Investing in stocks is one of the most common ways to earn significant profits. But investors should know how to invest in stocks UK in order to earn decent levels of profits. They should be aware how the stock market works and the variables that affect the stock market.
How to invest in stocks UK?
Setting one’s own trading strategy is one of the basic things before getting started with investment in the stock market. The investor should consider the amount of money to be invested, the rewards and the risks, risk management, selection of stocks, selection of personal investment advisor, the brokerage company and the time to enter and exit the market.
To start investing, investors should first know which stocks are available. Secondly, trend spotting is one of the most important aspects in order to determine the timing for entry (buying) and exit (selling). Each bull and bear market has winning and losing stocks. It is important to recognise the signs of a company whose stocks are about to soar. It often takes time for making considerable profits in investments which can range from a few weeks to months.
Basically, it requires patience to earn profits on investment. So, investing in stocks is all about timing and it often means the difference between a profit and a loss in the short term. While buying stocks and selling at the right time can return high levels of profits, buying at a time when the prices of shares are high and selling them at a time when the prices are low, may result in loss in investment. Apart from this, picking the right sector is also crucial for a successful stock investment.
How to get started?
The first thing to consider is to determine the amount of money available with you for investing. In case you are a beginner, it is advisable to start small and invest small amounts of money that you can afford to lose since the stock market is fundamentally volatile in nature and prices of shares can go up or come down within days.
Before investing in the stock market, investors should have a clear understanding of the terms and jargons used in the stock market. Investors should learn the basics of trading stocks such as the type of stocks, ways of stock trading etc. to help them with their investment decision.
Selecting stock options
There are different types of stocks such as Large cap, Mid cap, Small cap, penny stocks, growth stocks, dividend stocks, speculative stocks, preferred stocks etc. It is always good to invest in a particular type of stock. Investors should make their decision on the type of stock based on the amount of their fund, their capacity to take risk and the objective of the investment.
Selecting the investment mode
Investment in stocks can be done in many ways which include margin trading, delivery trading and derivative trading. As all these different modes of investments come with their own advantages and disadvantages, investors should explore each of these different types of trading based on their fund and ability to take risks.
Selecting the broker
Stock trading is done in two ways: online and offline. But, regardless of the trading way, a broker is required for making an investment in the stock market. Investors should consider a range of factors in terms of selecting the right broker and consider the brokerage rate, experience of the broker, services like the stock analysis and reports and, most importantly, the quality of customer service and overall reputation of the broker. The reputation of a broker is particularly crucial in case of the beginner in stock trading as selection of the broker may be the difference between profit and loss. The broker will charge a small fee every time the investor trades stocks. They will advise on the investment options based on the investor’s long term objectives.
Diversifying the portfolio
When investing in the stock market, investors should diversify their stock portfolio or spread the investment across companies to minimise potential losses as well as increase profitability.
Establish the type of return
When an investor buys stocks in a listed company, the investor is primarily buys a part of the business. It is about investing in a business and sharing in the profits of the company, in return. Investors typically look at the past performance of a company and expected future performance. But, past performance of a company is not a guarantee for the future performance of its stock.
The past performance of a stock is based on the PE ratio or the price to earnings ratio of a stock. As the price of stock is not stable and varies throughout the year, so the PE ratio is calculated at the time of dividend release date. This can be every quarter or once a year. As companies are not obliged to provide dividend payments to their shareholders, companies which do not offer dividends to shareholders, rely on capital growth for their investors. Dividend is the money held by the shareholders on per stock basis that is given to them as profit. It is the share of profits made by the company during the time allocated to the financial year.
Variables affecting future performance of a company
Factors affecting the growth and future performance of a company include external as well as internal ones. While the external factors responsible for the performance of a company in the future may include the economic climate, internal factors may include management related influences. As economic issues influence the returns through monetary exchange rates, they can affect the performance of a company favourably or adversely.
Though these factors do not affect the performance of a company immediately, they play an important role in determining the future growth of the company. The internal issues that may affect the business of a company may include internal factors such as leadership issues, policy direction and financial planning for future growth. For example, if the leadership of a company has changed, potential stock investors should evaluate the past performance of the leadership that has taken over the management of the company at present.