For many people, investing in shares may be confusing. They may also think that they do not earn enough money to start investing in the stock market. But even if you only have a few pounds to spare every week, you can invest, and your money could grow with compound interest over time to a surprisingly large amount.
FTSE 100 and FTSE 250
First a bit of terminology for those who are just getting interested in the stock market.
London has always sat at the centre of international financial markets and attracted robust companies to list there. The London Stock Exchange (LSE) is the primary stock exchange in the UK and the largest in Europe.
As described on the LSE website, the “FTSE (pronounced Footsie) Group is an independent organisation jointly owned by the Financial Times and the London Stock Exchange.” It has several indices of shares covering not only the UK but also other global markets.
The most famous index in the UK is the FTSE 100 which began in 1984. Most companies are multinational conglomerates. The components of the index are reviewed quarterly.
The FTSE 250 index consists of the 101st to the 350th largest companies listed on the LSE. It was launched in 1992. Companies in it usually have a more domestic focus so they are more directly affected by shorter-term developments in the UK economy.
Performance of the indices
My Motley Fool colleagues regularly point out that over the long run, the stock market returns about 6% to 8% annually, on average.
Over the past year, the FTSE 100 and FTSE 250 indices are up about 3.5% and 14% respectively. In January, the FTSE 250 also hit an all-time of 22,114.26.
And these increases in the index levels do not include the dividend payments made out to shareholders. Average dividend yields for the FTSE 100 and the FTSE 250 are about 4.5% and 2.8% respectively.
Thus, in the past year, a combination of growth and dividend income would have made either index an ideal portfolio choice.
While past performance may not exactly repeat in the months ahead, the track records of both indices highlight their growth potential.
Time is on your side
Let’s assume that you are now 35 years old with £10,000 in savings and that you plan to retire at age 65.
You decide to invest that £10,000 in a fund now and make an additional £4,000 of contributions annually at the start of the year. You have 30 years to invest. The annual return is 7%, compounded once a year. At the end of 30 years, the total amount saved becomes £411,904.
Saving £4,000 a year would mean being able to put aside around £333 a month or about £11 a day. Might you just be wondering if you should skip that next impulse purchase?
How to get started
Making the right investment decisions in stock markets is not necessarily about constantly picking winning shares and funds, buying cheap and selling fast when the price rises. Rather it is about having a long-term strategy. If you are unsure where to begin, a low-cost FTSE 100 or FTSE 250 tracker fund might be appropriate.
There are also several companies I’d consider buying, especially if there is any weakness in their share prices in the coming weeks. In the FTSE 100, they include Aviva, Carnival, Lloyds Banking Group, and Royal Dutch Shell.
In the FTSE 250, I like Bunzl, Direct Line, Dunelm, Inchcape, and Paypoint as potential long-term investments.
