You’re looking for a way to make more money and investing in the stock market has sparked your curiosity. You’re in the right place! But before we start, I would like to give you a little background knowledge and perhaps open up a world previously left undiscovered. Money is not taught in school, school teaches you to be a very good employee. Why? Because the world needs employees from whom they can take taxes easily (Yes, you read that correctly, the super-rich do not pay as much taxes as you do in comparison). Money plays with psychology and gives a sense of power, people struggle to control power and end up living paycheck to paycheck, they see a lot of money coming in, this money has already been halved before it even reaches your bank (its given names like Tax, National Insurance, VAT or GST, etc…), and ultimately you spend more than you’ve got. Now, this is not the case for everyone but let’s assume that this cycle is the most prominent among the vast majority of financially uneducated people (the book Rich Dad Poor Dad by Robert Kiyosaki explains this in more detail).
What happens to money over time:
Some people are given advice from their parents to save up. Now you should ask yourself, saving is a great idea, but where do I put the money? Should I withdraw the cash and keep it in my house under my bed for the next burglar to break in and wipe out all my effort?
Go for your life if that’s what you want. There is usually less security with money stored this way, have you checked your home insurance policy (if you have one?) Does it cover cash sums? If So how much.
If my sentence discouraged you and you are thinking: “that was only a metaphor, stashing huge sums of money into a mattress is not a thing, modern society uses banks!”. Banks (at least in the UK) have large organizations like the Financial Conduct Authority, the FCA regulating protection for my money, and some great (in theory) cyber security protocols. So ‘Banks have got to be safer?’. Not only that Banks usually offer interest, so my investment goes up over time, right. I’m already making passive income, right?.
I agree, banks are a great substitute for a mattress when it comes to storing your cash?
Let’s imagine that there is another burglar, but this is subtle. It is not a group of highly trained thieves that can break into the vault at night and run away with the jackpot, but they are more effective. Not as glorious as a bank heist and not as noticeable either. This slowly eats away at your money and before you realize your buying power has decreased over the years – I would like to introduce you to INFLATION. Inflation is at an all-time high, as much as 6% recently, meaning that for your money to not lose its value, your bank’s interest rate would have to be higher than this… If your bank does that, please tell me who you are banking with it sounds too good to be true! Chances are that banks do not give such a high return.
Luckily, there is another potential way for your money to work for you!
What is a share:
It is not uncommon for large companies to raise capital by selling fractions of the business; these fractions are called shares. Each share represents a proportion of ownership of that company (yes, owning shares means you’re effectively a partial business owner (maybe a very small part). Once the shares hit the market, you can buy whatever a number of shares, that are available, that you’d like (you could buy shares outside the stock market directly with the company but that’s a topic for another day). Let’s imagine the company you bought into has had a very profitable year; they decide to return some of their profit to the shareholder (after all, you own a part of the company; the money you paid for the share represents the total value of that company). This is called a dividend pay-out. The dividend is split equally among all investors according to the number of shares they own. Shares are a bit like a buy to let the house, the house is rented and generates money every month (very much like a dividend) and it also appreciates in value over time (shares have the same mechanic, although it’s up to the directors to decide when and how much profit becomes dividends, owning a higher percentage of shares often gives you more power to influence the board and encourage dividend payouts.).
How do I go about buying a share:
In the past buying, a share on the share market would have been done through a telephone call to a physical person (broker); the broker would then type up some info and issue a certificate, very much like a receipt; this was called a paper order. Nowadays you can do so through online platforms; the one I personally use is Vanguard, where the process is heavily automated. This can make it simple enough for the average person to access.
How do you pick the winning shares?
Picking individual shares can be risky and time-consuming, if you are a beginner I would advise against this method. If you love a particular brand and you think they are going somewhere, let’s say ‘Tesla’ and would like to put some money into it, you can, but consider limiting your investment in this specific company to only a small portion of your portfolio. A better strategy could be to buy into a fund that is made up of shares from the top 500 companies in a given market. That way you are diversified enough to overcome hiccups, and you gain the advantage of a Fund manager, someone who is literally paid to know the ins and the outs of the industry. And who ultimately is paid for picking shares that will make money. Picking a specific Fund & Manager is a matter for another article. Inevitably, shares will go up and down, and unless you’re Warren Buffett, you’re best to stick to diversification (investing in a range of options or industries, so that losses in one area might be recovered by winnings in another).
Follow us on our blog as we go further into the up’s and down’s of investment.