What are they?

Stocks, also know as shares or equity, are a portion of ownership of a company. Its like owning a very small piece of the pie with the company as the pie!

Public Companies

Generally people purchase shares in public companies only rather than private companies. A public company is one that is listed on a stock exchange eg. London Stock Exchange, which just means it is sold on a stock exchange. Anyone can purchase stocks of these public companies hence the name public, they are open to the general public. Often many shares are bought and sold each day and the price fluctuates throughout the day.

A private company is one where the general public cannot purchase shares and it is not listed on a stock exchange. Most companies are private.

When people talk about investing in the stock market, they are referring to investing in these public companies such as Amazon, Facebook.

Share Price

If a company is performing well e.g. making increasing profit, its share price will generally increase as the share of the company has increased in value. Alternatively, if a company’s performance is declining, or there is a scandal the shares will decrease in value and the share price decreases.

Long (buy)

To long or buy a stock means to buy and own it until you decide to sell. This is the traditional way of purchasing something and is less risky. You hope the price of the stock increases after your purchase so when you do decide to sell you make a profit. The price increase is the profit.

Short (sell)

To short or sell a stock means to borrow it from Person A, to then sell it to someone else. This is a more risky strategy. You hope the price of the stock decreases so that when you repurchase it and return it to Person A you make a profit. The price decrease is the profit.

Meme Stocks

There are several Reddit / meme stocks like Gamestop that have been making the news. Several Hedge Funds predicted the price of Gamestop stock would decrease, so they borrowed the stock and sold it. Reddit Wallstreet Bets then decided to play the system and purchase all the stocks possible. As the demand for the stock increased, the price went up. Hedge FunThere are several Reddit / meme stocks like Gamestop that have been making the news. Several Hedge Funds predicted the price of Gamestop stock would decrease, so they borrowed the stock and sold it. Reddit and Wallstreet Bets then decided to play the system and purchase all the stocks possible. As the demand for the stock increased, the price went up. Hedge Funds would then normally repurchase stock, and accept a loss as the price had increased. However there was no stock to repurchase! Everyone was buying, leaving them unable to return the stock they had borrowed and as the price continued to rise, they lost a lot of money.

The Big Short

You may have seen the film the Big Short. In the Big Short they predicted that Mortgage Financial Products (Mortgage Backed Securities) made up of thousands of mortgages would decrease in value. They borrowed the products and sold them, planning to repurchase them when the price decreased. This was due to happen when people defaulted on their mortgages, making the mortgages worthless and the financial products containing those mortgages worthless. This then did happen! In the film, instead of repurchasing and returning the products to Person A, they sold their Financial Product Shorts because there was a risk of Banks going bust and not being able to pay what was owed. Thus they sold their shorts to someone else to guarantee a profit, even if it was less than they could have got had they held onto it.

Dividends

When you purchase a share in a company you can also earn dividends. These are optional payments made by companies to their shareholders paid annually, biannually or quarterly. This is to share out some of the company profits with the owners of the company – the shareholders. Thus, when a company is performing well dividends can increase or be more frequent. During the pandemic, a lot of dividends have been cancelled or reduced as companies profits are lower. Sometimes in the news you will see outrage when a company is losing money, yet still paying a very high dividend! This is because it can suggest mismanagement of company money, or be seen as unfair etc.

Rights

When you purchase a share in a company, you also can have the right to a vote at a shareholder meeting or AGM (Annual General Meeting) depending on the share type. This is because you own a part of that company, and so have a say in how it is run. That’s why being the majority shareholder gives people a lot of control. This also can lead to ‘hostile takeovers’ where a company purchases many shares to get a majority ownership so they can then vote to get new management of the company and make other changes. A lot of investors in shares don’t end up participating in voting.

Investing

If you purchase shares in a company you can make money if the shares increase in value and from dividends.

Generally when investing, particularly when starting out its best not to pick individual stocks to invest in. This is because you are then reliant on one company’s performance.

It can be better to invest in:

This helps spread the risk as you are diversified. Stock markets can increase and decrease in value over time, thus investing for 5+ years helps smooth out these bumps.

What is a Stock Market Index?

A stock index measures the performance of a group of stocks. There are 3 main ways of calculating the performance, which are based on price and number of stocks. The most well known stock indices are the FTSE100, S&P500, FTSE250, Dow Jones etc. When you hear people say “the stock market is up” or “the FTSE is up XX points” it means overall the price of the stocks in the FTSE stock index have increased. These indices are used as benchmarks for a range of other financial products and as an indicator of how the stock market is performing in general. The different indices have different criteria for the stocks it includes. For example FTSE100 are all stocks on the London Stock Exchange in UK, those in S&P500 are all stocks based in USA.

What is a (Stock Market) Index/Tracker Fund?

An index or tracker fund is a type of investment fund that tracks or imitates a stock index. It aims to have the same makeup as the stock index it is tracking. So a FTSE100 index fund will be made up of FTSE100 stocks, and aims to closely follow the performance of the FTSE100. You can also get index funds that track bond indices, and other financial products. If you invest in an index fund, you should get the same performance as that of the index. This is a great way to get wide exposure and is often low fee as it is a simple investment strategy. These are know as passive investments, as you are passively following the index / market, rather than trying to actively beat it. Over time passive index funds have performed well and with their low fees there are large arguments for investing in these long term. Of course, as always, you need to decide what is right for you.

What is an ETF?

An ETF (Exchange Traded Fund) is a type of investment fund that is bought and sold (traded) on a stock exchange like how a stock is traded. They generally track an index or sector and can be made up of stocks, bonds or other financial products. They typically have lower fees as they are generally passive (tracking an index) and have become increasingly popular. They are often diversified and can give good exposure to a certain sector or market.

Investment Portfolios

Readymade Platform Investment portfolio’s are a very easy way to start investing! They are often made up of stocks, bonds and cash etc so are diversified.

Stock Investing Strategies

There are many other Investment Funds that follow different strategies for investing in different types of stocks and in different geographies. There are so many options out there so it’s best to start simply!