How stocks, shares and indices work
A share is a unit of ownership of a company and investors buy shares in the hope that the value will rise or that they will be able to pay out a share of its income in the form of dividends.
Investors look at broader indices (or collections of company shares), to get an overview of how the market has performed. There are thousands of indices across the world but the FTSE 100 (Financial Times Stock Exchange 100 Index) and America’s S&P (Standard & Poor’s) 500 are regularly quoted to reflect the health of UK or US companies.
While there are no guarantees you’ll get back more money than you originally invested and past performance is not an assurance of future success, last year’s growth figures for the FTSE 100 are positive when compared to current interest rates on savings accounts. In fact, the FTSE has generated an average 10 year return of almost 70%.
The key question this raises is whether recent FTSE 100 results tell the full story and hold any real significance to investors?
Recent performance has seen the FTSE 100:
• rebound from a 2008 low of -28.3% to 27.3% in 2009
• deliver an average annual return of 8.3% over the last five years
• make a total return of 19.1% in 2016 – its highest since 2009
• reach a record high in March 2017
It’s important to remember that there are a number of other factors impacting these results. A weak pound, for example, will always give the FTSE 100 a bit of a boost, as many companies in the index earn a large proportion of their profits abroad.
However, when you look at how stocks and shares have grown in value in recent years compared to cash savings, it is easy to see why potential investors may be looking to the stock market for possible better returns.
Here’s a quick comparison of how the FTSE 100 has grown in relation to the rates banks use to calculate interest on your savings accounts (controlled by the Bank of England):
• 0.25% – BoE interest rate as at March 2017
• 3.3% – the level inflation is predicted to rise to during 2017
• 8.3% – the FTSE 100’s average annual return over the past five years
It’s worth remembering that as the cost of everyday goods and services rise (through inflation), the value of your savings might be eroded.
How to invest in stocks and shares
For the possibility of better rates of return, which could make your money grow faster, investing in the stock market could be a good option.
There are a number of ways to do this, however a tax efficient way for UK residents to invest is to open a stocks and shares ISA (Individual Savings Account).
Unlike a cash ISA, where your money usually attracts a set rate of tax-free interest from the bank, with a stocks and shares ISA you can choose from a wide selection of potential investment opportunities. And, as long as you follow the ISA contribution rules, you won’t have to pay tax on any capital gains or income your money earns.
With Investec Click & Invest we will review your long term financial goals and offer a stocks and shares ISA, managed by our dedicated team of investment managers.
All investment carries risk and it is important you fully understand these risks and are willing to accept them. You may get back less than you invested. The information contained in this article does not constitute advice and the information referred to may not be the same for all, therefore we strongly recommend you seek professional guidance from your independent advisor before taking any action.