Investment basics

Why Invest?

Investing in the stock market offers a potentially better return on your money than that achievable through saving alone.

What is the stock market?

The stock market is a collective term for the different stock exchanges around the world. The stock market is just like any other market in that there are buyers and sellers of different products, or “securities”, such as shares and bonds.

The main stock exchange in the UK is the London Stock Exchange, or LSE.

What is a share?

A share is a document issued by a company which entitles its holder to be one of the owners of the company. If you buy one, you become a shareholder in the company with the right to share in its profits, to attend annual meetings and to vote on key issues and appointments. You can sell your shares if someone is willing to buy them.

Private companies seek to offer their shares through the stock market to raise extra money (capital) and/or enable the original owners to take money out.

Shares are also called ‘equities’.

What is a bond?

A bond is a piece of paper like an IOU, issued by a government, local authority or a company in return for the loan of cash.  Bonds usually pay a fixed rate of interest to the bond holder, and the bond issuer promises to pay back the amount borrowed at a certain time in the future.

Different types of bonds

The main types of bonds are as follows:

  • ‘Gilts’ – these are bonds issued by the British governments
  • ‘Index-linked gilts’ – these are bonds issued by governments where the rate of interest paid to holders is linked to official inflation figures.  The face value of the bond is also adjusted for inflation when it is repaid.
  • ‘Corporate’ bonds – these are bonds issued by companies

How do I make money on shares or bonds?

There are two ways in which investors can make money from shares or bonds. Firstly, the price of both shares and bonds can go up and down. This means that you can make a profit by selling shares or bonds at a price higher than that at which you bought them. (Note: in practice there will be other costs to take into account).  The difference between the sale proceeds and the purchase cost is the capital gain (or loss) of an investment.

Secondly, holders of shares and bonds may receive an income on their investment. For holders of shares, this will be in the form of dividends. For holders of bonds, this will be in the form of interest payments made at regular intervals.  Dividends or interest payments constitute the income element of the return on an investment.

The total return on an investment combines capital gain and income.

What is a dividend?

A dividend is a payment that is made by a company to its shareholders.

The price of a share moves up and down depending on all sorts of factors. In broad terms, share prices rise and fall depending on supply and demand. Demand is driven by buyers of shares; supply is driven by sellers. If demand for a particular share is high, the price rises; if demand is low, the price falls.

What is a stock market index?

A stock market index is a method of measuring a section of the stock market.

There are a vast number of stock market indices including global, regional, national and sector indices. The most common stock market index used in the UK is the FTSE 100 Index, also referred to as the FTSE 100, FTSE or, informally, the Footsie.

What is the Footsie?

The Footsie is stock market index of the largest 100 companies (measured by market capitalisation) listed on the London Stock Exchange.

What does ‘market capitalisation’ mean?

This is the total value at the market price of securities issued by a company, industry or market sector.

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