Stockmarket

The following article is a basic guide to investing in the stock market providing you with the knowledge to get started.

Your Goals

Investing in the stock market is one of many ways that people can try to extend their wealth. Remember that there are no hard and fast rules as investment is based on the individual.

There are various factors to consider that will differ from person to person, such as:

  • What is your goal?
    • House
    • Car
    • Holiday
    • Planning for the future
    • University
    • Retirement
  • How much you have to invest
  • What time scale you are working to
  • What returns you are aiming for
  • How easily you want access to the funds invested.

Top of page

Trading v Investing

There is a difference, which is important to understand in order to choose the right method of buying stocks for you.

You may have heard these terms and be asking what the difference is. The differences are best explained using these definitions:

  • Definition of "Trading"
    Buying and selling securities or commodities on a short term basis, hoping to make quick profits.*
  • Definition of "Investing"
    An asset or item that is purchased in the hope that it will generate income or appreciate in the future. In an economic sense- it is the purchase of goods that are not consumed today but are used in the future to create wealth.*

So you can see trading is when you try to make profits quickly from price changes on trades lasting anywhere from seconds to several weeks.

Investing is when you buy stocks with the intention of holding them for longer, usually several months to years.

*Source:www.investopedia.com

Investing

Investing involves longer term choices and a different mindset is needed to that used when trading. You don't need to pay attention to daily price movements or small percentage changes in your stock's value; you need to be able to see stocks that will appreciate in the longer term in spite of daily fluctuations.

Risks

There are risks associated with both trading and investing:

Trading

  • Share prices are affected by company performance. E.g. bankruptcy.
  • Share prices can be very volatile.
  • Share trading is time consuming and often difficult if you are employed full time.
  • Analytical techniques used to predict movement assume perfect information.

Investing

  • Company invested in could go bankrupt.
  • Inflation can eat away at funds invested if gains are not substantial enough.
  • Shares could lose value, for example if a company is losing its market share.

Top of page

Different Forms of Investing - value, growth or a mixture

Investing is a very broad topic and there are many different types of investment strategy, most of which are designed for a medium to long time period.

Value Investing

Value Investing is a strategy whereby you select stocks to invest in that you believe are trading for less than their real value. In other words the stocks have been undervalued by the market.

Value investors believe that the market overreacts to good and bad news causing price movements that are not fully representative of the company's long term potential.

The main problem for value investors is that because there is no correct intrinsic value of a company, it is always open to interpretation Typically, investors select stocks with lower than average price to earnings ratios and/or by looking at the future growth and forecasted cash flows. Whatever methodology is used it all comes down to trying to buy something for less than it is worth.

Income Investing

Income investing involves picking stocks that provide a steady stream of income. Fixed income products such as Bonds provide a steady stream of income but so do stocks by offering a frequent payment rewarding you for your investment, in the form of a dividend.

There are some sectors and companies that have historically paid higher dividends. For example, older, more established firms no longer maintain high levels of growth, so instead of reinvesting into themselves they pay out earnings to provide shareholders with a return.

Rather than looking at companies with the highest dividend payments in monetary figures, it is more important to look at the dividend yield, which is calculating the dividend paid as a percentage of the company's share price.

There are factors to be aware of when income investing using dividends:

  • Companies are not obliged to pay out a dividend because profits can be reinvested into the company if they choose.
  • Past dividends are not a guarantee that the company will pay out dividends in the future.

Growth Investing

Growth investing involves investing in companies that you expect to grow at an above average rate compared to their industry or overall market. This is even of the stock's current price seems expensive relative to its underlying value.

Growth at Reasonable Price Investing - or GARP

Rather than purely seeking stocks with high growth rates and inflated prices, it is now considered sensible to look for stocks with high growth rates that are trading at reasonable valuations. This had given rise to the strategy called 'Growth at a Reasonable Price (GARP).

GARP combines the doctrines of both growth and value investing. GARP investors select companies that are slightly undervalued, that have good, but more realistic future earnings prospects rather than targeting those companies with very high forecasted growth.

This strategy avoids the extremes of growth and value investing, leading investors to seek growth stocks with relatively low price/earnings (P/E).


Top of page

Popular Investment Strategies - sector wide or company specific

Top-Down Investing - The bigger picture

Top down investing is about looking at the "big picture" i.e. the wider economy. You examine the general direction of the economy and try to forecast which industry will generate the best returns in the current economic climate.

It's about trying to determine which industry would benefit the most from the relevant macroeconomic changes and then limit your search to the top companies in that industry.

Be careful though, many novice and experienced investors invested into internet companies in the mid to late 1990's. This has become known as the dot-com bubble, but soon after the Information Technology sector crashed.

Industry research is necessary and with a TD Direct Investing account you have access to industry news, which allows easy comparisons of companies within the same industry.

Bottom-Up Investing

Conversely to top down investing, bottom up investing overlooks broad economic conditions broad industry performance and instead seeks out stocks to invest in based on their individual attributes.

Bottom up investors select companies with good prospects, that will grow in spite of economic or industry outlook. Determining which these companies are is open to individual interpretation, some investors look at past performance, news, management style and products. Some look for low P/E ratios or earnings growth.

Your TD account provides extensive company research including stock selection tools allowing you to filter according to you own criteria.

Popular Techniques when choosing a company to invest in

There are many techniques available for choosing a company to invest in and it is up to you which suits best, but it is generally accepted that it is best not to concentrate of just one strategy.

Listed here are a few additional pieces of information that investors like to draw upon when using one or a number of the different investment strategies, as listed by Robbie Burns in The Naked Trader (2005):

  • Company's market- their market share and market conditions.
  • Company's product/service.
  • Quarterly results- including company accounts & forecasts.
  • News feeds- any announcements that will affect the company.
  • Investor sentiment.
  • Company Directors' behaviour.

Top of page

Investment Types

We've mainly talked about investing in individual equities, bonds and gilts but there are many types of investment instruments that you can put your money into.

TD provides a wide range of investment types, with explanations of what they are and how they work, including an overview of where they appear on the risk spectrum.Read more about investment types.

Funds

If you are new to investing funds can be an easier way to start investing in the markets. When planning to invest in individual equities and bonds the level of company and market research required increases considerably. When investing in funds you pay professional Fund Managers to make decisions and invest your money for you. For this service there is an annual management charge incorporated into the price of a fund.

Fund Managers specialise in different areas such as emerging markets, ethical companies and domestic property.

TD offers thousands of funds from many leading providers. Learn more on ourfunds pages. You may also wish to learn aboutclean funds.

Products for the Investor

In order to invest you need to open an account with your broker to allow them to take your trade orders.

An ordinary Trading Account is the straightforward way to buy, sell and manage your portfolio with TD but we have a range of accounts to suit every investors need. Below is a summary of just a few of those accounts.See all TD's accounts.

Trading ISA - Individual Savings Account

A Trading ISA is the ideal account to benefit from tax efficient investing. The current stocks and shares annual ISA allowance is £11,280 for the 2012/2013 tax year. Any profits made will be free from capital gains tax.

There is no administration charge if you have over £5,100 in assets or cash in a TD Trading ISA. Existing ISA's with other providers can also be transferred straight in to the TD ISA.

Please note that the tax treatment of this product is dependant on your individual circumstances and may be subject to change in future.

*Tax rates are subject to change, if you are unsure or would like further information please seek professional tax advice

TD Self Invested Personal Pension (SIPP)

A SIPP account is specifically designed for helping you save for retirement and it tax efficient because you receive tax relief on the money you save; this includes those in a higher tax bracket.

You can make your admin easier by moving other pensions into one SIPP and with a large range of investment options available a TD SIPP gives you great flexibility and control over your investments.

Please note that the tax treatment of this product is dependant on your individual circumstances and may be subject to change in future.

Regular Investment Account

Contrary to old beliefs, you don't need a large sum of money to start investing. Small amounts can make a significant impact on your long term returns.

TD lets you invest small amounts regularly into a Trading Account or Trading ISA, from just £25 a month in stocks or £50 a month in Funds.Learn about our Regular Investment Account.

This account also entitles you to commissions on a monthly basis of only £1.50 (up to 10 stocks per month). This includes any stock listed on the FTSE 100, FTSE 250 and Exchange Traded Funds.

There is no online commission charged on funds. The Initial Sales Charge on many of our funds is also discounted to 0%. A Fund Manager charge may also apply for some funds. Learn more on ourfunds pages. You may also wish to learn aboutclean funds.

Popular Investments

Whatever your goals, we’ve got the right type of investment to help you achieve them. Take a look at our range of investment types.

Risks

  • The value of your investments can go down as well as up. You may not get back all the money that you invest.
  • Please note the tax treatment of these products depends on the individual circumstances of each customer and may be subject to change in future.
  • There may be a Fund Manager charge, which is a percentage of the value of your investment. This can differ depending on the fund.

Choose Your Investments

From stocks to funds, we offer a wide range of investment types to suit your needs.