Everything Finance

When it comes to the stock market, it’s no secret that many people find themselves flummoxed. Seeing the tickers going down as well as up makes the stock market almost synonymous with risk, and many people with large savings simply won’t invest because they fear that the markets are too risky. To further qualify the fear, almost every investment product gives the disclaimer ‘You may get back less than you invest.’

Despite the apparent risks, over the long term stocks are actually one of the best places to put your money. One of the best examples is that over one year the stock market has only outperformed cash 50% of the time. Over five years, however, the stock market beats cash 80% of the time, while over twenty years stocks win 98% of the time. Certainly there is an element of risk investing in the stock market, but, although few people actually seem to believe it, there are similar risks in investing in property because prices can similarly fluctuate.

The greatest risks in a market are quite an interesting paradox, because they don’t come when the market is doing badly, rather they come when the market is going well – too well in fact. This is because, all too often, investors get carried away by the fast rises in stock prices, which is commonly known as a ‘bull market.’ Prices charge forward as people become more willing to pay high prices for stocks, and the higher prices go, the more tempted people are to join the party. However, at some point it is likely to become apparent that a stock price has risen too far, and there will be a market correction. Even the biggest growers over the last twenty years, such as Microsoft, have gone through periods of correction, so there’s not really such thing of a stock that rises in price for infinity.

One of the best examples of a feverish bull market and subsequent correction is the Dotcom bubble. This speculative and initially soaring market began around 1995 with the growth of internet based companies and technology stocks. Many investors saw huge potential in internet companies and began to put money into stocks. However, many companies had the same business plan of monopolizing in their sectors through network effects. Even if the plan was sound, it was paradoxically flawed because there could only be one network effects winner in each sector – so most companies would fail. Speculation reached fever pitch during the beginning of 2000 and the NASDAQ index surged some 2000 points (a 40% increase) in a matter of months, peaking at 5048 in March 2000. However, the bubble soon burst and by the end of the year the NASDAQ had fallen to below the 2000 mark (a 60% loss on its peak). From then until mid 2003 it continued on a downward spiral, shrivelling to close to the 1000 point mark.

While everyone else gets carried away by optimism, and the rare cases where someone has become an overnight millionaire through speculating, always try and remember that your investment is a long term one. You could get incredibly lucky through putting your money into a stock one day and seeing the price shoot up the next, but these occasions are extremely rare, and you will probably never get the time right when it comes to quitting. Often, the best way to make money in the stock market is through looking at a company’s long term plans and potential. If these look very promising, and there is a sudden downward correction in share price, then this is likely to be a good time to put your money in. You should, however, be willing to leave it there for five years, and certainly not less than a year.

One of the best ways to invest in the stock market over the long term is to invest in an ISA. These are tax free savings accounts, so if you make significant profits over the year then you will be protected from capital gains tax. Many ISA providers allow you to preselect your own stocks and shares, or you can invest in a selection of companies or a particular index. Take a look at Alliance and Leicester’s website for a selection of ISA accounts that can track various indexes.