Uk Equities: A Beginner's Guide To Getting Started

Investing in equities can be a great way to grow your wealth, but it's important to understand the risks involved. Equities are a type of security that represents ownership in a company, and they are commonly referred to as stocks or shares. By purchasing equities, you become a partial owner of a company and are entitled to a portion of its profits and assets. There are two main types of equity investments: public equity and private equity. Public equity involves investing in companies that are already trading on a stock exchange, while private equity involves investing in companies that are not publicly traded. When considering how to invest in equities in the UK, it's important to keep in mind the country's economic and political landscape, which can impact the performance of equities. Additionally, there are different investment strategies to choose from, such as leveraged buy-outs and venture capital, each with its own level of risk and potential return.

How to buy shares in a company

The process of buying shares in the UK has become a lot more accessible in recent years. In this guide, we will explain the steps involved with buying shares from an online broker.

Step 1: Choose a Broker

First, you will need to choose a share dealing platform or online brokerage. There are many options available, so it is worth researching the fees and features of each platform before signing up.

Step 2: Open an Account

Once you have chosen a broker, you will need to open an account. This usually involves providing some personal information and creating a password. Some platforms may also ask you to upload proof of identity and address.

Step 3: Fund Your Account

Before you can buy shares, you will need to deposit money into your account. This is usually done by bank transfer or debit card.

Step 4: Research Shares

Before buying shares, it is important to research the companies you want to invest in. Some platforms will provide inspiration and analysis tools, but you will also need to do your own research.

Step 5: Find Your Shares

Once you know which shares you want to buy, you can search for them by name or stock ticker symbol.

Step 6: Place Your Order

When you are ready to buy, simply hit the "buy" button or create an order.

Things to Consider Before Buying Shares

Risk and Diversification

Investing in shares carries a degree of risk, and it is possible to lose some or all of your investment. To mitigate this risk, it is important to diversify your portfolio by investing in a variety of companies across different industries.

Fees and Charges

There are several costs to consider when buying shares, including platform fees, commissions, tax, and foreign exchange fees. These can quickly add up, so it is important to choose a platform with minimal fees, especially if you are investing small amounts.

Long-Term Investing

Investing in shares is generally considered a long-term strategy, and it is recommended to invest for at least five years to ride out any bumps in the market.

Share Scams

Be wary of share scams, such as cold callers offering worthless or non-existent shares. Always do your own research and only invest through reputable platforms.

How to buy shares via investment funds

Investment funds are a way to buy shares indirectly. They are professionally managed and pool money from multiple investors to purchase a 'package' of shares and other assets such as bonds.

There are three main types of funds to choose from:

• Open-ended investment companies (OEICs): Actively managed funds where investors buy units that rise and fall in value with the underlying assets.
• Exchange-traded funds (ETFs): Investors buy shares in an ETF, the value of which changes with the underlying index it tracks. ETFs are passively managed.
• Investment trusts: Also known as 'close-ended investments', investors buy shares in an investment trust. They are mostly actively managed, but the share price may differ from the value of the underlying investments.

Actively managed funds aim to outperform a benchmark or index through active stock-picking, while passively managed funds aim to replicate an index and generally charge lower fees.

• Open a trading account: Choose an investment platform that suits your needs and open a trading account. You will need to verify your identity. Check that the company is listed on the FCA register to ensure it is legitimate.
• Add funds to your account: Transfer funds from your bank account to your investment platform.
• Decide which funds to buy and how much to invest: Research different funds and decide which ones you want to invest in. You can either buy a specific number of shares or set a fixed amount of money to invest.
• Follow the platform's process for buying shares: Each platform will have its own process for buying shares, which should be straightforward and only take a few clicks.
• Monitor your portfolio: Use the platform's tools to review the performance of your shares in real time and access historical data.

Remember to always do your research and understand the risks involved before investing.

The pros and cons of equity investing

Equities, also known as stocks or shares, are units of ownership of a company. They can be traded on a stock exchange, such as the London Stock Exchange (LSE). Equity investing has pros and cons that should be carefully considered before making any investment decisions.

Pros of Equity Investing:

• Growth potential: Historically, equities have offered greater returns than cash savings over longer periods, typically five years or more.
• Dividend payments: Many UK companies distribute a portion of their profits to shareholders annually through dividends.
• Voting rights: Shareholders can influence company decisions such as mergers, acquisitions and executive pay.
• Diversification: Investing in equities allows investors to diversify their portfolios across different sectors and industries, reducing the risk of relying on a single investment.
• Global opportunities: Investing in equities provides exposure to global markets, as many UK-listed companies operate internationally.

Cons of Equity Investing:

• Financial risk: Share prices fluctuate due to various factors, and returns are not guaranteed. Investors could lose some or all of their investment.
• Volatility: Equity investors must be comfortable with short-term fluctuations in the value of their investments.
• Fees and costs: Trading equities through an investment platform may incur fees, affecting overall returns.
• Time commitment: Building and managing an equity portfolio requires time and effort.
• Lack of liquidity: Equities may have longer holding periods, and instant liquidity options may be limited compared to other investments.

It is important to remember that all investments carry varying degrees of risk, and it is essential to understand the nature of these risks before investing.

The risks of investing in equities

Investing in equities always carries a certain level of risk. Here are some of the most common risks associated with investing in equities:

Market Risk

Market risk refers to the volatility and unpredictable nature of stock prices due to various market and economic factors, both locally and internationally. It is also known as systematic risk and is influenced by economic, geographical, political, social, or other factors specific to a market. For example, the Brexit referendum in 2016 caused UK companies to fall in value compared to their global peers.

Interest Rate Risk

Changes in interest rates can impact stock prices differently. Additionally, if your local currency is pegged to another currency, interest rate movements in your country can be directly influenced by interest rate changes in the country your currency is pegged to.

Global Risk

If the stock market of the country you are investing in is highly open, like in the case of Hong Kong, it is vulnerable to economic issues in all major markets. This means investors are exposed to economic events worldwide, and this should be factored into their risk assessment.

Business Risk

The company you invest in may suffer a severe decline in profits or even go bankrupt due to various factors such as poor management, industry slowdown, or competition. This could lead to a significant decline in the value of your investment.

Corporate Mis-governance

The company you invest in may have improper management or conduct transactions that go against your interests as a shareholder. For example, a company may buy an overvalued asset, negatively impacting its financial health. Regulators usually do not intervene in the commercial decisions of listed companies unless there is a breach of regulations.

Trading Suspension

A stock can be suspended from trading to avoid uneven information dissemination and prevent insider dealing. During this time, you will not be able to buy or sell the stock, and its price may move due to market and business risk changes.

Liquidity Risk

Some stocks, especially those with low capitalisation, may be hard or costly to liquidate, tying up your investment.

Currency Risk

If you are investing in a foreign market and your local currency appreciates against the currency of the country you are investing in, you may face translation losses.

Policy Risk

Changes in government policies and regulations can significantly impact stocks in certain sectors or industries.

Timing Risk

This is the risk of buying or selling a share at the wrong time. Not all sectors of the market follow the same price cycles, and understanding business cycles can help mitigate this risk.

Volatility Risk

Share prices can be very volatile, and investors should be aware that their shares may fluctuate significantly in price over short periods. This volatility can apply to individual stocks, sectors, or the market as a whole.

Capital Loss

When a company performs poorly or receives negative market perception, its share price may fall below the price you originally paid or even drop to zero. If a company goes out of business, its shares become untradeable, and shareholders are usually last in line to receive any funds during liquidation.

How to lower equity risk

Equity investments carry varying degrees of risk, and it's important to understand the nature of these risks before investing. Here are some ways to lower the risk of investing in equities:

Long-Term Investment

Investing in equities for the long term can help lower the risk of loss. Short-term fluctuations in the market can cause panic, but a long-term perspective smooths out these variations.

Diversification

Diversifying your portfolio is a crucial strategy to reduce risk. Hold shares of different companies across various industries. This strategy ensures that your risk is spread out and not concentrated in a specific company or sector.

Stable Companies

Look for stable companies with consistent cash flows and less market or economic sensitivity. These companies are more likely to weather turbulent economic conditions and provide long-term stability to your portfolio.

Avoid Unpredictable Forces

Steer clear of investments heavily influenced by unpredictable forces such as geopolitical risks and macroeconomic developments. For example, energy stocks are driven by oil and gas prices, which are highly volatile due to geopolitical events.

Mutual Funds and ETFs

Investing in mutual funds or exchange-traded funds (ETFs) can provide meaningful diversification. These funds hold a multitude of stocks and asset classes, reducing the risk associated with individual stocks. However, choose your mutual funds carefully, considering their historical asset class exposure rather than relying solely on their marketing names.

Index Funds

Consider investing in index funds, which have been shown to outperform actively managed funds in most cases. Indexing is also very cost-effective, charging lower fees than typical mutual funds.

Avoid Overconfidence

Don't fall into the trap of thinking that holding a few dozen stocks or a handful of mutual funds is enough to diversify your portfolio. True diversification requires a global perspective and allocations across multiple equity asset classes.

Don't Time the Market

Selling equity positions during a falling market locks in losses and forfeits potential recovery gains. It is nearly impossible to time the market accurately, and you risk missing out on the best days of a rebound, which can significantly impact long-term returns.

Remember, investing in equities always carries some level of risk, but by following these strategies, you can make more informed decisions and lower your overall risk exposure.

Frequently asked questions