When you invest in stocks and shares, there is the potential for greater rewards than you can get from a savings account over the long term, but there’s also a much higher level of risk involved.
When you buy shares, you’re essentially buying a small stake in a company, which makes you a shareholder in the business. Companies sell shares to raise money and push their business forward, and if the company performs well, the price of its shares will go up. So, in theory, if you buy a share in a company that goes on to perform very well, you could sell your share for a considerable profit.
Of course, the opposite is also true. If the company doesn’t do so well then its share prices could drop, which means that you could end up having to sell for less than you put in to begin with. Share prices aren’t strictly tied to company performance either – they can be affected by interest rates, borrowing costs, political events, the wider economy and other events (the Covid-19 pandemic notoriously sent markets into freefall when lockdown measures were first announced). Share prices can even be swayed by how well the company is predicted to perform, rather than its performance at the time. In other words, investing in shares can be very unpredictable and isn’t for the faint-hearted. Read more about investing in our article Investing – the basics.
Of course, there are steps you can take to reduce the risks involved, for example by ensuring you don’t put all your eggs in one basket. Funds can be a good way to get started with investing, as your money will be pooled together with other people and invested across a wide range of different shares and possibly other assets. This means that if one company underperforms, hopefully gains made by others will help offset some of these losses.
Drip-feeding your money into funds or shares gradually, perhaps by investing £50 or £100 a month as opposed to a lump sum, can also help reduce risk as you’ll end up buying more shares when prices are low, and fewer when they are higher, which can help smooth out market volatility.
Some shares might also offer income in the form of dividends, meaning that the business will pay the shareholders a regular cut of its earnings. Businesses that offer dividends often appeal to investors seeking to boost their retirement income.