Don’t bet on the National Lottery. I think the FTSE 100 is a quicker way to get rich

Roland Head reveals why he prefers the FTSE 100 (INDEXFTSE:UKX) to the National Lottery and looks at how to get started in the stock market.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Call me a spoilsport. But I’ve never been very comfortable with the odds of winning the National Lottery. The official figures show that your chance of winning a £1m prize is 1 in 7.5 million. The chances of winning the jackpot are a lot worse — roughly one in 45 million.

Basically, this means you’re not going to win the jackpot. You’re more likely to win a prize of £1,750 (odds of 1 in 144,415) or £140 (odds of 1 in 2,180).

If you play the lottery for long enough, you’ll probably win something. But these odds make it clear you’ll probably spend much more on lottery tickets than you’ll ever win back.

Can you live with a 93% loss?

If you buy two lottery tickets a week at £2 each for 20 years, you’ll spend a total of £4,160. This would buy you 2,080 tickets. Statistically, this number of tickets would probably be enough for you to win two £140 prizes, giving you a total win of £280. That’s equivalent to a 93% loss on your ‘investment’ of £4,160.

If you paid £4 per week into the stock market instead, then your £4,160 investment could be worth £10,262 after 20 years, based on a typical long-term annual return of 8%. Although this £10k won’t be enough to let you retire, it would give you a 146% return on the £4,160 you’ve paid in during this period. That’s a lot better than the likely loss of 93% if you rely on the lottery.

How to get started with stocks

Investing in stocks can be pretty scary to start with. It’s not something they teach at school and there’s a lot of jargon involved. The good news is understanding the basics is really easy.

A share represents part-ownership of a company. If your local double glazing company issued 10 shares and you bought one of them, you would own one-tenth (10%) of the company.

Each year, a company’s profits are divided by its share count to give a figure known as earnings per share, often known as eps. This figure is often used to work out a price for a share.

For example, investors might value shares in a business with limited growth prospects at 12 times earnings per share. A fast-growing company where profits are rising might attract a higher price of perhaps 20 times earnings per share. This multiple is known as the price/earnings ratio. It’s often shortened to P/E, or PER.

Making money from shares

As a general rule, if a company’s profits rise consistently each year, its share price will rise too. That’s one way to make money from shares.

The other way to make money from shares is from dividends. A dividend is a portion of a company’s profits that’s paid in cash to shareholders. Like earnings, dividends are usually expressed as an amount per share.

For example, supermarket giant Tesco reported earnings of 13.6p per share last year. Out of this, it paid a dividend of 5.8p per share.

Dividing the dividend by the share price gives the dividend yield. This is similar to the interest rate on a savings account. Tesco’s dividend yield is about 2.3% at the time of writing.

Next time, I’ll explain how you can invest small amounts into the stock market without facing excessive costs. Until then, this might be of interest.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Tesco. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »