Stock Market Investing Hub (2024)

Whether you’re new to investing, or a seasoned stock market participant, a crucial caveat to bear in mind is that there are no guarantees when it comes to investment returns.

That said, it’s been demonstrated time and again that, investing for the long term in stocks and shares is potentially a way to produce superior returns compared with, say, leaving cash on deposit, or turning to other asset classes such as bonds.

When it comes to investing, a useful rule of thumb to remember is the higher potential risk from an asset, the higher the potential return. If an investor is not comfortable with the first part of that maxim, then for a peaceful night’s sleep, there’s little point adopting that investment approach.

What does make sense is to start an investment journey early. This is because returns will benefit from the element of ‘compounding’, where returns are generated on already-accrued investment growth and, where relevant, dividend income.

Beginners with financial targets that are many years off into the future should also be able ride out the inevitable volatility from short-term dips that inevitably crop up in share investing.

The question may also arise of whether to invest via a lump sum, or through a steady drip-feed of money. Opting for the latter means an investor can potentially benefit from the process known as ‘pound-cost averaging’.

Pound cost averaging refers to investing smaller amounts of money regularly, say on a monthly basis. Money is paid in no matter what’s the prevailing state of the market.

Because of the regular basis, the process means investors capture the average return of the market. In other words, when prices are high, low and anything in between. Over time, investors can potentially end up with a larger investment position compared with someone who’s relied on just one or two lump sum investments during the course of the year.

It depends what is meant by ‘a lot of money’ here. It’s true for example that, in recent times, some of the world’s largest technology stocks have produced eye-catching returns, of the order of several hundred per cent over relatively short time periods, five years say.

That said, investing in individual stocks remains inherently risky and, in the long history of stock market investing, these sorts of returns tend to be the exception rather than the rule.

What’s more, they don’t take into account all the corporate failures that have taken place along the way when investors would have lost their cash.

In addition, there’s no guarantee going forward that, just because a company produces a stellar run of returns, they will go on indefinitely. Practically speaking, a portfolio of investments which consistently manages to produce a high single figure or low double-digit percentage return each year can probably be categorised fairly as a success.

Profits made from investments are subject to tax. There are some notable exceptions in the UK, however, such as investments held in tax-efficient individual savings accounts (ISAs), or self-invested personal pensions.

When it comes to other investments, the amount of tax an investor pays depends on several factors including one’s personal tax situation, and the amount of profit made.

For example, if you hold investments outside of an ISA and receive money from share dividends, then an annual tax-free dividend allowance applies which stands at £500 for the 2024/25 tax year.

Exceed these allowances and the tax rates apply as follows: 8.75% (basic rate tax payers), 33.75% (higher rate), and 39.35% (additional rate).

If your only income is from investments, then you can use the tax-free personal allowance of £12,570 (that applies in both the 2023/24 and 2024/25 tax years), to offset the bill.

Similarly, capital gains tax (CGT) is payable on the profit (or gains) an investor makes when he or she sells investments that have increased in value over time.

Again, there are allowances to factor in before tax becomes due. In the 2024/25 tax year, the CGT allowance stands at £3,000. Investors do not pay CGT on gains that have accrued within an ISA.

The amount of CGT that is due on stocks and shares depends on an individual’s tax bracket. To work out how much could be due, add capital gains to income within a particular tax year. If the total remains within the basic rate income tax band, then the level is paid at 10%. If it falls within the higher rate tax band, the level rises to 20%.

Tax treatment depends on one’s individual circ*mstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.

It’s important to reiterate that investing comes with risk and no guarantees. It’s possible that investors who choose to buy individual stocks could hit on winners. Then again, they may end up with a portfolio full of duds. Before committing any cash, it’s important to carry out plenty of research and understand the potential risks.

If this sounds too off-putting, in terms of the time spent researching stocks against any potential gains (or losses), then buying funds with exposure to numerous businesses could be the more comfortable route for some investors to take. Buying stocks or funds through providers that are approved by the UK’s Financial Conduct Authority, affords an investor financial protection – up to £85,000 in potential compensation – in the event that something goes wrong with the said company. This will depend on what regulated activity the firm was carrying out for you and whether any exceptions apply.

Note that lousy investment returns in and of their own right, however, would not qualify for compensation.

Investing involves realising a profit from a particular asset class such as shares or property. As such, there are no hard and fast rules when it comes to selling shares. But it makes sense to establish a set of indicators that can be used to trigger the need to review the performance of an investment portfolio.

For example, if a stock that you’ve held has met your objectives, for example, having reached a pre-agreed target price, then it could be time to cash out and reinvest the proceeds elsewhere – even if the stock price continues to climb.

It also makes sense to review your financial goals periodically, say, annually. Doing this can help re-fashion investing strategies which, in turn, may alter your attitude to selling – or holding on to – a particular stock or fund.

Your personal financial circ*mstances can also change and this might impact on your investment philosophy as well. For example, as a younger investor with a time horizon stretching out decades, you may be happy to retain a high risk tolerance in your portfolio.

As you move into middle or even old age, however, this attitude to risk can change. By this stage, there may be more of an argument to move assets steadily into safer havens such as bonds or cash.

Looking at the other end of the telescope, there can be times when it may not be wise for an investor to sell his or her shares. For example, although it can be difficult to do so, it’s sometimes important to blank out short-term ‘noise’ about a particular company’s performance. One bad set of results might not mean curtains for a business. But it’s certainly worth bearing in mind, in case a trend emerges.

In addition, when markets turn bumpy and share prices start to dip, making a snap decision to sell at a loss means that money won’t ever be recouped. In this sort of scenario, it’s important to put emotions to one side, not follow the herd, and review whether ditching a stock in this situation actually makes sense.