Making money on the stock market isn’t difficult, if you understand how it works. What is difficult is finding the knowledge you need to get started safely and profitably.
It’s no wonder that many of us find it easier to play safe and put our money in a Cash ISA. The problem with this is that cash interest rates are currently lower than inflation. So the purchasing power of your cash is falling each year – playing ‘safe’ isn’t as good as it looks.
Today, I want to share with you three pieces of information that I believe are all you need to make money from stock market investing.
1. Use a Stocks & Shares ISA
Cash ISAs are a useful place to keep your emergency savings fund. But for retirement saving I prefer a Stocks and Shares ISA. Like Cash ISAs, these are tax-free and allow you to pay in £20k each year. The big difference is that they allow you to invest your ISA cash in the stock market.
Although the stock market goes up and down fairly randomly from year to year, over the long term it usually goes up. The average long-term annual return from the UK stock market is about 8%. That’s a lot better than cash.
To give you an idea of what’s possible, I’ve worked out how much you might have if you saved £200 per month for 20 years at different rates of interest.
|
Annual rate of return |
Value in 20 years |
|
2% |
£58,959 |
|
4% |
£73,355 |
|
8% |
£117,804 |
2. Investing your cash
So you’ve opened a Stocks and Shares ISA. What next? There are lots of choices. But for a new investor wanting a simple, cheap and reliable way of building wealth, I think the best choice is to invest in a tracker fund.
These funds are known as passive funds because all they do is track the overall movement of the stock market. For UK investors, I would choose a FTSE 100 tracker fund. This will follow the movement of the 100 biggest companies listed on the UK stock market.
There are lots of tracker funds around. I’d choose one from a big firm such as Legal & General, iShares, Vanguard or Blackrock. They’re all very similar. Check the annual costs. You should be looking for something under 0.5%, if possible.
When you invest, make sure you choose accumulation (Acc) units, not Income (Inc) units. This means that the dividend income paid by the companies in the index will be automatically reinvested, boosting your returns. You can read more about this here.
3. Don’t make this huge mistake
Many investors stop investing if they see the stock market falling. If you’re investing in a tracker fund, this is a huge mistake that will cost you money.
If the stock market falls, it means you get more for your money. It also lowers the average cost of all your monthly investments. This means that when the market rises again (which it will), the value of your fund will rise more quickly than if you’d stopped paying in.
The secret to building wealth with a tracker fund is to set up a direct debit each month and then forget about your investment for as long as possible. When you come back, you may be pleasantly surprised by how much it’s grown.