Many people know that, over the longer term, stockmarket investments in most cases have significantly outperformed returns available from bank and building society deposit accounts. However, what puts some people off becoming investors themselves is the knowledge that stockmarkets are prone to short-term fluctuations and the worry that these fluctuations may mean they lose money. This is why investment professionals recommend that investors should take a long-term view – typically five to ten years or more – when investing in the stockmarket. In this way, you allow your investment longer to grow, which should more than make up for the effects of any short-term volatility.
The principal advantage of stockmarket based investments is that they enable you to participate in the profits of successful companies. When you buy shares in a company, you are entitled to a share of the company’s profits, usually paid out to you each year in the form of dividend payments (for fund investors, dividends are often retained within the fund to increase its value, rather than paid out)
Over the longer term, successful companies will increase their profits. When this happens the dividends paid to shareholders are likely to increase. Because shares of companies expected to increase dividend payments are sought after, investors are willing to pay more for them – causing their price to rise. This is why share prices have historically risen – because this increase directly reflects the growing profits achieved by the successful companies as they expand and develop.
If you have decided that a proportion of your money should be invested in stockmarket investments, one option is to buy shares in individual companies directly through a bank or stockbroker.
However, nowadays, an increasing number of people choose to invest in a collective fund such as a unit trust, an OEIC (open ended investment company) or SICAV (societe d’investissment a capital variable).
In these funds your money is spread across the shares of many different companies (and sometimes different countries) which diversifies your investment portfolio and reduces the risks associated with investment in individual shares. Additionally, most collective funds benefit from the expert management of a professional fund manager.
If you would like further information on stock market investment, please contact us for an initial consultation.