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What is the stock market?

Our pensions mean most of us have some money invested in the stock market, but what is it and could I lose my money? Here are the key facts every investor needs to know

BY GARY ADAMS

SHARES REPRESENT (often tiny) fractions of a company. These are traded back and forth by people and computer programs every day, based on their perceived value either at that moment in time or on a future date. Share prices change all the time. The stock market is simply the place where this happens - mostly electronically through exchanges, such as the London Stock Exchange.

So when people say “the stock market rose yesterday", they are taking all the companies listed under a certain umbrella as a whole. The FTSE 100 Index, for example, is a list of the top 100 companies on the London Stock Exchange. Its performance is a statement on how well they are doing.

Shares exist to raise capital. If a company needs money for, say, expansion into a new territory, it can sell shares. A company can issue new shares at any time too - and while it's easy to imagine this being bad for existing shareholders (known as share dilution), it can also signal good times ahead for the company and work in everyone's favour.


WHY DOES THE STOCK MARKET GO UP AND DOWN?
The prices of shares change constantly. For example, take the case of oil prices falling so dramatically. This caused many people to believe that big oil companies BP and Shell would make smaller profits in future, thus lowering the value of their stocks, and so they sold their shares.

Factors that affect the perceived value of stocks and shares include:

• political stability in certain regions.
• the weather . proposed government investment (look at the current argument over building on the green belt).
• market sentiment (the trust people have in the economy, banks and private companies).

With so many factors at play, it's a wonder that anybody can navigate the stock market at all. But there are simple ways to invest that mean you don't have to worry too much about the ups and downs.

WHAT RETURNS CANT EXPECT?
If you invest in the stock market for a year, you might do well, badly or break even. So don't invest if you only have a short time period before you need your money.

You need to be able to put your money away for at least for five to seven years, because history shows us that this is the period over which you can at least expect to break even and, in most circumstances, are likely to get a decent return.

However, if you're prepared to wait, making sure to continue investing gradually, re-investing any returns you make over and over again, the rewards may be bigger.

The Barclays Equity-Gilt study is a highly regarded annual survey of where the best investment returns can be found. The study shows that since 1899, UK shares have produced an average annual return of 5.1% over inflation. That compares with 0.8% above inflation for cash.

Barclays concludes that shares typically deliver higher returns - and over longer periods they are likely to perform better than other asset classes. In other words, the risk of holding these shares reduces the longer you hold them.

AXA Self Investor assessed the 10-year performance of the FTSE 100 on a rolling monthly basis since February 1996. During this period, it found that the Index generated a positive return 9.5 times out of 10, turning £1,000, on average, into £1,690 over 10 years (this is the total return including income from dividends paid to shareholders by the company).

The research found only six out of 120 occasions where investors would have lost money over a 10-year period. You would have lost money only if you had bought during the dot-com bubble in the late 1990s and subsequently sold at the lowest point of the financial crisis 10 years later.


WILL I LOSE MY MONEY?
If you try to outsmart the market and handpick shares, and buy and sell at the right time, you'll most probably lose money, unless you're very lucky.

However, invest steadily and regularly into the stock market over a decade and it would take an extreme dose of bad luck to not make substantially more than you would through your average cash individual savings account (Isa).

You just have to remember to hold your nerve and stay invested when the economy gets shaky and people panic, the occurrence of which comes and goes like the seasons.

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