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If you don’t know much about investing you may believe the stock market is nothing but a glorified casino.
After all, isn’t investing just gambling? And shouldn’t you just save your money to earn a guaranteed interest rate instead?
In this article, we’re going to explore these questions and more. Plus, we’ll touch on how you can make money investing, even if you’re a stock market newbie.
Keep reading for all the details or click on a link below to jump straight to a specific section…
When you invest there are two ways to make a profit.
The first way is through capital gains. For example, if you buy shares and they go up in value, you can then sell them at a profit and pocket a ‘capital gain’.
The second method of making money when investing is through dividends. Dividends are payments issued by companies to shareholders. These payments are essentially a share of profits the company has made over the past year or so.
Do note, however, that not all companies pay dividends. To learn more, see our article that explains how to earn passive income through dividend investing.
Shares can appreciate and depreciate in value. This is why there’s a risk you can lose money if you invest.
Yet when you buy stocks and shares, it’s not the same as putting everything on red at the roulette table where there can only be one winner – you or the house.
For starters, investing isn’t necessarily a zero-sum game. That’s because if you buy shares and make a profit – either through capital gains or dividends – another investor hasn’t had to suffer a loss to compensate for your ‘win’. That’s because the value of the stock market can rise over time, which is why investing with a long-term mindset is often the best course of action.
Take the UK’s largest share index for instance. Back in 2003, the FTSE 100 was equal to roughly 4,100 points. Today, the value of the index sits at over 7,600 points (at the time of writing). This means the value of all FTSE 100 constituents has risen by more than 85% over the past 20 years.
This increase is simply due to the combined growth of FTSE 100 constituents over the past two decades, and demonstrates why the stock market can rise without there being any ‘losers’ as such.
The only type of investing that could be compared to a casino is short-term day trading. This is where you buy stocks with the sole intention of selling them as soon as they rise in value. While big profits can be made when day trading, bumper losses are also possible. This is why buying and selling stocks in quick succession is far riskier than taking a long-term approach.
With savings rates rising, you may be wondering if it’s really worth trying to make money investing. After all, why not earn a standard interest rate on your money, rather than taking a chance that you’ll lose some of your wealth?
Well, one of the main arguments against opting for a savings account right now is inflation.
Unless you’ve been living under a rock, you’ll know that inflation is a big topic right now. In fact, the UK witnessed 8.7% inflation for April 2023, and that’s a modest assumption. The Consumer Price Index is a rather unreliable way to measure rising prices, though it often suits the government because it almost always reports a lower figure than the Retail Price Index – which is hardly ever reported on!
Whatever your thoughts on the way inflation is measured, however, it’s a fact that the value of our money is falling. And when inflation is high, the only way to ensure the your money maintains its value is to stash your cash in a savings account paying at least the rate of inflation.
Well you’ve more chance of finding a pot of gold at the end of a rainbow than finding a normal savings account paying anything close to 8.7% right now.
In fact, the best you can do is earn roughly HALF of the current rate of inflation – and that’s only if you’re happy to lock away your cash in a fixed savings account!
So given the current situation, many are understandably shunning savings accounts right now. And yes, while there are certainly no guarantees you can beat inflation when investing, if you invest for the long-term then history tells us that, generally, investing returns do tend to trump inflation.
Of course, whether you choose to save or invest your money is totally up to you, and your tolerance for risk certainly comes into any equation.
If you’re on the fence, do remember that you don’t have to choose one or the other. You can have both savings and investments, though you don’t necessarily have to choose a 50/50 split, of course.
If you’re looking to invest, then setting your investing strategy should be your first course of action. Following this, you should aim to invest over a long period of time and ensure your portfolio is both diversified and tax-efficient.
Let’s take a closer look at these investing need-to-knows…
To find the right investing strategy for you, you’ll need to understand your tolerance for risk. You’ll also need to determine how long you’re happy to invest for, and whether you want to pick and choose your own investments.
Once you’ve set your investing strategy, you’ll then need to choose a suitable broker.
It’s important to accept that the stock market will rise and fall.
However, history tells us that the value of the wider stock market generally goes up over time. So, if you want to make money investing and increase your chances at being able to ride out any short-term dips in the market, strapping yourself in for the long-haul is often the most-effective approach.
Rather than investing solely in stocks and shares, you may wish to add commodities or even bonds to your portfolio to spread out the risk. Whisky investment UK, for example, has gained popularity as a lucrative alternative asset class with the potential for significant returns over time. By spreading your investments, you can hopefully offset any losses incurred when one particular asset takes a hit, as the value of your wider portfolio may not suffer to the same extent.
Investing in a mixture of assets ties in with the important of understanding your appetite for risk. To learn more, see our article that explains the importance of holding a diversified portfolio.
If you successfully make money investing, you may have to pay tax on any capital gains or dividends you earn. One way to avoid this, however, is to put a tax-free wrapper around your portfolio in the form of a stocks and shares ISA.
To learn more about ISAs, see our article that explains what is a tax wrapper?
And while we’re at it… do you want learn more about investing? If so, why not sign up for our fortnightly MoneyMagpie Investing Newsletter? It’s free and you can unsubscribe at any time.
Disclaimer: When investing your capital is at risk. Remember, the value of any investment can both rise and fall. Always do your own research.
MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.