If you’d like to start investing in the stock market, then you’re in the right place. Here at the Motley Fool we believe that the stock market is the best way for most people to build long-term wealth.
That’s not just our view — it’s backed up by hard data. According to Barclays, the UK stock market has delivered an average return of about 8% per year over the last 100 years or so. That’s significantly better than cash or bonds.
To get started, you don’t need to be rich already. And you don’t need to be a financial whizz kid.
All you need is at least £25 per month, and a tiny amount of knowledge about the stock market (which I’ll provide).
A word of warning
The stock market is a great way to invest money for the long term. For me that means at least five years, preferably closer to 10.
Shares are not a good place to put cash that you expect to need in less than five years. Short-term setbacks such as market crashes and recessions can cause the value of your stocks to fall and rise unpredictably over short periods.
If you want to save cash for a rainy day, for holidays or perhaps for a university fund, then I’d stick to cash. You need to know that it will be there when you want it.
How to get started: funds vs stocks
Stocks and shares are the same thing. They represent part-ownership in a company. You can buy shares directly in individual companies, such as BP or Sainsbury, or you can buy a collection of shares grouped together to form a fund.
If you’re new to the stock market, I would definitely start with funds. There are two main types of fund, active and passive.
Active funds are run by human managers who decide which stocks to buy for their fund. They hope to outperform the wider market, but most of them fail to do so. Picking future winners is difficult and fees can be quite high.
Passive funds are run by computers according to a set of rules. These are often known as tracker funds or index funds. The most popular tracker funds follow one of the major stock market indices, such as the FTSE 100. This represents the 100 largest publicly-traded companies in the UK.
A FTSE 100 tracker will contain shares in companies such as HSBC, BAE Systems, Unilever, Tesco and GlaxoSmithKline.
Passive funds are generally very cheap and provide reliable returns that will match the market over time. Many also allow monthly contributions from as little as £25.
I would always choose to invest in passive funds rather than active funds.
Opening an account
In my opinion, the best way to get started is to open a Stocks and Shares ISA with a major provider. By choosing an ISA, any future capital gains and dividend income will be tax-free.
Once you’ve opened an ISA, you can choose where to invest. Most providers will offer you a choice of funds, including tracker funds. I’d probably start by investing in a FTSE 100 tracker fund.
Once you’ve chosen a fund, setup an automatic monthly payment. Then you can just sit back and get on with life, knowing that you’re building a long-term nest egg.
Roland Head owns shares of GlaxoSmithKline and Tesco. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended HSBC Holdings and 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.