One of the most searched for internet queries is ‘what is a stock and why do people invest in stocks?’
In the simplest terms, a stock is a small part of the ownership of a company. The owner of a share owns part of that company’s stock, and people generally invest in stock with the aim of that company increasing in value over time. The goal is that when they come to sell that stock, they make a profit on their investment.
For example, if you’d have invested in Netflix stock ten years ago, you’d undoubtedly be very happy today with the value of the stock having doubled in value many times over.
However, investing in stocks isn’t quite as straightforward as that. In 2011, how would you have known Netflix would become the media giant it is today? Look at this another way, with another stock, Nokia. This type of mobile phone was very popular in the early 2000’s and the stock price was riding high. Then the iPhone came along and the stock value declined significantly. The lesson here is that you never know what the future holds when investing in individual stocks; you can never see what is just around the corner. When investing in stocks your capital is at risk, and past performance is not a guide to future performance.
Guessing winners and losers could mean you lose your money on an investment. That’s why they say individual stock investing is a bit like putting all of your eggs in one basket, a bit of a risky business when an unforeseen bump turns up. Whether it’s a technological change, a cultural change, or even what we’ve seen recently with a pandemic, you are exposed to greater risk when invested in individual stocks.
There’s an influx right now of people promoting things like trading in currency and complex investments as a way to get rich quick – but the reality can be very different.
Investing in a diversified portfolio of industries, asset types and geographic areas makes more sense. In other words putting your eggs across several baskets. This is known as diversification. At True Potential, we use over 200,000 holdings across our Portfolios – there’s no way for an individual to replicate that. Our Investment Managers are world class.
This type of diversified investing into a Portfolio is just as easy as individual share buying. Whether it’s through a Stocks & Shares ISA or a Pension, you can easily invest into Portfolios which match your attitude to risk. At True Potential, you can invest from just £1 through impulseSave® in the True Potential Investor app. True Potential Portfolios benefit from Advanced Diversification, rather than following a single strategy they blend multi-asset strategies from a range of fund managers into what we believe is the best position for our clients’ money.
With this type of investing you are still investing in stocks, owning small parts of the likes of Amazon or Netflix, but in a way where the money is spread across all sorts of stock and asset types to ensure volatility in one sector could be balanced from another sector.
With this investment type, it isn’t just stocks, you’d also be invested in other asset types such as bonds – the end result is that your investment risk is spread, your eggs aren’t all in one basket in the way they would be with individual share dealing. Leave it to an expert.
All of the expertise involved in a diversified Portfolio doesn’t necessarily mean more cost. In fact, share dealing accounts often have a cost per trade whereas a portfolio usually has an annual fee that’s a small percentage of your investment – for our True Potential Portfolios that’s around 0.8% per year. Plus, you can get started from just £1 so there’s really no financial barrier to entry.
Investing in stocks is easy, but isn’t necessarily the smartest way to do more with your money. Stock picking can leave you exposed, just look at 2020 when airline stocks crashed. In contrast, diversified investors have multiple assets in their portfolio, so a drop in airline stocks may have been balanced by a jump in tech stocks such as Zoom.
Think about your goals and reasons for wanting to invest. A monthly direct debit into a diversified Portfolio could be the best way to reach long term goals, perhaps via a Stocks & Shares ISA or for goals like retirement a Pension.
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