Things to think about before investing in stocks and shares

Stocks and shares can be a lucrative investment; however, there are no sure-fire winners on the FTSE 100 - or any other exchanges - which means it is vital that you do your research before embarking on this kind of investment strategy.

If you are totally new to stocks and shares as an investment vehicle, it really will pay off if you read up on the different exchanges you can put your money into.

The FTSE 100 is a popular option among investors the world over and while it is a UK-based market, it is certainly not just comprised of British firms.

You will find that 100 highly capitalised blue-chip companies are listed on the FTSE 100 and because many of these operate in overseas markets, you must bear the global economy in mind when making an investment.

The best place to start with stocks and shares is with the basics and it is advisable to decide exactly what you are hoping to get out of your investment.

For example, if you are looking for capital growth you will need to find shares that are expected to experience strong increases in value - and then sell these shares before their price drops too much.

The other option is a more long-term strategy, whereby you select shares that can generate a high income through dividends.

Whichever route you choose to go down, you will still need to consider a wide range of factors when deciding which companies and sectors to put your money into.

Risk will always be an issue if you are trading on the stock market and to minimise your exposure to certain industries, you should ensure you have a broad range of shares in your portfolio.

This also applies to geographical markets, as turmoil in a particular region could cause share prices to drop sharply - and wipe out much of your capital - if you do not spread some of the risk around.

When it comes to individual companies, there are a variety of things that can affect the performance of shares.

This may include potential takeovers, financial results or expansion into new markets, so you should keep your eye on any news relating to firms you have an interest in - or have already invested in.

But it is not only the companies listed on the FTSE 100 that you need to research - you should also take the time to understand how the exchange itself works.

Every business listed on the market will have its own unique EPIC code - which is usually three or four letters long. This will allow you to identify the different shares on the exchange.

You will also find that a number of different prices are presented on the FTSE 100. An opening and closing value is always posted next to each share, so you can see how the firm started or finished a day's trading.

In addition, a bid and offer price will also be displayed. The bid price represents how much you can expect to receive if you were to sell your shares, while an offer price denotes the amount you would have to pay to acquire the shares.

When you start looking into investments in stocks and shares, you will discover that there are many ways to trade and make money - or lose money - on the stock exchange.

One option that you may want to consider is spread betting. In simple terms, this is where you predict whether the market will rise or fall over a specified period of time.

You can 'bet' on it going up or down and you will be offered a price per point that the value changes.

However, you should note that you will lose money if the market moves against you - and could end up owing more than you initially paid out if there are substantial fluctuations that do not go your way.

Investing in stocks and shares is not a sure-fire way to make money - although the returns can be significant if you get it right.

There is a level of risk involved with any investment of this kind and it is vital that you not only understand these risks, but are also prepared to lose as well as make money when you begin trading in stocks and shares.

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Moneyextra.com recommends you take independent financial advice before acting on any article

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2011-04-07 07:09:46 © Moneyextra.com