The stock market is a place where you can make a fortune, only when you know what you’re getting into. Refer to the information below to get a clear understanding of 7 things you need to know about investing in UK shares and stocks.

1. What is the UK stock market?

The UK stock market refers to the collection of exchanges and platforms where the buying, selling, and issuance of shares of publicly-held companies in the United Kingdom take place.

The UK’s primary stock exchange is London Stock Exchange (LSE). It is one of the oldest stock exchanges in the world and offers various markets for different types of securities.

2. How does the UK stock market work?

Companies seeking to raise capital through the sale of shares can list their stocks on the LSE.

Individual and institutional investors can buy and sell stocks on the UK stock market through brokerage accounts, investment platforms, or financial advisors, with the expectation of earning returns through capital appreciation (increase in share price) and dividends.

3. Why is it important to diversify?

Diversification means spreading investments across different assets to reduce risk and increase the likelihood of achieving consistent returns over time.

In the stock market, if you place all your money into a single company or sector, the potential success could quickly turn into a disaster because of regulatory issues, industry downturns, or company-specific risks.

4. Investing carries risks. Invest only what you can afford to lose

Financial markets are subject to fluctuations, influenced by various factors such as economic conditions, market sentiment, and geopolitical events. Market volatility can lead to unexpected losses, and investing funds you can’t afford to lose may expose you to excessive risk.

Investing funds earmarked for emergencies can leave you financially vulnerable in case of unforeseen circumstances requiring immediate access to cash.

5. Stocks vs. Shares

When a company goes public by issuing shares to the public, these shares collectively represent the ownership of the company, and stock refers to ownership units.

For example, if a company is worth £10 million, and there are 2 million shares, each share is worth £5.

6. Funds vs. Indices

Funds are investment vehicles that pool money from multiple investors to invest in various securities, while indices are measures that track the performance of a specific market segment or the overall market. Funds can be actively managed (like mutual funds and some ETFs) or passively managed (like most ETFs that track indices), with the latter designed to replicate the performance of a specific index.

Some well-known indices in the UK stock market include:

• FTSE 100: An index of the 100 largest companies listed on the LSE based on market capitalization. Many people see it as a benchmark to check the overall performance of the UK stock market.
• FTSE 250: An index comprising 250 mid-cap companies listed on the LSE, representing the tier of companies below the FTSE 100.

7. Try practice trading before risking real money

One way to enter the investment world with 0 risks is to practice trading in a demo account. Many stock brokers offer free demo accounts, which enable traders, especially beginners, to test trading strategies under real market environments with virtual funds.