If you have decided that you want to become rich, then you would have realized that you need to invest your money wisely to achieve your goal. The stock market is one of the best options for investors to earn good returns and become wealthy. Now that you have taken a decision to invest in the stock market, you need to know what to do next and how to do it. There are many things that you need to be aware of before you start investing in the stock market.
The following are some of the important things you need to know in order to invest in the stock market:
1) The basic concepts of stocks and stock market
Some basic concepts about the stock market need to be understood. The market is traditionally a place where goods and bought and sold. In the same way, the stock market is where securities are bought and sold. There are various types of securities, stocks being the most prominent among them. Stocks can be bought from a stock exchange. A stock exchange is where the buying and selling of stocks take place, e.g.: New York Stock Exchange, NASDAQ, Japan Stock Exchange, Shanghai Stock Exchange, London Stock Exchange, Euronext, Bombay Stock Exchange, etc. Companies are listed with a stock exchange and offer their shares or stocks through the stock exchange.
A company that needs money for its new projects or expansion can go public and invite institutional investors and the general public to invest money. This is done through the stock market. Once the company is listed on the stock market, it offers shares for sale through an initial offering. These shares can be purchased based on the price offered by the company. Once the company is listed on the stock market, its market price is determined. If it is more than the price you bought it for, you have already made a profit.
Once a company’s stock is available in the stock market, it would be bought and sold regularly. There would be those who want to sell their stock for whatever reason. You can buy the stock from them. The price you buy is what is listed in the stock market. This is determined by demand. For instance, if the company is doing very well and announces a new project or a new deal, then there would be a great demand for its shares. The price of the share would shoot up and you need to pay more to buy the stocks of that company. If you already owned the company’s stock in this situation, you can sell it and earn a good profit.
However, if the company faces bad times, like disappointing business performance, or if the industry sector in general is not doing well, the price of the stock falls. The prices of stocks rise and fall constantly that is how the market works. Traders are those who keep monitoring these prices and keep buying and selling regularly to make profits. Since you are planning to invest in the stock market, you would be buying stocks for the long term. Hence, the day to day price fluctuation is immaterial for you.
2) Which stock to buy?
If you have knowledge about the financial market and are ready to put in time and effort for research, you can do it yourself. There are two tools that an investor needs. One is fundamental analysis. This is a tool that helps you analyze a stock based on factors like the economy, industry performance, company performance, and related factors. You would be using data from sources like financial reports, newspaper reports, journal reports, etc. to make an analysis. The idea here is to try to find out the strengths and weaknesses of the company. This can help you decide if a stock is worth buying.
The other tool an investor can use is technical analysis. This involves analyzing the statistical trends of a stock based on past performance. There are various tools using which you can analyze price changes and trends. Using this, you can try to decide if the stock is on an upswing or downswing, and then decide on whether you want to buy the stock or not.
There are many agencies that do fundamental analysis and technical analysis and you can refer to their reports (by paying a fee) and then decide which stocks are worth buying. If you have the knowledge, you can do the analysis on your own. Buying stocks involves risks and hence proper analysis helps you minimize risks and allows you to pick a winner.
3) Taking help of experts
If you are not the do-it-yourself type, but still want to invest in the stock market, then don’t worry! There are investment advisors who can guide you. They are professionals who know the stock market and do their own analysis. Based on the analysis, they can tell you which stocks to invest in. You would need to pay them fees for using their services. They can even manage the entire investment for you.
You must know that there is no guarantee that the recommendation of investment advisors will always be winners. That’s the reason you need to evaluate the track record of the advisors before deciding which advisor to work with. Remember – you are investing your hard earned money, so be careful whom you entrust your money with. You can also choose a robo-advisor to invest money, where a software picks stocks for you based on your investment goals. Here again, do your own analysis before deciding which robo-advisor to choose.
4) How to buy stocks?
Now that you have decided which stock to buy, the next step is to actually buy it. So, how do you buy stocks? Where do you buy it from? The answer is that you buy stocks from an exchange. The stock exchange has intermediaries known as brokers, who are registered with the exchange. You can buy stocks from a broker. The broker would have a terminal that connects directly to the exchange. The broker can carry out real-time transactions on the exchange using the terminal.
You can open a brokerage account or trading account, where you become the broker’s customer. There would be formalities for opening the account, which would include providing your details, completing documentation formalities, and you may have to link your bank account to the brokerage account. This would ensure easy financial transactions. Once your trading account is open, you can start transacting on it.
You can place an order with the broker to buy or sell a particular stock. The order can be placed over phone or you can do it online. In the earlier days, individual investors had to place orders only by phone or in person, Today, brokers offer online options to buy and sell in the stock market. Software would be available that you can use by logging in to the broker’s website or by installing it on your computer system.
When you have the online software, you would be given credentials to login to it. You can login and the software would show you stocks and their current price. Since you are not into trading, you need not worry about price fluctuations. Just place a buy order using the option provided. The quantity of the stock would be purchased and placed in your account. In this way, you can keep buying stocks and they would be added to your portfolio.
6) Going the mutual fund route
When you want to invest in the stock market, apart from buying stocks, there is one more option you can consider that is mutual funds. A mutual fund is where investors invest their money in a fund operated by a well-known company. The fund would be operated by a fund manager, someone with experience and expertise in the financial market. The fund manager uses the funds available to buy stocks. It would be the responsibility of the fund manager to analyze the market and decide where to invest money.
Instead of stocks, investors are allotted units of the fund. The value of the units would rise proportionately to the performance of the stocks owned by the funds. A good fund manager can ensure sizeable returns for investors. This is a less risky option as compared to stocks. This is because a professional fund manager does the investment and you can benefit from it. You can buy and sell mutual funds through a broker or directly with the mutual fund company.
There are various types of mutual funds. An index fund is like a replica of the stock market index. It invests in the same shares that the market index has. So its price movements are directly related to that of the stock market. There are various other types of funds available. You need to do some research on your own to understand the risk and returns of the funds before you decide which one to invest your money in. You can also ask an investment advisor to help you with this.
7) Dividend and dividend reinvestment
In the case of both stocks and mutual funds, the investor can receive dividends. The company whose stock you buy or the mutual fund company can share their profits with investors in the form of a dividend. Regular dividends can be expected from the top performing companies/funds. This can help you earn money from the stock market. There would also be an option of dividend re-investment, where instead of taking the dividend, you can choose to reinvest in. This will allow your investment to grow, so that you have a sizeable amount after some years.
8) Charges, commission, and taxes
When you invest in the stock market, you need to keep in mind that there would be various charges that need to be paid. Whenever you buy stocks, you would pay a charge or commission to the broker who is facilitating the transaction for you. This is called a brokerage and is a small percentage of the total value of the transaction. Similarly, when you sell a stock, there would be brokerage to pay. You need to consider this amount in your calculations. If you have 100,000 in your brokerage account, you will not get it all. You will get the amount minus brokerage. So, this is something you must keep in mind.
If you work with an investment advisor, they would charge either a fixed fee or a percentage of the sale in exchange for their services. This is also something for you to keep in mind. There may also be annual account charges that your broker may charge. These are things you need to know about, so you don’t get a nasty surprise later.
Then there is the taxman who is waiting to take his cut from your earnings. Taxes vary depending on local laws. When you sell the stock or mutual fund units and take out your earnings, you would need to pay taxes on it. This may be in the form of capital gains tax or income tax. This can be a sizeable amount and can reduce your overall earnings. You need to know the current tax rates and factor it. If for instance you need 100,000 for some purpose, you need to wait for your investment value to be 100,000+charges+taxes before you withdraw it.
9) Selling stocks
You can sell the stocks you own either when you need the money or when you feel you have earned a sufficient profit. When the market reaches an all-time high, you can book profits fully or partially. Later on, when the market comes down, you can invest money again in the market. You need to have investment goals when you invest in the stock market. These goals will help you decide when to sell your stocks/mutual fund units. You can also sell if you feel that the stocks are underperforming.
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood
The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.
The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.
Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.
Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.
Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.
Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.
Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.
We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.
We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.
We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.
On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.
Optimising tax reclaim through tech: What wealth managers need to know in trying times
By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange
This has been a year of trials: first, a global pandemic and, now, many countries facing the very real possibility of a recession. For investors, private banks, and wealth managers, these tumultuous times have manifested largely in asset price volatility, ultra-low interest rates and uncertainty about when things may level out, as well as questions about what can be done to safeguard portfolio performance.
The answer here lies within identifying and creating efficiencies to maximise performance and minimise cost, and while there is a slew of options as to how to do this, they are often siloed or have a single USP. Tax optimisation, on the other hand, provides benefits to all, not just in increasing returns for investors, but also in creating economies of scale across stakeholders, creating millions – if not billions – in savings for banks.
Evolving tax reclaim
The tax reclaim process used to be a tedious one banks had to manage themselves, and required detailed, industry and country-specific knowledge to stay on top of constantly shifting requirements and regulations. And when we consider that many countries – such as the UK – allow for capital gains exemptions, tax optimisation may not seem like an integral part of the process. However, this isn’t the case for all countries, and can lead to severe after-tax implications on global portfolios.
Furthermore, even if you’re able to avoid double taxation, getting the money back is not always as simple as it sounds. This, combined with the fact that countries often have contradictory taxation rules or requirements, makes navigating the tax reclaim space a challenge even for those with the right expertise and experience.
Ultimately, providing tax optimisation to investors ends up being a heavy lift for private banks and wealth managers, who often don’t have the right solutions, are relying on outdated technology and manual processes. While this is generally fine for business, it is no longer fit for the purpose when it comes to tax optimisation. To date, knowledge and expertise have been the key to protecting and maintaining profitable investments and avoiding tax leakage. However, through tax optimisation services starting to emerge, portfolio managers can now manage and reinvest easily.
Today, technology has evolved the process so that banks are able to access and submit tax reclaim – and the relevant documentation – online, leaving the tech provider to coordinate next steps with custodians and tax authorities behind the scenes. In essence, taking the legwork out of the process while assuring consistency and completeness in execution.
Simplifying tax through tech
While tax optimisation may seem like an easy choice in theory, it is not always the go-to for every private bank or wealth manager. Without the right supports and setup, including innovative technologies and automation, tax reporting must be done manually, leading to labour intensive processes and huge time wastage. Changing these processes can be overwhelming for those used to a certain way of operating.
By making tax reclaim digital, banks will be more able to optimise returns and gain efficiencies while reducing redundancies and unnecessary complexities. Cloud based solutions or platforms can offer a safe and secure solution for banks, wealth managers, and investors to access and submit any information required, processing the data automatically for conformity and completeness.
It is critical that providers who intend to offer tax services are able to do so efficiently with the right software and data processing capabilities. Not only does this drive continuity in service and efficiencies in process, but it is the only sustainable way to handle such a complex landscape sustainably without wasting time or money.
End-to-end, technologically driven tax services offer a huge number of advantages to private banks and wealth managers, the most important of which is the ability to provide continuity through tumultuous times. As we move through the end of 2020 into 2021 this will only be increasingly important as banks, managers and investors look to provide new services to clients and strengthen existing relationships in a difficult market.
As investors seek to find returns amid the global economic downturn, the demand for innovative solutions will only increase. Technology like cloud-based software, AI, and data optimisation can all serve to improve not just the tax reclaim processes, but the overall client experience within capital markets. Private banks and wealth managers are suitably equipped to provide these innovative solutions, but those who do not prepare themselves effectively and keep ahead of trends will run the risk of losing current and new clients to someone who can offer more for less.
Equity Sharing – How do you choose the right plan for you?
By Ifty Nasir, co-founder and CEO of Vestd, the share scheme platform
In a survey of 500 SMEs, nearly half told us that the pandemic had made them re-evaluate how they operate. That’s not surprising as they’ve been faced with some unique challenges this year. Government support during the early stages of the pandemic, is now being extended till March 2021 but many businesses continue to struggle.
Making good people redundant improves cashflow in the short term but will have a long-term damaging impact on the business. At the same time, motivating employees, who are working remotely and worried for their jobs, is not easy. It’s therefore not surprising that equity sharing, in the form of ‘share’ and ‘option’ schemes has become even more popular, with one in four SMEs now sharing equity with their employees and wider team
However, sharing equity can be a complex area and is easy to get it wrong. When it goes wrong there is a danger that you create tax issues (for you and your employees), de-motivate your team and even create future funding issues for the company. It is therefore really important that you choose the right scheme to set-up, but make sure you manage it too.
Below is a brief summary of the main schemes used by Start-ups and SMEs in the UK today. There are similar schemes and considerations globally.
- EMI Option Schemes – This is the most tax efficient scheme. Recipients pay just 10% Capital Gains Tax (CGT) on any value growth. The employer can also offset both the cost of the scheme and the value growth achieved by employees against its Corporation Tax liability. You can also set conditions to control the release of equity, such as time served or performance. The recipient can’t simply walk away with shares, having delivered no value (which is one of the top concerns of many of the businesses and founders we talk to). EMI Option Schemes are used by 41% of SMEs (who share equity) and, for good reason, are the most popular. Read our full guide to EMI for more information.
- Ordinary Shares – This is the issuance of full ordinary shares in the business, often without conditionality and with immediate effect. They are most often issued against cash investment. Once an employee (or any other recipient) has ordinary shares, you have no control over what happens to the shares thereafter. The individual can simply walk away with the shares, so we don’t normally recommend them for contribution that’s yet to be delivered. They’re also not tax efficient, as the recipient will have to pay tax at their marginal Income Tax (IT) rate, on any value the shares have at that point. These are used by 31% of SMEs.
- Growth Schemes – These are a good option when the founders have built value into their company. The recipient only shares in the capital growth of the business from the date that the shares are issued. You can give growth shares to anyone (not just employees) and you can attach additional conditions. These shares limit the risk of the recipient having to pay income tax on receipt of the equity, as they do not hold any value when they are issued but do pay CGT on the value growth at sale. Growth schemes are used by 31% of SMEs. Read the full details on Growth Shares here.
- Share Incentive Plan – SIP – This is a tax efficient plan for all employees that gives companies the flexibility to tailor the plan to meet their needs. Share Incentive Plans are used by 23% of SMEs.
- Unapproved Options – These are not very tax efficient as the recipient will pay IT on any value inherent in the share, above the exercise price, when they exercise the option. That said, they do provide more flexibility than the other options and are the easiest to set up as you don’t need HMRC approval. Unapproved Options are used by 22% of SMEs.
Is it worth the hassle? Earlier this year (i.e. during the first lockdown ) we carried out a piece of research with business leaders, exploring their attitude towards sharing equity with employees and wider team. We spoke to over 500 owners of SMEs and identified six main business benefits to doing so:
- Recruitment. You can combine salary with equity, to create compensation packages that match, or improve on, offers made by other more established companies with deeper pockets.
- Retain the best talent. Share schemes are proven to increase employee retention and can help you reduce if not avoid hiring costs.
- Increase productivity and performance. Studies have shown that employees who are also shareholders are more committed to their work and contribution because they feel directly vested in the growth in value of ‘their’ company.
- Improve employee engagement and happiness. The more all employees feel included in the mission, direction, and success of the business, the more they’re motivated to contribute to the company.
- Relieve cashflow pressure. Equity can be used to reduce the need for finance. Instead of paying people top rates and large bonuses, you can incentivise them via shares or options…giving them a share of the future they are helping to create.
Recruitment and retention are clearly the key drivers. It’s not too surprising to see why. Companies succeed or fail largely due to the quality of the people they manage to attract and retain. However, for smaller and start-up employers, attracting the right people can be difficult. Good people are typically attracted to the idea of working for a house-hold name brand, they look for job security and are enticed by comprehensive employee benefit packages and high salaries that are unaffordable by most smaller companies. Employee share schemes are an effective way for smaller companies to compete in the job market against larger companies, with that potential for a massive/significant upside.
However, at this challenging time, it’s not all about money, keeping people focussed and motivated during the pandemic is at the top of most employers’ worry list. If you choose the right scheme, equity sharing encourages employees to align their motivations to that of the long-term success of the business, over the immediate or short-term gains. And, right now, that is perhaps worth more than anything.
If you’d like to get into the detail then check out our guide to employee share schemes.
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