3 Tips for Investing in the Stock Market
It may seem like the economy is all doom and gloom, but now might actually be the best time to invest in the stock market. That’s because investing in stocks during a recession can be one of the best ways to build wealth.
The stats back this: over the past century, the UK stock market has registered annual returns of 4.9% above inflation on average. That said, investing in the stock market is not risk-free. There are pitfalls at every turn, so you must have your wits about you.
It helps to equip yourself with the right information to navigate the volatile stock market, so keep reading to learn the top three tips on investing in the stock market:
Invest for a minimum of 5 years
When investing in the stock market, think long-term. The stock market is volatile, which makes short-term investments risky. Considering most investors are poor timers of the market, it’s not a viable option if you don’t have the requisite experience.
Your best shot at succeeding in the stock market is long-term investing, preferably not less than five years. That’s because the volatility of a stock weathers out the longer you keep it. Here's a 5 year graph of the S&P 500:
Sure, it’s unnerving to see dips in the stock market, which might tempt you into selling what’s left of a losing stock. However, the stock market generally reflects the growth of the economy over time, something you’ll only enjoy if you are patient.
Besides, keeping a stock in your portfolio is more cost-effective than buying frequently, as you may incur charges whenever you trade depending on the platform you use. That’s not even mentioning the benefits of compounding interest you’ll get from dividend stocks.
Choose a low-cost platform
Finding a reliable and reputable platform is crucial in investing in the stock market, as the charges can pile up.
These are some of the fees and monetary restrictions you would typically face: deposit minimums, monthly or annual account maintenance fees, investment minimums, margin rates, trading commissions and advisory service charges.
As you can see, you have your work cut out for you to identify the right platform that offers the best rates, charges the least, suits your trading style and matches your stock market experience levels.
The ideal platform shouldn’t charge a fee to open an account and should charge minimal account maintenance fees, trading commissions and transaction fees. Further, it shouldn’t have excessive minimum investment levels or extortionate commission schedules.
Personally I use Hargreaves Lansdown for my ISA and Trading212 for my General Investment Account.
Utilise a tax-efficient wrapper such as an ISA
The government offers tax incentives known as “tax wrappers” that help “wrap” your savings and investments in a tax-reduced cocoon to minimize your tax liability as long as it stays within the wrapper. They provide useful protection against taxation of investment income.
Since the government will only take pennies off your earnings, they are more attractive than other investment methods. The most popular investment tax wrappers are:
- Stocks and Shares Individual savings accounts (ISAs)
- Personal Pensions
- Offshore and onshore investment bonds
Each tax wrapper has its distinct tax status and degree of flexibility.
Investing in the stock market is tricky, but the best way to go about it is by investing for at least five years, using tax wrappers to minimize tax liabilities and utilizing a low-cost platform
Book a FREE Wealth Coaching Session today to learn more about investing in the stock market.