fisher on shaping his investment style.
Buffett made his entire fortune investing, and has lots of very useful advice for people who'd like to follow in his footsteps. Buffett has provided these to read online free: www. These are easy to read, informative and entertaining. Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay and Reminiscences of a Stock Operator by William Lefevre use real-life examples to illustrate the dangers of emotional overreaction and greed in the stock market.
You can also enroll in basic or beginner investment courses offered online. Sometimes these are offered free by financial companies such as Morningstar and T. These are often low-cost or free and can provide you with a solid overview of investment. Look online to see if there are any in your area. Practice by "paper trading. You can literally do this on paper, or you can sign up for a free practice account online at places such as How the Market Works.
Practicing will help you hone your strategy and knowledge without risking real money. Formulate your expectations for the stock market. Whether you are a professional or a novice, this step is difficult, because it is both art and science. It requires that you develop the ability to assemble a tremendous amount of financial data about market performance. You also must develop "a feel" for what these data do and do not signify.
This is why many investors buy the stock of products that they know and use. For such household products, try to envision economic conditions that might lead you to stop purchasing them, to upgrade, or to downgrade. If economic conditions are such that people are likely to buy a product you are very familiar with, this might be a good bet for an investment.
Focus your thinking. While trying to develop general expectations about the market and the types of companies that might be successful given present or expected economic conditions, it's important to establish predictions in some specific areas including: The direction of interest rates and inflation, and how these may affect any fixed-income or equity purchases. Consumers have more money to make purchases, so they usually buy more. This leads to higher company revenues, which allows companies to invest in expansion.
Thus, lower interest rates lead to higher stock prices. In contrast, higher interest rates can decrease stock prices. High interest rates make it more difficult or expensive to borrow money. Consumers spend less, and companies have less money to invest. Growth may stall or decline. Inflation is an overall rise in prices over a period of time.
Moderate or "controlled" inflation is usually considered good for the economy and the stock market. Low interest rates combined with moderate inflation usually have a positive effect on the market. High interest rates and deflation usually cause the stock market to fall. Favorable conditions within specific sectors of an economy, along with a targeted microeconomic view. In strong economies, consumers are likely to feel confident about their futures, so they spend more money and make more purchases.
These industries and companies are known as "cyclical. These industries and companies are usually not as affected by the economy. For example, utilities and insurance companies are usually less affected by consumer confidence, because people still have to pay for electricity and health insurance. These industries and companies are known as "defensive" or "counter-cyclical.
Part 2. Determine your asset allocations. In other words, determine how much of your money you will put in which types of investments. Decide how much money will be invested in stocks, how much in bonds, how much in more aggressive alternatives and how much you will hold as cash and cash equivalents certificates of deposit, Treasury bills, etc. Securities and Exchange Commission Independent U. Select your investments.
Your "risk and return" objectives will eliminate some of the vast number of options. As an investor, you can choose to purchase stock from individual companies, such as Apple or McDonalds. This is the most basic type of investing. A bottom-up approach occurs when you buy and sell each stock independently based on your projections of their future prices and dividends.
Investing directly in stocks avoids fees charged by mutual funds but requires more effort to ensure adequate diversification. Select stocks that best meet your investment needs. If you are in a high income tax bracket, have minimal short- or intermediate-term income needs, and have high risk tolerance, select mostly growth stocks that pay little or no dividends but have above-average expected growth rates. Low-cost index funds usually charge less in fees than actively-managed funds.
The fund would purchase most or all of the same assets, allowing it to equal the performance of the index, less fees. This would be considered a relatively safe but not terribly exciting investment. Advocates of active stock picking turn their noses up at such investments. Choose index funds with the lowest expense ratio and annual turnover. See Decide Whether to Buy Stocks or Mutual Funds for more information whether individual stocks or mutual funds are better for you.
An exchange-traded fund ETF is a type of index fund that trades like a stock. ETFs are unmanaged portfolios where stocks are not continuously bought and sold as with actively managed funds and can often be traded without commission. You can buy ETFs that are based on a specific index, or based on a specific industry or commodity, such as gold. You can also invest in actively managed mutual funds. These funds pool money from many investors and put it primarily into stocks and bonds.
Individual investors buy shares of the portfolio. Go to source Fund managers usually create portfolios with particular goals in mind, such as long-term growth. Mutual fund expense ratios can end up hurting your rate of return and impeding your financial progress. These are "asset allocation" or "target date" funds that automatically adjust their holdings based on your age. For example, your portfolio might be more heavily weighted towards equities when you are younger and automatically transfer more of your investments into fixed-income securities as you get older.
In other words, they do for you what you might be expected to do yourself as you get older. Costs and fees can eat into your returns and reduce your gains. It is vital to know what costs you will be liable for when you purchase, hold, or sell stock. For funds, costs may include management fees, sales loads, redemption fees, exchange fees, account fees, 12b-1 fees, and operating expenses.
Determine the intrinsic value and the right price to pay for each stock you are interested in. Intrinsic value is how much a stock is worth, which can be different from the current stock price. The right price to pay is generally a fraction of the intrinsic value, to allow a margin of safety MOS. There are many techniques used to value stocks: Dividend discount model : the value of a stock is the present value of all its future dividends.
Discounted cash flow DCF model : the value of a stock is the present value of all its future cash flows. A typical DCF calculation projects a growth rate for annual free cash flow operating cash flow less capital expenditures for the next 10 years to calculate a growth value and estimate a terminal growth rate thereafter to calculate a terminal value, then sum up the two to arrive at the DCF value of the stock. It compares the stock's current price ratios with an appropriate benchmark and the stock's historic average ratios to determine the price at which the stock should sell.
Purchase your stock. Once you've decided which stocks to buy, it is time to purchase your stocks. Find a brokerage firm that meets your needs and place your orders. You can select a discount broker, who will simply order the stocks you want to purchase. You can also choose a full-service brokerage firm, which will cost more but will also provide information and guidance. The most important factor to consider here is how much commission is charged and what other fees are involved. Some brokers offer free stock trades if your portfolio meets a certain minimum value e.
Merrill Edge Preferred Rewards , or if you invest within a select list of stocks whose companies pay the transaction costs e. Some companies offer direct stock purchase plans DSPPs that allow you to purchase their stock without a broker. If you are planning on buying and holding or dollar cost averaging, this may be your best option.
Search online or call or write the company whose stock you wish to buy to inquire whether they offer such a plan. Build a portfolio containing between five and 20 different stocks for diversification. Diversify across different sectors, industries, countries, company size, and style "growth" vs. Hold for the long term, five to ten years or preferably longer. Avoid the temptation to sell when the market has a bad day, month or year.
The long-range direction of the stock market is always up. On the other hand, avoid the temptation to take profit sell even if your stocks have gone up 50 percent or more. As long as the fundamental conditions of the company are still sound, do not sell unless you desperately need the money. It does make sense to sell, however, if the stock price appreciates well above its value see Step 3 of this Section , or if the fundamentals have drastically changed since you bought the stock so that the company is unlikely to be profitable anymore.
Invest regularly and systematically. Dollar cost averaging forces you to buy low and sell high and is a simple, sound strategy. Set aside a percentage of each paycheck to buy stocks. Remember that bear markets are for buying. That may sound scary, but the market has always bounced back, even from the crash that occurred between and The most successful investors have bought stocks when they were "on sale.
Part 3. Establish benchmarks. It is important to establish appropriate benchmarks in order to measure the performance of your stocks, as compared to your expectations. Develop standards for how much growth you require of each specific investment in order to consider it worth keeping.
Typically these benchmarks are based on the performance of various market indexes. These allow you to determine whether your investments are performing at least as well as the market overall. It may be counter-intuitive, but just because a stock is going up does not mean it is a good investment, especially if it is going up more slowly than similar stocks. Conversely, not all shrinking investments are losers when similar investments are doing even worse. Compare performance to expectations. You must compare the performance of each investment to the expectations you established for it in order to determine its worth.
This goes for assessing your other asset allocation decisions as well. Investments that do not meet expectations should be sold so your money can be invested elsewhere, unless you have good reason to believe your expectations will soon be met. Give your investments time to work out. One-year or even three-year performance is meaningless to the long-term investor. The stock market is a voting machine in the short term and a weighing machine in the long term.
Be vigilant and update your expectations. Once you have purchased stock, you must periodically monitor the performance of your investments. This is a part of investing. The key is to properly process and assess all new information and implement any changes according to the guidelines set in the previous steps. Consider whether your market expectations were correct.
If not, why not? Use these insights to update your expectations and investment portfolio. Consider whether your portfolio is performing within your risk parameters. It may be that your stocks have done well, but the investments are more volatile and risky than you had anticipated. If you aren't comfortable with these risks, it's probably time to change investments.
Consider whether you are able to achieve the objectives you set. It may be that your investments are growing within acceptable risk parameters but are growing too slowly to meet your goals. If this is the case, it's time to consider new investments. Guard against the temptation to trade excessively.
After all, you are an investor, not a speculator. In addition, every time you take a profit, you incur capital-gains taxes. Besides, every trade comes with a broker's fee.
Invest in high-yield stocks. Invest in stocks with stable businesses that pay dividend yields of 5% to 15% or more. Some industries offering. One of the best ways for beginners to get started investing in the stock market is to put money in an online investment account, which can then. investing in the stock market hoping for a quick profit speculation loss of property due to nonpayment of the mortgage foreclosed.