Why do individuals invest directly in stocks as opposed to allowing a fund manager to do the work?
For some, it’s because they believe they can outperform the market and the manager; for others, it’s the allure of having direct ownership in a firm; and for many, it’s simply because they find it interesting.
Regardless of the motivations of individual investors, buying shares directly remains a resoundingly popular alternative that has had a resurgence over the past year.
During the coronavirus lockdowns, the largest do-it-yourself investment platforms in Britain reported a spike in interest in purchasing firm shares, as well as the emergence of a new generation of younger investors, called lockdown traders.
Read our guide to share investing if you are interested in purchasing shares, want to grasp the difference between investing and trading, or wish to learn more about discovering and valuing strong firms.
Purchasing shares
When you purchase shares, you acquire direct ownership of a portion of a firm. If the company is successful, the share price should rise and the value of your ownership will increase.
Investing in shares can be extremely beneficial if you choose the correct firm, but if you choose the wrong one, you could lose most or all of what you invested.
When reading about the stock market, you will frequently encounter the terms trading and investing. In terms of intent, they are sometimes used virtually equally, but there is a significant distinction between the two.
There is no strict definition of trading and investing, but trading is considered a short-term endeavor in which the fundamental qualities of a company are less important than making a profit and moving on; whereas investing is considered a long-term game in which carefully weighing a company’s fundamental strengths and patience are more important.
This article focuses on the long-term strategy of investing in stocks and constructing a profitable portfolio.
For many people, investing with a fund, investment trust, or a solid low-cost tracker is the best and most prudent alternative. However, if you are interested in selecting individual stocks, continue reading.
Why invest in stocks directly?
But why would you invest directly in stocks as opposed to allowing a fund to spread risk?
Instead of stock-picking, you may be better off with a simple, low-cost global tracker fund, according to statistical evidence.
The answer for many resides in their interest and sense of direct investment.
The payoff may be the excitement of a firm that you have researched and backed delivering on its promise or releasing better-than-expected results and seeing its share price soar.
Inevitably, though, a sinking feeling will ensue when a company disappoints and its stock price declines.
To be a successful stock investor, you must be able to take the good with the bad, diversify your risk, and avoid emotional overreactions.
Remember that this endeavor is not all-or-nothing. In whatever proportions you want, you can invest a portion of your capital in mutual funds and investment trusts and the remainder directly in stocks.
A prudent strategy for novice investors is to have a large core of trusted trackers, funds, or investment trusts and a smaller satellite portfolio of stock holdings.
Time, exertion, variety, and a modicum of forbearance
Time, effort, and diversification are keys to successful stock investment.
If you choose to invest in individual stocks, you must be willing to conduct thorough research on companies and monitor their performance; make the effort to comprehend their balance sheets, results, and trading statements; and ensure that the portfolio you construct is properly diversified – comprised of companies that engage in different activities.
Dividends are periodical payments that can vary in size and are given to shareholders as a reward for holding the company’s shares; over the long run, reinvesting and compounding dividends has shown to be a substantial source of the stock market profits.
You won’t pick only winners along the way – there’s always something that could go wrong that you haven’t considered – but by putting in the effort and diversifying your portfolio of stocks, you can enhance your chances of making profits and reduce your risk of incurring losses.
Many investors make the typical error of investing in too few distinct companies.
There is no magic number for the number of stocks to hold; nevertheless, scholarly research on the number of stocks owned vs. risk by Elton & Gruber (in 1977 and later by others) suggests that at least 15 to 20 equities dispersed throughout different sectors is beneficial. The following graph demonstrates how this reduces risk.
In recent years, it has also been significantly easier and cheaper for British investors to invest in the shares of firms listed on stock markets outside the UK, such as Apple or Tesla in the United States. Avoiding home bias and investing outside your country’s boundaries is a crucial method to diversify, however you may find it more convenient to use funds or investment trusts.
Where to purchase stock
You can purchase into a firm when it first issues shares, which is known as a float or an IPO (initial public offering), but by far the most popular method is to buy shares already trading on the stock market, which is equivalent to buying used stock.
You may manage your shares on a computer or mobile device, and buying and selling them is a lot easier and less expensive than even relatively recently.
Use a do-it-yourself investment site or app; some demand a fee to buy or sell, while several newer platforms offer free share trading.
Some investors may still opt to hire a financial advisor or stockbroker, but for the sake of this tutorial, we will focus on do-it-yourself stock investing.
To purchase and manage shares online, you must register for an account with a do-it-yourself investing platform or one of a variety of new app-only services.
Hargreaves Lansdown, Interactive Investor, AJ Bell, Fidelity, Charles Stanley, and Halifax-owned iWeb are among the largest DIY investing platforms with a focus on both share investing and funds.
When you buy or sell shares, they charge a commission of between £5 (for iWeb) and £11.95 (for Hargreaves Lansdown) in addition to several other account administration fees, including percentage, capped, and flat rates.
Several trading apps, such as eToro, Trading 212, and Freetrade, offer commission-free share trading and the ability to hold shares for free, posing a threat to these well-established firms. With these applications, some services and Isa accounts incur additional fees.
Fees consume a smaller portion of your investment with free trading apps, however, constructing a portfolio of 15 shares on a DIY investing site charging £10 each trade will feel pricey.
Be cautious that some free share investing programs also provide high-risk CFD trading – while this allows you to inexpensively back stocks, this is not investing, and warnings will frequently state that 70 or 80 percent of CFD users lose money. Consider them.
When you purchase shares, you will also be required to pay a 0.5% transaction tax, which goes to the government. The majority of companies listed on the junior, high-growth Aim stock market index are exempt from this rule.
Signing up for a platform or app is typically simple and quick, and depending on the service you select, you can choose to invest a lump sum or make monthly direct debit payments – or both.
The majority of platforms are extremely user-friendly and simple to adapt to. They will provide tips, analysis, tools, and services in varying degrees.
This is Money’s best DIY investing platforms roundup highlights some of our preferred platforms and explains how their pricing works, whereas our cheapest share dealing guide focuses on stock picking fees.
Where to acquire investment ideas
There is no dearth of sources for stock-buying inspiration.
These include observing the world around you and noting which companies you believe are performing well, speculating on what could happen in the future, reading share tips, analysis, and investing ideas, running the numbers on a stock screener, and exchanging ideas with others in person or via social media.
You must conduct your research. This is true of all the sources of inspiration listed above, as well as any others you can think of.
Never rely solely on a tip or recommendation from another person or the results of a single data screening.
Be wary of FOMO (fear of missing out) when someone tells you they’ve made a fortune on a stock and you think, “I want some of that and must act quickly.”
It is your money that is at stake, so be sure to conduct thorough research before investing.
This is Money’s Investing area contains our weekly Midas Share Tips and Small Cap Share Ideas sections, as well as other frequent articles on investment inspiration.
The biweekly Investing Show on This is Money includes conversations with fund managers and specialists who explain how they invest.
