Invest in stocks

To help you make an informed choice, we’ve detailed the differences between these two methods below.

Investing (long term)

With this approach, your aim is to buy shares in a company (or a number of companies) that you think will perform well over time. If you’re right then the stock’s price will rise in value and you’ll be able to sell your shares for a profit at a later date. Here are the core actions you want to take when investing your money in the stock market:

• Conduct fundamental analysis. As you’re investing your money for the long term, your focus should be on the strength of each company that you’re interested in. Fundamental analysis such as researching the particulars of a company, knowing whether the CEO is reliable, and whether there is a growing demand for the business’s products – these are the things that define your strategy.
• Look for long term value. Just as with the point above, your concern should be on the prospects of your investment years into the future. You should be looking to hold a stock for one or two years as a minimum, so don’t get distracted by anything that draws your attention away from the bigger picture.
• Think about how long you want to invest for. One drawback of investing over the long term is that it ties up your capital in that investment (you can’t invest the same £100 in different companies). Your timeframe impacts everything from the strategy you want to follow, to how much you can invest and how often.
• Prepare for volatility. Stock markets are volatile, with prices moving up and down every day. This is normal and so don’t sweat the small stuff too much: if the company in which you’ve bought shares has strong fundamentals, it will usually ride out any short term volatility and keep gaining strength.
• Be ready to change your approach. While volatility is normal, there are moments when it gives way to more serious problems. When stock markets dip sharply, a bear market could set in, leading to prices falling across the board. While you want to ride out bumps in the road, be ready to sell your shares if it looks like they’re heading for a huge drop – such as in March 2020 when the coronavirus pandemic sent stocks plummeting.
• Choose a reliable broker. You’re going to be trusting your broker with both your money and your shares, so you want to make sure the platform is reputable, regulated, and reliable. Our reviews can help you make the right choice.

In order to be a successful stock investor, you need to be able to keep a cool head and react rationally to market movements. Understand how much volatility you can tolerate considering your long term analysis of each stock, but be ready to cut your losses if this limit is exceeded and it looks like a bear market is setting in.

Approaching the markets like this can lead to big gains in the long run. For years Tesla stock underperformed – but, as the need for renewable technology became more apparent in 2020, the price started shooting up. Investors who held firm because they knew the company would come good in the end were rewarded, and those who sold early missed out on the big gains.

Trading (short term)

If you want to make money quickly rather than pursue long term gains, then it’s likely trading stocks is the right approach for you. With this approach, instead of looking for future value in companies, you’re looking to profit by reading their stock price charts and anticipating movements in real time. Here are the key considerations when trading:

• Learn the basics of technical analysis. As you’re aiming to make frequent short term trades (think hours and weeks rather than months and years), the long term goals and strength of a company aren’t very relevant to you. Instead, you want to learn how to read stock charts and spot patterns that will help you predict price movements – a practice known as technical analysis.
• React quickly to events. Markets often react quickly to current news, with rises and falls often being seen after major company news or governmental policy announcements such as budget speeches. For this reason, you need to be on top of current affairs and react quickly when trading activity picks up.
• Focus on mitigating risk. Nobody is right 100% of the time. The best traders follow strategies to increase their chances of long term success, and the most important of these is to manage the amount of risk they take on. Think of your job as a trader to be right 50% of the time, with the other 50% being about not losing what you’ve earned. Ideally being right will turn £100 into £120, but being wrong will only turn £120 into £118.
• Keep calm and focused. The biggest challenge when trading is to control your emotions. It’s easy to get caught up in the moment, especially when you place a string of successful trades in a row, but you always have to focus and make sure you’re acting rationally. Don’t get drawn into placing larger trades than you can afford, and don’t start chasing your losses if things have gone against you.
• Look for the right trading platform. To place your trades you’ll need to sign up with an online broker or app. Be sure to choose a platform that has a user-friendly interface and offers the trading options you need. For instance, if you want to trade using a method such as spread betting, make sure a broker supports this before signing up.

Overall it is important to keep your trading strategy at the front of your mind – this will help you stay rational and place trades based on your research and knowledge rather than emotion. 

Remember that your aim is to make short term profits; if you get a stock at £50 and you sell it at £55, then that’s a successful trade with a 10% return. If it then jumps to £70 a couple of days later, that’s fine: this is a £5 profit, not a £15 loss.

What is best for me?

Only you can answer this question, and we have come up with a helpful checklist to go through when making your choice:

1. Know the differences between types of stocks. There are a wide variety of different types of stock, and it’s important to know your options before deciding how to invest your money. Whether you want to invest in technology giants such as Microsoft, or companies such as GameStop which attract a lot of online attention, considering all your options will help you craft a strategy.
2. Figure how much you want to invest. The funds you have available can help you decide which way of investing works best for you. While you can start trading or investing with almost any amount of money, smaller budgets are generally best suited to buying and holding a few shares in prominent companies, whereas those with larger amounts can pursue short term gains with big trades.
3. Decide the level of risk you’re comfortable with. Your capital is at risk when making any sort of investment in the stock market, but your approach can determine how much risk you’re exposed to. Owning shares in well-established companies is much less risky than placing leveraged trades on volatile stocks at the other end of the spectrum, for instance.
4. Consider your timeframe. If you’re planning on building a nest egg for retirement, then you will want to invest your money for the long term so as to build your capital gradually over time (say from £100 to £1,000 over a couple of years, and then more beyond). If, however, you want to become a day trader and generate regular amounts of money, like a salary, then trading will be the right approach for you.
5. Select your ideal platform. Most brokers support both share dealing (buying actual shares to hold) and CFD trading (speculating on price movements using financial instruments). This means you can get flexibility from most trading platforms, but you should still do your research to make sure you can access the services you want. For instance, some brokers will allow you to use financial instruments such as ETFs or mutual funds, whereas some won’t.
6. Start investing gradually. Don’t jump in the deep end immediately. Instead, start out with smaller investments so you can learn the ropes without taking on too much risk. As you gain experience, you can keep building your funds and assets by investing more money. For example, if you’ve got £100 don’t invest it all in one stock; choose two or three and invest £10 a month in each so you can grow your position and react to the markets.

A final thing to bear in mind is that you don’t have to choose a side and stick to it; you can pursue both strategies at once (and many people do). You might want to build a small portfolio of blue-chip shares for the long term, yet also keep some money aside for day trading. Or, alternatively, it might appeal more to place regular trades and also pick up a share or two in a company you like the look of in the long term.

What to invest in, and ways to invest

There are many different options available. Individual stocks can be bought and sold, financial instruments such as CFDs can be used to make trades without owning the shares outright, and you can also invest indirectly by putting money into a trust or ETF.

First, we’ll take you through the types of stocks available, and then summarise the ways they can be bought, sold, and traded.

What should I invest in?

By and large, stocks fall into nine categories – depending on the sector of the economy in which the company operates. In no particular order, here’s a brief overview of these groups and examples of stocks that fall into them.

• Technology stocks. These are stocks of companies in the tech sector – and they have been among the best-performing stocks in the 21st century. Technology giants such as Apple and Google are now household names, and growth in this industry doesn’t look like slowing down any time soon.
• Energy stocks. Shares in companies that operate in the energy sector are grouped as energy stocks. This includes everything from oil drilling companies to solar panel manufacturers. Some of the biggest names in this category are ConocoPhillips and Dominion Energy.
• Healthcare stocks. Businesses that are involved in the provision of healthcare services fall into this category. This includes pharmaceuticals giants such as GlaxoSmithKline and Pfizer. As the coronavirus pandemic swept the world, many healthcare companies saw bumps in their stock prices.
• Financial stocks. Financial services is a huge global industry, and many of the businesses operating in this sector trade as financial stocks. Banks such as Citigroup, HSBC, and Lloyds are prominent names in this category and tend to perform well when the economy is strong.
• Utilities stocks. Utility companies are organisations that provide vital services like energy, water, and gas to people’s homes. Society couldn’t function without these services and their price tends to hold up even at times of crisis. One of the most recognisable names among utilities stocks is US giant General Electric.
• Retail stocks. This category includes all businesses that are dedicated to selling consumer products. From big names on the high street to huge internet retailers, these stocks tend to perform best at times of economic growth when people are more willing to spend money.
• Telecom stocks. We live in a world where we can talk to anyone on the other side of the world at a touch of a button – and the companies who help us do this trade as telecommunications stocks. This sector includes established names such as BT and Vodafone.
• Industrial stocks. Industrial stocks are the companies that build the world around us. From building and supplying machinery, to undertaking major construction projects that change the skyline of prominent cities, these businesses maintain and improve our physical environment. Examples of industrial stocks include Caterpillar and United Rentals.
• Material stocks. Finally in our list are materials stocks: companies that are involved in discovering, developing, and processing raw materials. Prominent examples of stocks in this category are DuPont and Applied Materials, and the fortunes of these companies tend to follow the manufacturing and industrial sectors, along with the price of oil.

While these are the general categories into which individual stocks fall, they’re not the only ways of differentiating between your options. Another way that many people approach stock market investing is by the relative size of each stock. These are the three main groupings to consider in this regard:

1. Large-cap stocks. The biggest companies around, large-caps are stocks with an overall market capitalisation of over $10 billion. These are well-established companies with expensive shares. Investors like these stocks because they’re less prone to volatility – but on the flip side, they’re also less likely to see the explosive growth you can get when investing in smaller companies.
2. Mid-cap stocks. Mid-caps are stocks that have a market capitalisation of more than $2 billion but less than $10 billion. Offering a sort of half-way-house between small and large-caps, these stocks have the benefit of being established businesses that can survive market turbulence, but also have room to expand in the future.
3. Small-cap stocks. Companies with a strong foundation and a lot of room to grow, small-cap stocks usually have a market capitalisation between $300 million and $1 billion. The attraction of these stocks is that they offer the chance to get in on the ground floor of a future giant. The drawback is that they’re less protected against market downturns than mid- or large-caps so are a bit riskier.

Sorting stocks into type and size are just two ways of choosing between them. When investing for your future you might want to look into growth stocks or stocks that pay dividends, and to construct a balanced portfolio you’ll want a balance of defensive and cyclical stocks.

To get a full overview of your options, check out our different types of stock investments course. For now, however, let’s move on to the different methods available.

Ways to invest

Now you have a grasp of the investment opportunities that are out there, you need to consider the method you want to use when investing your money. There are pros and cons to each of the options available, and you can find a short summary below to help decide between them.

• Share dealing stock brokers. The easiest and most direct way is to sign up with an online broker. These platforms allow you to trade physical stocks to build a portfolio. Sometimes these are distinct services, but more often they also support CFD trading as well.
• CFD trading platforms. Trading with CFDs (Contracts for Difference) means betting whether a stock’s price will go up or down without actually taking ownership of the shares. This allows you to make quick trades, and to trade with leverage. As mentioned above, many stock brokers also support CFD trading.
• ETFs. ETFs (Exchange-Traded Funds) are collections of stocks that have been grouped together. For example, a ‘technology ETF’ may comprise the top 25 tech stocks. When you buy an ETF, you have a small portion of each of these shares. This is much safer than getting a stock in a single company, and less time-consuming than buying stocks in each of those 25 stocks individually. There thousands of ETFs available to choose from with different mixes of stocks.
• ISAs. One of the best ways to save for the future is with a stocks and shares ISA (Independent Savings Account). In the UK, you can put a total of £20,000 into an ISA each year, and this will be invested in shares within the account. The advantage of building up savings this way is that profits made within your ISA are tax-free. That said, most ISAs available through banks offer no control or transparency. 
• Robo-advisors. An increasingly popular form of stock investing app, robo-advisors help you save for retirement by using technology to construct a portfolio over time. Essentially they are ISAs that are constructed for you by a robot or fund manager. When setting up an account you give certain pieces of information (e.g. how much risk you are willing to take, what type of companies you want to own shares in, and how much you’re willing to invest) and the platform uses these instructions to grow your money over time without you needing to lift a finger.
• Mutual funds. These allow you to benefit from a diversified investment portfolio and expert knowledge. Mutual funds are made up of different individual investors who put their money in the hands of a fund manager. The fund manager then decides how to invest the total sum of money, with the investors receiving a share of any profits proportional to their original investment.
• Trusts. An indirect way is through a trust that invests large amounts on the stock market, with any profits being shared among the investors. They work similarly to mutual funds, but are set up as companies and traded on stock exchanges.

These options are all viable ways to invest your money in stocks. That said, we would recommend that beginner investors stick to share dealing and ETFs when first starting out. Trading is more complicated than long term investing, and it’s helpful to learn the basics before using CFDs.

What now?

If you’re ready to make your first investment now, then find a broker today. Otherwise, you can find the latest news, analysis, and data below, and also continue to explore Invezz by following any of the links at the top of the page.