The whole point in investing in the stock market is to generate significantly better returns than you would currently receive with cash on deposit and more than keep pace with inflation. But because stock markets can go up and down, this objective can only be achieved by investing in the long run. If you are not prepared to commit your cash to the stock market for more than five years, taking the plunge into the world of stocks and shares is not necessarily a good idea.
There are costs of investing and it is important to keep these costs low as costs have an important impact on your returns. Here is a simple 3-point plan.
- Don’t pay tax on your gains from investing.
The easiest way to achieving this is by putting your investments in a stocks and shares ISA. If you make money on shares from dividends and or capital gains it will be protected from tax if it is an ISA. You can contribute as much as £20,000 a year to an ISA each tax year; don’t worry ISA providers accept much smaller lump sums and allow you to contribute a small amount each month.
- Choosing a platform
Investing in a stocks and shares ISA is a 2-stage process. First you need to choose a provider or platform to buy your ISA from. Like supermarkets these providers offer you a wide range of choice of investments at a lower price. As a rule, look for platforms that are towards the cheapest end of the range.
- Choosing a fund
If you are new to the stock market and are not confident about making your own investment decisions, you might opt to invest in a fund that invests in a wide range of companies and activities. The cheapest way to gain exposure to the general movements in stock markets is to invest in a tracker fund. Tracker funds that move in line with indices like the famous FTSE 100 index are popular. But you might want to widen your horizons and invest in a global index fund which has exposure to booming companies like Apple, Google, Amazon and Netflix. These index funds are cheap to operate and so should be cheap for you too.
A word of warning
In the world of financial services beware of cuddly brands. Well-known names like Virgin Money charge 1% a year for a FTSE index fund when others offer a similar service for less than a third of the price. Have a look at what Vanguard, Fidelity or Legal & General have to offer
Next time we will look at your pension.
Part 1 – Are you Scared of the Stock Market?
Part 2 – Making Your Money Work for You
Part 3 – A Brief Guide to the Two Faces of Debt
Part 4 – Are you Ready for the Stock Market?
Part 5 – Three-Point Plan for the Investors New to the Stock Market
Part 6 – Should I Consolidate my Pensions?