Is Now A Good Time To Trade In UK Stocks?
When a business owner wants to raise money to invest in their business, they sell shares in their company. When you buy shares, also called equities and stock, you are buying a (usually very small) part of the business. The value of shares can rise and fall, the price being determined by how much investors believe they are worth.
Looking at stock prices over a long period of time, such as the past 100 years, the value of the stock market has steadily increased. However, look more closely and you will see this upward trend incorporates numerous ups and downs.
These ups and downs are the stock market cycles. While cycles do not repeat with exact precision and predictability, it is a fact that a sharp ‘up’ will most likely be followed by a ‘down’ and vice versa. It is this changeability in the value of shares that provides investors with the opportunity to generate profit. The trick is to know when to buy and when to sell.
Buying and selling shares
The most basic investing principle, ‘buy low, sell high’, may be simple, but it isn’t easy to apply in practice. After all, who knows when markets have reached their peak or fallen to their deepest depth?
In practice, skilled investors use their knowledge of individual companies and awareness of the broader economic environment to buy when they consider shares are cheap and sell when they consider shares are overvalued.
Following the EU referendum in June and the recent fall in the value of the pound, the UK FTSE 100 index of blue-chip companies soared to near record highs. A sudden escalation in share prices like this has inevitably prompted fears among investors that share prices are overvalued and heading for a fall.
Safeguarding your capital against a falling stock market
While opinion is divided on where the stock markets will go next, this level of uncertainty is too much for many people who prefer their investment activities to be less capricious. A proven way to reduce risk and potentially deliver a more steady income is to invest in a diverse portfolio covering a mix of different asset classes.
This could mean including your exposure to commodities (metals, natural resources and agricultural produce), for example, which have been shown to provide a counterbalance to stock market fluctuations.
Like commodities, property (commercial and residential) also involves physical assets with an intrinsic value essentially detached from the vagaries of share prices. Although the property market has experienced some ups and downs over the years, its overall trend is upwards and it rarely experiences the rapid movements sometimes seen in the stock market.
There are also a variety of fixed income products offering varying degrees of risk that are managed with the aim of maximising certainty and minimising unexpected surprises. This can be a very useful tool, offering a stable and consistent return for a fixed period of time.