How to choose stocks for investments in UK

Highlights 

• Investing is a process of allocating money on assets with an expectation to generate an income or profit over time.
• Investing works when you purchase shares of any company at a low price and sell it at a higher price, which is known as capital gain.
• As inflation is rising unexpectedly and interest rates on saving accounts are lower, investing in other shares, ETFs may be profitable. 

Investing is a process of allocating money on assets with the expectation to generate an income or profit over time. Many people believe that investing in shares is risky and it is not for them. Investing works when you purchase shares of any company at a low price and sell it at a higher price, which is known as capital gain and when you buy and hold assets to generate dividend income.  An investor may choose to invest in various asset classes such as stocks, commodities, mutual funds, bonds, real estate, and exchange traded funds (ETFs) to earn profits.

Currently, as inflation is rising unexpectedly and interest rates on saving accounts are lower, investing in shares can be a better option to hedge against inflation and to grow your money.

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Investing in shares of a publicly listed company gives you part of the company’s ownership with voting rights and you are entitled to dividend payouts. Under the UK legal concept, shareholders are not liable for a company’s debts.

How to buy shares?

Before starting investment in shares, you need to know your investment goal, your risk-taking capacity and where all you can invest to achieve you goal. The first step to purchase shares of publicly listed companies is to open a share-dealing account with an online investment platform.

You may choose to buy shares directly or pool your funds with others into an investment fund such as mutual funds and exchange traded funds (ETFs). These funds are managed by experienced fund managers who select shares to be bought and sold.

You may also choose to hold shares in a stock and shares individual savings accounts (ISAs) that do not change any tax on any capital or dividend gains. For the tax year 2021-22 and 2022-23, the maximum allowance is £20,000. Investors may also choose to hold their shares in a Self-invested personal pension (SIPP). 

Also Read: How hike in interest rates will hit Britons

How to invest in shares?

The stock markets can fluctuate over the short-term as the market volatility is inevitable. However, when the volatility increases the potential to make above-average profit also increases but with higher risk. Financial advisors say that the best strategy is to ignore short-term volatility if you are looking for long-term gains.

To mitigate risk and maximise profit diversification is one of the most important strategies to achieve long-term goals by allocating investments across different shares, financial instruments, assets, industries, and other categories.

While investors should consider diversification of their investments and spread risk, they should go for long-term plans, and understand that greater returns usually come with a greater risk. One should keep an eye on portfolio and performance of the stocks and shares to understand when to enter or exit.

Also Read: How can investors survive the crypto bearish phase?

What are the different types of shares?

Stocks are divided into five main categories that you may invest in according to your financial goal. It includes:

1. Blue-chip stocks

Blue-chip stocks are the shares of large companies with excellent reputation. These companies are large in size, well established and financially sound. Their market capitalisations are in billions. These companies are generally market leaders or among the top companies in their sector. A blue-chip company has a long record of paying stable and rising dividends.

2. Growth stocks

Growth stocks are the shares of the company that is anticipated to grow at a higher rate than the average growth for the market. These companies generally do not offer dividends as they reinvest their profit for the expansion and growth of their business. These stocks are highly risky but have a potential for high capital gains. Growth stocks usually perform well in bull markets and are prevalent in sectors such as technology.

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3. Value stocks

Value stocks are the shares of a company that appears to trade at a lower price relative to its intrinsic value and fundamentals. These stocks offer consistent dividends and stable growth forecasts. Price of value stocks are undervalued for various reasons like the industry is becoming less relevant or has seen bad press or tighter regulation.

4. Penny stocks

Penny stocks are the stocks that are available at a very low price and belong to companies with very low market capitalisation. In the UK, penny stocks are those stocks that are trading below £1 with a market capitalisation of less than £100 million. In the US, they are traded below US $5 have a market capitalisation below US$300 million. Penny stocks are highly volatile but if you invest in the right stocks, you may experience significant growth.

5. Dividend stocks

Dividend stocks are the shares of companies that pay out regular dividends. These companies are generally well-established companies with more predictable profits and seek to maximize shareholders wealth.

Also Read: Why work from home tax relief is being reviewed?

How a share dealing accounts work?

A share dealing account can be opened online through and an online investment platform or a stockbroker. The account allows investors to buy or sell shares of publicly listed companies easily. However, online investment platforms are usually offered on an execution only basis, which means it does not provide any advice on any investment. But if you open a share dealing account from stockbroker, they may offer advice on advisory or discretionary basis. Advice from stockbrokers may help you plan your investment, while discretionary advice allows the broker to trade on behalf of the investor.

Share dealing accounts may charge annual platform fees, transaction costs, annual fund management fees, annual investment costs, trading fee, transfer out fee and advice fee. Some platforms may also charge inactivity fees.