A guide to investing

Most people who begin investing do so in the stock market, while the term "stock market" tends to evoke images of people in colourful jackets yelling "buy" and "sell" and using strange hand signals.  

They may see a movie like Wall Street, Boiler Room or Rogue Trader and say, "this looks fun and easy" throw some money into a day trading account, learn a bit of technical analysis and think they will be able to make great financial decisions just by reading the Financial Times and watching Bloomberg.

The reality of pit trading these days is a distant memory. Screen-based day trading is much less glamorous and more akin to watching paint dry. The odds of losing money from day trading are extremely high.

Stock trading is a highly complex performance discipline akin to becoming an Olympic-level sportsman. 

Only a few individuals possess the talent to generate profits consistently. 

Day trading is based on the idea of short profits, making several buys and sells on the same day, whereas investing is about buying stocks for long-term gains. It requires patience, as it involves holding and waiting for the value of the investment to go up.

It is a gamble, as you may incur a loss before the investment rises, but the returns can be significantly higher than those earned by leaving your money in a bank account.

Professional help through financial advice

 If day trading or investing is not for you, but you require a higher rate of return than a bank account, then you should seek the services of a financial advisor. 

Whatever your goal, a diverse portfolio made up of various investment classes is generally recommended, as it's rarely a good idea to put all your eggs in one basket. 

A financial advisor will help you set up your portfolio by first carrying out a fact-finding. This is principally to determine your attitude to risk. 

Risk is fundamental to investing; higher-growth investments carry higher risks, while low-risk investments offer lower growth. 

A financial advisor will tailor your portfolio to your current risk profile. 

Remember that your risk profile changes over time, which is why effective management is key. Your advisor will be able to monitor your investments and rebalance your portfolio as needed. 

This is more about how resilient your finances are rather than how cautious you are. 

Let Regulated Advice match you with a financial advisor for expert advice.

Glossary of investment terms

Here's a brief glossary of common investment terms:

Asset allocation

How your funds are split across different asset classes (e.g., stocks, bonds, and cash) to achieve a desired risk and return profile.

Alternative investments

These are non-traditional investments such as stocks, bonds, and cash. These include private equity, hedge funds, property, commodities and cryptocurrencies. 

Bull market

A market characterised by rising prices, optimism, and investor confidence.

Bear market

A market characterised by falling prices, pessimism, and a lack of investor confidence.

Bonds

These are loans, either to the government or corporations, that are repaid over time with interest. They range from low-risk (UK government bonds, also known as Gilts) to high-risk (bonds issued by a company). They tend to provide steadier returns and fluctuate less in value, therefore being a lower risk.

Capital gains

The profit from the sale of an investment, such as stocks or property.

Commodities

Commodities funds invest in raw materials or agricultural products, anything from wheat to gold. Investing in commodities is a relatively high-risk endeavour while, on average, not delivering as much growth as securities. The advantage of commodities is that their performance is largely independent of that of securities, allowing them to help balance portfolios.

Equities

Also known as stocks & shares, they represent a stake in a company. They are traded on the stock exchange; their value fluctuates, both gaining and losing value. This makes them best suited to longer-term investments as they are high-risk in the short term.

ETF (Exchange Traded Fund)

An ETF is just like any other product on the stock exchange. However, it is a collection of multiple investments. It allows people to spread their risk with a single purchase.

Diversification

Spreading investments across different assets or types of investments to reduce risk.

Dividend

A bonus is given to shareholders by the company in the form of capital or additional shares in the company.

Derivatives

These are complex and should be approached with caution and with specialist advice. The value of derivatives is based on the performance of another type of asset.

Hedge funds 

Classed as an alternative investment. These can include traditional investments in stocks and bonds, as well as more complex strategies like short-selling (betting that an asset will decrease in value) and leverage (using borrowed money to increase investment exposure).

Portfolio

A collection of financial investments, such as stocks, bonds, and other securities, held by an individual or institution.

Private Equity

Classed as an alternative investment. These are essentially Investments in private companies that are not publicly traded. Investors often acquire ownership stakes in private firms.

Liquidity

The ease with which an asset or security can be bought or sold in the market without affecting its price.

Market capitalisation

The total value of a company's outstanding shares of stock is calculated by multiplying the share price by the number of shares.

Return on investment (ROI)

The gain or loss made on an investment relative to the amount invested is usually expressed as a percentage.

Risk tolerance

The degree of variability in investment returns that an investor is willing to withstand.

Return on equity (ROE) 

A financial metric that measures the profitability of a company by expressing net income as a percentage of shareholders' equity.

Securities

Securities are composed of three asset types: derivatives, equities, and bonds. 

Unit trust

An investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. You buy units of a fund, which are managed by an experienced fund manager.