The stock market is the platform for a company to raise money (or 'capital') from investors, in exchange for part-ownership (or 'shares') of their business.

Part of the stock market consists of 'stock exchanges'. These stock exchanges operate within a geographical stock market. For example, in the United Kingdom, the stock exchange is the London Stock Exchange (LSE).

A share is a portion of a company, which can be purchased. In order for a company to grow, investors are offered the opportunity to buy into the business with their own money.

That's right - when you buy shares in a company, you own a small part of that company!

The stock market can be broken down into the good, the bad and the beautiful.

The good

The stock market is a wonderful, fascinating arena, moved in equal weight by economic fact and human emotion. It is subject to the whims, insecurities and hopefulness of millions of individuals and corporations across the world.

The bottom line is this: the average total stock market return over the last 200 years (the change in value of the stocks themselves and any dividends paid) is 8.1% per year. When adjusted for inflation it’s about 6.6% per year. These returns far surpasses any other asset class available to the average person, including, bonds, gold and currency. 

This means that, on average, a diversified portfolio of stocks (i.e. a group of stocks that covers many industries and sectors) has doubled in value roughly every 10 years.

Lets say you invested £10 in a company’s stock. The first year the stock increases in value by 8% (10 x 1.08 = 10.8 ), the value of that stock is £10.80 at the end of the first year.

The second year it increases another 8% (10.8 x 1.08 = 11.66 ), now it is worth £11.66 – here you are also making 8% of the 1st year’s profits as well, this is compound interest , and this is what has made Warren Buffett one of the richest people on the planet. By the end of the 10th year you have almost exactly £20, i.e. the value of your investment has doubled over 10 years.

Another bit of good news is that if you take any 20-year period throughout that 200-year history, a diversified portfolio of stocks has never lost investors money. It hasn’t even fallen below inflation; in fact the worst 30-year return for stocks remained comfortably ahead of inflation by 2.6% per year.

REMEMBER, these are average returns. We will discuss investing strategies in other posts, but know that there are many investors that consistently beat the market – meaning they achieve above average returns year after year.

For those who tell you that the stock market is akin to gambling or that it is a zero-sum game, in truth the risk of losing value in is not with the investors in the market, but with those who choose to keep their savings in cash - which loses value over time through inflation.

However, there is a caveat: the market is only reliable in the very long term.

The Bad

The bad news is that on a day-to-day, week-to-week, even month-to-month basis, the stock market is a casino. If your investment horizon is less than one year, you are just as well buying a stock as you are going and putting your money on black (for those who haven’t played roulette, that’s about a 50/50 chance of winning or losing.)

Constant news updates, economic fluctuations, Donald Trump tweets, Brexit anxiety and a million other factors keep the stock market in a constant state of flux. Individual companies can change in value by several percent in an hour for seemingly no reason at all. Many investors attempt to make money from these fluctuations: good luck to them; that is gambling and not what we do here.

Even more crucially, economic crashes can wipe out huge amounts of value from the market. The 2008 financial crash saw the FTSE 100 (the 100 largest companies on the UK stock exchange) lose 48% over an 18-month period. This is why a short term investing outlook can be very dangerous.

‘The only people who get hurt on a rollercoaster are the ones who jump off.’ - Dave Ramsey

Before you start investing, you have to understand the 3 things:

1 - Crashes can happen at any time.

2 - Don’t invest money you cannot afford to lose.

3 - When crashes happen, you will not sell your shares! You will wait.

The market has ALWAYS returned to, and surpassed, its previous value. 

The Beautiful

As of August 2018, 57% of US citizens have less than $1,000 saved, and a quarter of UK citizens have no savings at all. - CNBC , Independent https://www.cnbc.com/2019/01/23/most-americans-dont-have-the-savings-to-cover-a-1000-emergency.html 

If you’re reading this Q&A, you are already thinking about your future and you are taking your retirement into your own hands. Hopefully you understand the power of paying yourself first – by that I mean spending what is left after you save, rather than saving what is left after you spend. By putting those savings into the stock market, you send those pennies and pounds out to work for you to make more pennies and pounds and so on.

“Compound interest is the eighth wonder of the world. He who understands it; earns it, he who doesn't; pays it.” – Albert Einstein

The end goal for the Compounding Club is to reach 1 million pounds.

When (not if!) that figure is reached it will create a sustainable, self-refuelling salary of around £60,000 per year in dividends. That is our financial freedom; the amount that would allow us to do whatever we want.

We know that this is going to take a long time (maybe 20 years, maybe 30), but we will continually learn and improve our strategy as we go to make sure we are as efficient as possible. We already utilise methods such as Value Investing, pound cost averaging and dividend reinvestment , strategies that have been shown to outperform the market.

First of all, thanks for joining and welcome to the club! 

We screen the whole stock market every month looking for stocks that fulfil certain criteria. We have honed these criteria to pick stocks aligning to a method of investing called ‘Value Investing’. Value Investing is built to work over a very long-term investing horizon, we’re talking 15-20 years, so don’t expect to get rich quick using this method! However, the effects of compounding interest and dividend reinvestment have shown this method to be a very powerful way to grow wealth. Pioneered by investing giants such as Warren Buffet and Benjamin Graham, it involves picking quality companies at low prices and holding on to them until the price corrects. 

Once we have screened the market, we are usually left with 15-20 companies from the whole UK market, we then dive into their financial statements and look for any red flags or encouraging signs for the company. Then pick the most undervalued stock to invest in and release our stock pick at the beginning of the month to you - stating our rationale. 

You can then choose to invest in the company or not - we have to be very careful about giving individual financial advice, and this portfolio is made up of stocks we are actually investing in, they may not be suitable for anyone else. 

We always have a portfolio of 12 stocks; it's a 'one in, one out' situation, so each time we buy a new one we sell one in our portfolio. 

For new followers, one option is to follow our stock picks each month over the next year and build up a portfolio of 12. Or you could buy all 12 of our current picks straight away and follow our picks from there. Or you can pick your favourites, or the most undervalued; it is really up to you! But bare in mind some of the stock prices have changed since we originally bought in. Our current portfolio can be found using our returns table at the bottom of the stock pick page. 

 If you want to get more of an idea about our strategy, I can recommend reading a few of our blogs, such as https://www.startinvestinguk.com/investing-101   

Any questions at all feel free to reach out. However, as I said earlier, we are not allowed to say ‘You should do this’ or ‘We recommend you should buy this particular stock’ as that would be individual financial advice and should only be done by trained Financial Advisors. 

The most tax-efficient way to invest is by setting up a Stocks and Shares ISA. 

If you are over 18 years old and live in the UK, you will have access to a £20,000 tax-free allowance for 2023/2024 to split between your ISAs. That means you can put up to £20,000 into your account before you start being taxed. 

If you do not already have an ISA, you can deposit up to £20,000 into a Stocks and Shares ISA tax free. If you already have some money in a Cash ISA, you can still put money into a Stocks and Shares ISA tax free until the total in both accounts is £20,000. 

In a Stocks and Shares ISA:

• You do not pay capital gains tax on money you make. 

• You do not pay tax on your dividends.

We love Stocks and Shares ISAs in the Compounding Club, but they may not be suitable for everyone so please take the time to research different accounts available. 

In order to buy individual stocks, you will need to sign up to a trading platform. 

A trading platform is usually a website which will offer you a Stocks and Shares ISA or a regular trading account. The money you transfer to the website will be deposited into your new account, then the website will let you access the stock market so you can buy and sell stocks. 

Now for the exciting part: use your trading platform to buy your first stock. 

You can follow our investment strategy to choose stocks that have been rigorously researched, and which fit the value investing system. Sign up to our Patreon account to access our previous picks, our entire portfolio and our new picks released every month. 

You can choose to buy shares by:

• Number of shares

• Pound amount

If your platform will only allow you to buy whole shares, you will find that the shares will not come to exactly £100, so you will have some money left over to invest next month. 

Some companies allow the purchase of fractional shares, in which case you will be able to buy exactly £100 worth of a company’s stock.

You can see a video of Joe buying a stock, here:  https://www.youtube.com/watch?v=Qb4XDHJQOJI&t=13s 

There are several companies that offer this service. Most trading platforms charge a fee for holding the account and/or a fee per trade. 

In the Compounding Club, we will be making a maximum of 24 trades per year (2 per month) to reduce trade fees to a minimum. Therefore we look for platforms that are cheap to sign up with, with low cost trade fees. 

Platforms often offer cheaper ‘frequent trading rates’; usually for 5-10 trades per month, but trading this often is a sure way to eat into profits and we don't want to be going anywhere near that number. 

Reducing trade and account fees to as low as possible is the best way to maximise your gains in the market, so choosing a trading platform wisely is very important. 

Joe currently uses a trading platform called Interactive Investor, a very reputable trading website which is user friendly and has excellent customer service. This site charges £120 per year. They then give this money back to the investor in the form of trading credits. Each trade costs £10 to make, so you can make 12 trades per year without increasing your yearly cost. We have no affiliation with Interactive Investor. This link will take you to their stocks and shares ISA page: https://www.ii.co.uk/existing-customer/isa 

Matt uses a platform called iweb. Their fees are also reasonable and can be found here: 

https://www.iweb-sharedealing.co.uk/our-accounts/self-select-stocks-and-shares-isa.html

There are now platforms with lower account fees and no trade fees, for example: Freetrade and Trading 212. One drawback of these is that, for the time being at least, they do not offer all UK stocks on the platform. 

https://freetrade.io/stocks-and-shares-isa

https://www.trading212.com/invest 

I think it really depends on what is important to you and what stage you are at. I feel that, for those that are just starting, the very low fee platforms are a good way to get into investing without getting discouraged that 10% of your investment (for example) is consumed by trade fees. But after a while you may be investing a lot more each month, and a £6 trade fee doesn't make much of a dent, and what is really important is a fixed price rather than a percentage fee. 

One of our most common questions!

This website is a goldmine for all things investing: https://www.investopedia.com/

Our top tips for books here: https://www.startinvestinguk.com/top-five-books-on-investing-to-read-in-2019

Our tops tips for audiobooks here: https://www.startinvestinguk.com/the-top-five-audiobooks-that-teach-you-how-to-grow-your-wealth-in-2019 

An ETF is an ‘Exchange Traded Fund’ and it is supposed to act like a tracker for various bundles of stocks. For example there are ETFs that track the FTSE 100 and S and P 500 as well as a host of others. Some ETFs are real; in that when you buy the fund you are buying real shares in the companies listed. Some are synthetic, where the fund is basically an agreement between the fund provider and an investment bank. This provides cheap access to markets that may be difficult to access for the average investor but it does mean that if the bank cannot pay, the shareholder could be exposed. 

The short answer is yes, ETFs make up around 50% of our portfolios. They are a great way to gain average market returns over the long term and, if you are happy with 6-8%, there is no safer way to enter the stock market. 

For the long answer, and for why we also prefer to invest in individual companies, you can read our blog: https://www.startinvestinguk.com/individual-stocks-vs-etfs-which-is-the-better-option-for-young-investors 

In order to determine the performance of a company's share price or an individual's share portfolio (the collection of shares an investor has), you must be able to measure its performance. This performance can be judged in relation to standardised market metrics, also known as 'Market Indices'.

A market index provides an investor context when reviewing the company he or she has invested in.

For example, if you have invested in 'Company X' and the share price falls by 3% over the course of a day, you would want to know whether this fall was an isolated incident for 'Company X', or whether a similar fall in share price was observed across the market.

In 1984, the Financial Times  agreed with the London Stock Exchange (LSE) that the UK stock market needed a formalised set of market indices to help investors review their investments against 'market yardsticks'. This resulted in the birth of the FTSE (pronounced 'Footsie').

The two indices which are used most often to measure performance are the FTSE 100 and FTSE 250.

FTSE 100

The basis of this index is the 100 largest and most valuable companies whose shares are listed on the LSE. The companies are all ranked in order of their market capitalisation (the market value of the company's outstanding shares, or share price multiplied by the number of outstanding shares). The FTSE 100 is often quoted as making up around 80% of the total market capitalisation of the LSE's main market.

This list is reviewed quarterly, with some of the smaller companies (often ranked in 98th, 99th and 100th place) being replaced by companies from outside of the FTSE 100 . This is where the second market index comes in.

FTSE 250

As you may have guessed from the previous section, this index includes the 250 largest and most valuable companies outside of the FTSE 100 (positions 101st to 350th). The FTSE 250 represents around 15% of the total market capitalisation of the LSE's main market.

A stock showing as red straight after purchase can happen sometimes and it could be due to a couple of factors. Firstly, the platform might take some of your invested amount as part of the trade fee and stamp duty. Part of the reason could also be the 'spread' of the stock (which is the difference between the price to buy and the price to sell the stock). For example, the spread of a stock might be 420p to sell and 437p to buy. Meaning the offer to buy a stock is 437p, but after you buy it the share price will list as the average, which might be 430p and may show at a small loss in your account. That would be a relatively high spread, which can happen because a stock is commonly traded, (unlike stocks such  as Apple or Tesla etc., which would have very small spreads). This spread moves around the average share price and can work against our gain/loss %. 

The potential reason is if there is a drop in share price immediately after we buy it. This phenomenon prompted me to do a bit of research. There is no scientific evidence that I can find on the best time to buy in terms of time, day, month etc. However with the rise of ETFs I am wondering if the beginning of the month will see more price movement - everyone has just been paid and sets their direct debits to buy first thing on a Monday? We aren’t going to change anything for now in terms of timings, personally I still set my platform to buy first thing as the market opens and I think it will average out over time! 

For more reading on this, check out this article to learn more. investopedia.com/day-trading/best-time-day-week-month-trade-stocks 

The stock picks are always released on the first Monday of the month (excluding bank holidays). 

Over the long-term the UK market has increased on average between 6-8% per year, our goal is simply to beat UK market returns. Now this may mean that in a year where the market returns minus 10%, that achieving minus 5% is a good result. But also in years where we see 20-30% growth, we also want to be bettering that with our method. With returns varying so much from year to year it is impossible to set a fixed % goal as we are always going to be reliant on market conditions. 

This bit is actually quite tricky. It is so easy to succumb to natural human greed, to hold on too long and then lose out if the price decreases. At times like these it is always best to look at the methods of the successful, the experienced, and lets face it, the incredibly wealthy.

Warren Buffett has famously stated that his ideal investing horizon is forever, but the big man does sell stocks pretty regularly. He advocates selling stocks for two reasons:

1.A better opportunity has arisen

2.The fundamentals of the business have changed

The first point is called ‘opportunity cost’ - losing out by holding on to an investment when a more profitable one is available, which is something we take advantage of often in Compounding Club. When the stocks in our portfolio approach their fair values, we sell them in favour of a more undervalued, hopefully building a very powerful compounding system.

The second point is something that sometimes happen (but hopefully not too often). Here are our non-negotiable selling criteria when it comes to the fundamentals of the businesses:

• The stock becomes very overvalued

• The stock stops paying a dividend completely

• The stock is in financial trouble

THE SHARE PRICE GOING DOWN IS NOT A GOOD REASON TO SELL -

THAT IS THE OPPOSITE OF WHAT WE ARE GOING FOR!

Peter Lynch, who managed the Fidelity Magellan Fund for 13 years and averaged annual returns of 29.2%, has a a similar set of selling rules of his own from his book One Up On Wall Street. Lynch advocates selling when the price has gone up by 30-50%, when the fundamentals become less attractive or when the price to earnings goes above its normal range – i.e. the stock becomes overvalued. Great minds think alike!

This golden advice nugget also comes from Lynch:

“As it turns out, if you know why you bought a stock in the first place, you’ll automatically have a better idea of when to say good-bye to it.”

As value investors, our strategy is finding businesses that are undervalued, ignored or unjustly hated on by the market. When the market comes to its senses and values the stock accurately we can choose to sell and put that capital into a better opportunity.

If the business is strong and growing, the share price increasing alone may not be a good reason to sell. In that case the better option may be to keep the stock for the long term, collect the yearly dividends and add to the position if and when the stock looks undervalued again. A potential pitfall of this tactic is becoming over-diversified. By never selling stocks and collecting new stocks every month, you might eventually make a portfolio with too many stocks in it. At this point you will be getting close to average market returns and may as well be investing in a fund that tracks the entire stock market.

Our strategy is to hold our stocks until we believe they have reached a fair value according to our criteria. For example, if a stock makes a 35% gain and we feel that its now priced accurately, we will sell it and reinvest the money into another stock. 

A dividend is part of the profit made by the company you have invested in, which gets paid to ordinary shareholders (that’s us), usually on a regular basis. It is usually noted as a % (often between 1-10%). This is effectively the % of the amount you have invested that you will get back in dividends in 1 year. 

Dividends are effectively a type of profit share, and many companies (though not all) offer these to their shareholders. These dividend payments are usually made every 3, 6 or 12 months.

Importantly, these dividend payments are not directly dictated by the 'ups and downs' of the stock market. In other words, companies that pay a dividend will do so even if the price of the company stock decreases .

For this very reason, all of our monthly stock picks pay a dividend .Dividends form one of the cornerstones of our value investing strategy, and because of this, we will only invest in companies who choose to share their profit with hard-working investors.

No dividend? No deal!

Now, when it comes to dividends, there are 3 key dates you need to look out for, they are:

1. The Declaration Date

It is on this date that the company paying the dividend will announce the two other important dates for investors: the first being when investors have to have invested in order to be eligible for the next dividend, and the second being when the next dividend payment will be made to the shareholders.

2. The Ex-Dividend Date

In order to receive the next dividend payment from the company, you must have invested before the ex-dividend date stated. Generally speaking, you need to have invested at least one day before the ex-dividend date, which is often referred to as the 'record date'.

Put simply, if you purchase shares before the ex-dividend date, you are eligible for the next dividend payment. If you purchase on or after the ex-dividend date, you will not receive the dividend payment.

3. Payment Date

This is the date on which the company will pay all eligible shareholders the dividend as outlined on the Declaration Date.

It can take a little while to get your head around the terminology, but stick with it, it'll soon become second nature.

Our favourite website, which is solely dedicated to the wonders of dividends, can help you track historic and up-coming dividend dates for the companies you are invested in:

https://www.dividenddata.co.uk/

Historically, dividends were paid by companies who were able to pay off their debt by being profitable year-on-year.

Now, the companies could use their profits in one of four ways:

1. Keep the cash in the bank to build up their 'liquid asset' reserve (not a very profitable solution at all)

2. Reinvest the profits back into the company to further grow and expand the global reach / service offerings (this can require a great deal of strategic planning)

3. Buy back shares in the company (purchasing shares from shareholders, and re-acquiring ownership of a portion of the company that was previously publicly-owned)

4. Paying dividends to investors (making regular payments to their loyal shareholders)

As value investors, we seek out companies who choose to use part of their profit to reward those willing to invest their hard-earned cash.

In the past, dividend-paying companies have been referred to as 'stable', 'non-volatile', and 'will not be subject to huge swings in share price', making them 'ideal for mature people approaching retirement'.

We are here to quash this myth, for two very good reasons:

a. Just because a company pays a dividend, does not mean that it is a sound investment.

b. Strong and stable dividend-paying companies are perfect for young people to invest in due to the wonders of DRIP and compound interest.

"I am like a drop of water on a rock. After drip, drip, dripping in the same place, I begin to leave a mark, and I leave my mark in many people's hearts." - Rigoberta Menchu

We write quite a lot about the ideologies and theory behind value investing, but we also want to talk about the nuts and bolts of the investing world. These are the issues that are rarely discussed in investing books but can be just as important to your gains as getting the strategy right. We are constantly ironing out the creases in our own investing strategies and we will give you a head’s up as much as possible so that you can do the same.

We subscribe to the concept of DRIP, which stands for dividend reinvestment plan. This means that when you are paid a dividend, it is automatically used to buy more shares of the company that paid them to you, usually at a reduced cost to your normal trade fee. It is an option available with most trading accounts but you often have to opt in to it. If you do not have a DRIP activated, the dividends instead pile up in the cash section of your account and you don’t the benefit of the ‘double compounding’ magic of reinvesting dividends.

Sometimes there is a minimum dividend value for reinvestment: this means that if you are paid a dividend that does not meet the minimum cash requirement by your trading platform, it will not be reinvested. For example: the minimum dividend value for reinvestments with Hargreaves Lansdown and Interactive Investor is £10; that means if you are paid a dividend of £9.99 or less, it will not be reinvested. For more about this, you can read our blog, here: https://www.startinvestinguk.com/a-short-but-powerful-blog-about-drip 

During a market crash, we rest easy knowing we have invested in strong companies, companies that are equipped to survive recessions and come back stronger, not because they are in-vogue or exciting, but because they are good businesses.

Crucially we have invested in companies that pay a healthy dividend, which is beneficial in this climate. We re-invest those dividends, which means that they are automatically used to buy more shares of the company as soon as they are paid. When the share price of the company drops, more shares are purchased. 

Now when the price increases we will own more shares and our gains will be greater. Even better than that, the next time we are paid a dividend we will own 10 more shares, the payment will be bigger and we will reinvest again! This is how compounding turns a little into a lot. Using dividend re-investment is a great way to profit from market downturns.

THE LAST THING WE WOULD WANT TO DO IN A CRASH IS SELL OUR DIVIDEND PAYING SHARES!

If we think about the market in terms of Ben Graham’s Mr Market (a metaphor for the market represented by a temperamental, erratic salesman whose mood swings can offer great bargains or jumped up prices) the climate during a crash will show him to be in a totally unreasonable mood.

In some cases he is offering to buy shares for less than they were bought for, even though nothing has changed in terms of the company’s strength; not a good deal. However he is also offering to sell some great companies at a discount, companies that have been around for decades with strong financials, wide moats and that pay a healthy dividend.

This is a man you want to be buying from, not selling to.

“You make all your money in a recession; you just don’t know it.”

Short-term trends in the market are impossible to predict, but they have always increased in the long term.

"How do we know the market won’t keep falling?"

Well, the truth is that no one knows when the market will pick up again. It could can take months or years before it increases to pre-crash levels. 

Two things are certain: firstly, anyone who says they know which way the market is going to go in the short-term is either mistaken or dishonest; and secondly, the market has always returned to its previous levels eventually. We have seen time and time again, through great depressions, housing crises, bubbles and two world wars; the market always recovers.

A market crash is the time to buy shares. There is a sale on and now is the time that smart investors will take advantage.

What this market downturn should underline to you is the importance of a long-term investing horizon; if you are depending on money that you have invested to pay your bills or for a house deposit; you are going to have a bad time.

In the short-term the stock market is a gamble; you are just as well head to the roulette table and put it all on black, or bet on Manchester United to win the league. Even with the best company in the world or the safest strategy you cannot predict Mr Market’s short-term moods.

What you can rely on is that the stock market as a whole will increase ON AVERAGE by 6-9% per year. So if you’re in the game for long enough, you will see gains - as long as the stocks you are picking are of high quality, of course.

In the Compounding Club, we use a strategy called pound cost averaging where we invest approximately the same amount of money into the market every month; this means we keep adding money when the market prices decrease; we do not try and predict what the market will do and we benefit when it recovers.

We always select high quality, dividend paying stocks with a good potential for growth. We then invest in these companies on the same day every month in our real money portfolio.

Personally we don't invest in crypto, because it seems a little too much like gambling.- how can you accurately measure the value of a cryptocurrency? And if you can't, how can you know if you are buying at a good price? What is to stop it halving in value tomorrow? I like to invest in businesses because we can put a price on their value and I just don't see that with crypto at the moment. Not to say a lot of people haven't made a lot of money doing it, but I don't think the majority could do it again and again. Part of value investing is winning year after year after year over the very long term, and putting yourself in a position where you can rely on the income from your investments.