A Basic Introduction To The Stock Market

WHAT IS THE STOCK MARKET?

The stock market is a marketplace where shares are traded. There are many different stock markets around the world, but the UK’s is known as The London Stock Exchange (LSE). 

To form a market index, company shares are grouped together, and their value is combined. This results in a single figure – known as a ‘weighted average’, which means the bigger the company the larger its effect on the value of the index. A market index value gives a good indication of movement within markets and is a useful tool for investors and economists to describe the market, and to compare the value of similar shares. You’ll often hear people refer to the market being up or down, which more specifically, means stock market indices are rising and falling. Sometimes, a more casual way of referring to a stock market that’s brimming with optimism and confidence is a ‘bull’ market, whereas the opposite would be a ‘bear’ market. 

The main indices to know are:

The FTSE 100: An index of the 100 biggest companies in the UK. Examples include Barclays, AstraZeneca and – yes – even Burberry.

The FTSE 250: An index representing the next 250 largest UK companies. Since these companies are smaller than those in the FTSE 100, they tend to be less international, or have less of an impact on the global economy, and instead better reflect the fortunes of the British economy. Examples include Savills, William Hill and Cineworld.

FTSE All-Share: An index of shares listed on the LSE’s main market. It includes all shares in the FTSE 100, FTSE 250 and FTSE Small-Cap indices.

WHAT ARE SHARES?

Shares – or sometimes ‘equities’ – are the most common term used to describe what’s traded on the UK stock market. Put simply, a share represents part-ownership of a company. When you own a share in a public company (usually referred to as a PLC), you own a ‘share’ of that business. Shares also have monetary value – known as their ‘share price’ – and can be bought and sold. After buying shares, you become a shareholder in the company – something which is confirmed via certification, although most of these records are electronic today. Being a shareholder gives you certain rights and benefits, for example the right to vote on company matters at the Annual General Meeting (AGM) and potential dividend payments.

WHY DO PEOPLE BUY SHARES?

Investors buy shares to make money via one of two ways: share price appreciation and dividends. 

If the value of the share itself rises, you might be able to sell the shares for a profit. Alternatively, you can keep holding the shares, and if the company continues to be successful the value of your shares could rise. If you hold onto the shares and the company pays a dividend, you will receive either annual or biannual payments, which could also increase over time if the company continues to grow and reports higher profits.

WHAT ARE DIVIDENDS?

A dividend is a payment by the company to its shareholders, and usually represents a share of the profits. There is no obligation for companies to pay a dividend (especially if they don’t turn a sustainable profit), although many do. Successful companies can raise their dividend payments over time, as profits increase, to encourage loyalty from their shareholders and more demand for the shares in the market. However, it’s important to remember both dividends and the share price can fall just as quicky as they rise. Past performance is never a guide to future returns.

WHY DO SHARE PRICES MOVE?

There are many factors that affect the demand for a company’s shares. In low demand, the share price will fall, but if plenty of people want some shares, the price will rise. It’s all about supply and demand. Here are some of the other reasons why share prices move:

The National & Global Economy

There are many events – both on a global or national level – that affect confidence in the economy. Right now, the uncertainty surrounding the global pandemic, and at one time the Brexit deal, affected people’s desire to spend money and stimulate economic growth. With more nervousness comes more trepidation, and less appetite for risk in the stock market. 

Industry Events

There are some events beyond a company’s control that might affect their fortunes, or ability to grow and increase profits. A mining company, for example, is open to changes in the price of the commodity it mines, like gold or diamonds. 

Competition

If the company is doing better or worse than its competitors, it can affect the share price. For instance, if Marks & Spencer is struggling to keep up in the age of online shopping, its share price might fall while shares in Asos or Boohoo jump. 

Company-Specific Factors

Sometimes a company is badly run, while rumours of a merger or lucrative deal might spark sudden demand for the shares, pushing up their price. It’s always important to keep up to date with current news on the companies whose shares you own. 

HOW DO YOU INVEST IN THE STOCK MARKET?

While shares are most frequently traded on the stock exchange, the first opportunity investors get to buy shares is when they are first created.

The Secondary Market

Once a company has created its new shares, they can be bought and sold on the stock exchange, a process known as the secondary market. When you buy shares this way, you should use the services of a stockbroker, which offer a range of different services depending how much input you want from them. Many stockbrokers these days operate entirely online, including Hargreaves Lansdown – which is dubbed the largest shares ‘supermarket’ in the UK. Shares can be bought for an individual portfolio or via a fund, which is essentially a cluster of shares designed for a specific purpose – be it income, growth or even high risk/high reward.

Initial Public Offerings (IPOs)

When a company decides to ‘go public’ it means it plans to list its shares on a public exchange. Therefore, ownership of the company, which may have been family owned or in private hands before the IPO, is split up into millions of shares. These shares are then offered for sale to the public. There are many reasons why companies go public: to raise money or so an early investor can cash in some, or all, of their money. Just because shares are issued at the beginning doesn’t mean further shares can’t be issued later on to raise more money.

FURTHER RESOURCES

One of the most common misconceptions about investing in shares is that you need a large amount of money to do so. Some brokers allow customers to open trading accounts with as little as £25, but it’s important to always remember you could lose everything – certainly as much as you make by choosing the wrong investments. Always take the advice of a qualified professional and consult an expert before making any financial decisions.

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*DISCLAIMER: Anything written by SheerLuxe is not intended to constitute financial advice. The views expressed in this article reflect the opinions of the individuals, not the company. Always consult with an independent financial advisor or expert before making an investment or personal finance decisions.