In this guide
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Your capital is at risk. All investments carry a degree of risk and it is important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in.
The UK population will go to the polls this summer for a general election with the economic situation finely balanced.
Inflation has fallen back to near the Bank of England’s 2% target but interest rates are yet to start coming down.
Britain’s FTSE 100 share index has been on a strong run and recently reached record territory above 8400 points. Here we lay out what you need to know before investing in UK shares.
In this article we cover:
- How does the UK stock market work?
- What has been happening to UK shares?
- Where will UK shares go next?
- What are the pros and cons of buying UK shares?
- How can I buy UK shares?
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How does the UK stock market work?
There are around 60 major global stock exchanges – from the New York Stock Exchange and London Stock Exchange (LSE) to very small local exchanges, according to online trading provider IG.
A stock market is a place where investors can buy and sell shares and bonds in companies which list on that exchange to raise money. It will track the performance of those shares and work out what the price will be based on supply and demand from investors.
The UK stock market is divided into two main indices: the FTSE 100 and FTSE 250. These are also combined to form the FTSE 350.
There are smaller companies you can buy shares in that sit outside of these indices, but that tends to be a higher risk strategy and better suited to advanced investors.
The FTSE 100 is the 100 largest companies by market capitalisation, i.e. the number of shares issued by a company multiplied by the price of the shares.
Most household companies names sit here, including the energy giants, banks and large supermarkets. Many are global companies and draw their revenue from around the world.
The FTSE 250 companies are your lesser-known names. In the majority of cases they lean more heavily on the domestic UK marketplace for their revenues than the FTSE 100 constituents. As a result their performance is more closely tied to how the British economy is doing.
If you want to understand more about investing, we have lots of useful tips and guides for beginners.
What has been happening to UK shares?
As of the end of May 2024 the FTSE 100 is at around 8200 points having hit a record high of over 8400 earlier in the month.
If you take a look over a longer timeframe, the FTSE 100 has risen over 14% over the past five years.
The FTSE 250 has also performed well in 2024 so far but remains well below its peak. The index reached record high of around 24,000 points in September 2021. As interest rates began to be hiked from December 2021, it went on the slide from there.
The index has been slowly climbing back but remains someway lower, in the region of 20,000 points.
Where will UK shares go next?
With any particular investment or asset class, you can’t guarantee what will happen in the future. You can, however, look at likely scenarios, consider the determining factors, and weigh up the probability.
When shares are available at a significantly lower price than in the recent past, that can represent a good buying opportunity for you. But you need to have solid reasons to believe they will rise again in the near term, rather than continue downward.
“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria, argued fund management legend Sir John Templeton. Investors could be forgiven for looking at UK equities in this context,” says Russ Mould, investment director at platform AJ Bell*.
“The FTSE 100 index’s exposure to oils, banks, miners and insurers, and the absence of tech, is currently helping rather than hindering it. But unloved can mean undervalued and it is not difficult to argue that the FTSE 100 represents decent value.”
“Interest rate cuts, unexpected economic strength or even persistent inflation could be potential catalysts for performance,” Mould added. He believes the FTSE 100 is well placed to ride out the ongoing period of higher inflation, as the energy companies and banks that form a large part of the index are still doing well.
Read more: How to invest £10,000
What are the pros and cons of buying UK shares?
No-one has seemed interested in the UK equity market for ages, believes Russ Mould from AJ Bell. “Other than to bash it for failing to attract more new flotations and temporarily losing its status as Europe’s largest arena by market cap to France”.
It can be argued that the UK stock market is cheap because it deserves to be, he suggests. With the FTSE 100 heavily weighted towards “the unpredictable: oils and miners; the indigestible: banks and insurers; the beyond-the-pale (at least so far as ESG screens are concerned): tobacco, oils, miners, bookmakers and defence stocks).
“Yet the valuation is tempting. Certain sectors – banks, miners, housebuilders – already appear to be pricing in a downturn in earnings and a recession – looking at their valuations and analysts’ predictions for the trajectory of their earnings,” Mould continues.
“And in a lot of cases, deep declines in earnings are already expected by analysts across the cyclicals in 2024.”
“An unloved market”
Jason Hollands, managing director at Evelyn Partners adds: “The UK is undoubtedly an unloved market. UK equity funds have now experienced relentless outflows for several years on the trot.
“This is partially down to lure of the high growth mega cap tech companies in the US compared to the more traditional sectors which dominate the UK market. But political and trade uncertainties and gloomy forecasts for the domestic economy have weighed heavily on sentiment too.”
“Much of the case for investing in UK equities now is that a lot of pessimism is priced into their valuations. These are cheap both compared to global equities and their longer-term average. Currently FTSE 100 company shares are trading at around 10.3 times their projected earnings over the next 12-months.
“This is both a substantial 33% discount to global equity markets and well below their longer-term average of over 14 times earnings,” Hollands says. “If the market reverts towards longer-term average valuations over time, this suggests the potential for significant upside.
“Another positive factor for UK equities is the availability of high dividends. The FTSE 100 has a 12-month projected dividend yield of 4.4%. This is double that of global equities as measured by the MSCI AC World Index.
Investors tend to pay less attention to dividends in times of soaring share prices and low interest. But in tougher and uncertain times regular pay-outs from solid companies – which can be taken as income or re-invested – are not to be sniffed at. They can provide a degree of predictability compared to erratic share prices.
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How can I buy UK shares?
There are several online investment platforms that are relatively easy-to-navigate. Depending on how much money you have to invest, you could sign up with a financial adviser, wealth manager or stockbroker who can make investments on your behalf.
In terms of the investments themselves, there are three broad options.
The first and simplest is to buy a tracker fund which gives you exposure to the entire FTSE 100 or FTSE 250. The returns that you receive, or falls in value, will be the same as the index – minus a small fee. These can either be a standard passive fund or an exchange-traded fund (ETF).
The main difference is that a passive fund provider will hold the fund on their own books and issue you with units in the fund. Whereas an ETF will be listed on a public stock exchange and you buy shares in it on the open market.
The second option for if you want to buy UK shares is through an active fund. There are many fund management firms that will offer you UK focused funds – for a fee.
Active funds are run by a portfolio manager, or team, and will give you exposure only to the shares they pick. The aim is to outperform the index over time but this is not always the case and active funds often underperform trackers.
The third of your main options is individual company shares. This is where you select which of the 350 companies you want exposure to, and how much.
If you are new to investing, this approach is often best left to the more experienced investors. You could find that individual shares can hugely outperform the index, or crash in price and undershoot it by a lot.
You can find out more about how to buy shares.
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