The stock market
The stock market is a baffling institution governed by arcane and esoteric rules incomprehensible to normal folk – right? Wrong. It’s no more complicated than any other aspect of the financial world, as we shall see. So if you don’t know your Isas from your IFAs or if you think the Footsie is some sort of courtship ritual, read on.
The stock market is the general name for the various different stock exchanges around the world. On it shares and other financial instruments, such as government bonds, can be bought and sold. In the UK, the main stock market is the London Stock Exchange. Other main exchanges you will hear about are based in New York, Tokyo, Frankfurt and Hong Kong.
In many ways, the stock market is just like your local fruit and veg market. It brings together people wanting to sell and people wanting to buy. But one key difference is that the transaction is undertaken by a middleman, your broker, through a dealing screen in his or her office – you don’t have any direct dealings with the stock market. You can only buy shares in public limited companies, known as PLCs, on the stock market. If you want to buy shares in a private company you would normally have to contact that company direct.
Indices are produced to give an at-a-glance guide to the performance of sections of the stock market. Each index comprises a collection of companies. In the UK the best-known is the Footsie – the FTSE 100 index. This reflects the average performance of the biggest 100 stock market-listed companies in the UK.
TIP: Just because an index is doing well, it does not mean that an individual share will be doing the same. To check out how the market is performing click here or read our market reports, updated five times a day.
There are two ways to invest in the stock market – directly or indirectly. Direct investment means buying individual shares which give you a stake in a PLC. Indirect investment involves a fund manager pooling together money from a number of investors and then using this large sum to invest in a whole range of shares. This sort of collective investment spreads the investors’ risk and means that if one share drops in price, the overall value of the fund will be largely unaffected. Additionally, because collective investment funds are run by professional fund managers, they allow individuals with only a relatively small amount of cash to get access to the kind of investment expertise which they would not normally be able to afford.
TIP: Only invest in shares if you can tie your money in for the long term. Investment advisers believe you should be prepared to invest for at least
five years to smooth out short-term ups and downs on the markets.