What School Doesn't Teach You
This is the first in a series of articles about the basics of investing and the stock market, what the basics are and everything else that school should have taught you. This series of articles will cover saving money, investing for a brighter future, basics of the stock market and how being enrolled in a pension is actually a fantastic way to plan for your retirement.
In school you learn all about the world and how it works, how to communicate and make friends, create new ideas and start your journey into your first job. However they don’t teach you all the basics of how to manage your money and effectively create wealth throughout your working life. This is something I wished I was taught from a young age and I firmly believe that it’s actually one of the fundamentals of life that isn’t ‘taught’ so to speak. So let’s start with the stock market, what is it?
Investing Basics: The Stock Market
The stock market in it’s simplest of terms is essentially a shop or marketplace that sells parts or part of a company or fund (more on them later). Imagine that there is a market selling lots of antiques that you can purchase, it could be anything from a vintage Coca-Cola cool box to a vintage dress from the early 1900’s. So let’s say you purchase this vintage Coca-Cola cool box from a seller in the marketplace for £50 and you plan to keep it for a few years, over time the value of the Coca-Cola cool box will go up and down based on customer supply and demand. After 10 years you have a clear out and decide to sell the cool box at a local market and it’s now worth £100, this means that the value of the cool box has increased over time and has doubled in value since you purchased it. This term is called growth and is a form of investing, buying a stock or share in a company in the hope that in the future the share you own has risen in value and you can sell it for a profit. In this case the cool box has increased in value by 100% (£50 + 100%(£50) = £100) and would mean a yearly average return of 10%, which in the stock market would be considered a good outcome.
A stock market has shares of companies for sale at different prices depending on how much people are willing to pay for a share of the company, usually smaller companies like Tesco that don’t innovate much will have a smaller price per share than a company such as Walt Disney. This however is not the only factor in the stock market, as the more shares of the company there are out in the markets the less of the company you actually own. This means that your shares in companies have varying degrees of value and weight (the amount of the company you actually own), this can be explained with pizza. Say you go to buy a bit of a 12″ pizza and it comes cut into 4 slices, you buy one slice for £4, that means it would cost £16 for the full pizza. Now you buy a slice of another pizza with different toppings and it’s cut into 6 slices, but still costs £4. This means that the second pizza is worth a total of £24. You spent the same amount of money and bought a single slice of the pizzas, but the slices you bought are different sizes. This is how the stock market works in it’s most basic form, it’s just a giant pizza shop!
What's On The Stock Market?
Stocks & Shares – This is part of a company or business and is usually what you will see if you search your favorite company into Google and write ‘stock price’. For example typing Coca-Cola Stock Price into Google returns a graph and the current value of 1 share of the company. Any company or business that is ‘floated’ on the stock market, meaning shares of the company available to the public to buy and sell, will have a share price relative to their company. These prices and valuations fluctuate depending on the actions or earnings of the company, or it’s future growth potential.
ETF (Exchange Traded Funds) – ETFs are a collection of companies that are traded on the stock market as one single stock or share. If you purchase an ETF then you invest into all of the companies within that fund, for example the UK FTSE 250 (Financial Times Stock Exchange) would follow the performance of 250 companies in the UK. There are ETFs for everything these days including property and clean energy. I will go into detail on ETFs another time and tell you why you should be investing in them.
Bonds – A bond in it’s simplest terms is a loan to be repaid at a set amount in the future. Bonds are used to lend money to companies and institutions throughout the world, including governments. Bonds are much safer compared to Stocks or ETFs as they are loans and the value of the money lent doesn’t fluctuate as much as the global markets. It’s for this reason that bonds are considered a good way to aid your portfolio in long term growth, with less risk but also lower returns.
Commodities – These are a good that has value regardless of who owns or sells it, such as oil or gold. The most common way to invest in these ate ETFs, however there are other ways depending on how you want to invest. Commodities are considered riskier as the value is in proportion to demand, for example in 2020 the price of oil went into minus meaning that producers and sellers were paying companies to take the oil off their hands. Strange times aye?
Where IS The Stock Market?
You’re probably wondering where the stock market is, right? Well it’s everywhere, let me explain.
Every country has a common stock exchange, in the UK it’s the London Stock Exchange located at Paternosta St. in central London and can be accessed anywhere in the world through brokers who you can use to purchase stocks or shares through. These providers provide access to stock exchanges around the world for example the NYSE (New York Stock Exchange) is traded on Wall St. in New York City, however in modern times people aren’t all in a room throwing around paper stocks and bonds anymore, meaning that a lot of the transfers are processed electronically in Mahwah, New Jersey, New York. Technology rules. Brokers in the UK can give you access to most of the worlds most sought after exchanges where big companies are ‘floated’, remember that term?
These days you can trade on the go with the phone in your pocket with services such as Trading 212 or Stake, keeping up to date on the latest your money is doing without the need for a computer. Other services such as Moneybox invest in ETFs for you and it a great way to get started with investing. If you haven’t already, read the article on how to start investing today with Moneybox.