12 - Summary

By THIS IS MONEY
Updated:

 

Expert

LESSON ONE - THE BASICS

The stockmarket has performed measurably better than its competitor investments over the last 25 years.

Companies issue shares, basically to raise money so that they can invest in their businesses and help them grow. Shares are traded in the same way as, say groceries, with market-makers, or Retail Service Providers, matching the buyer to the seller instead of the grocer.

They buy and sell shares on their own behalf and make a profit on the difference between the buying and selling price when they sell them on to others. The more popular a stock is, the more expensive its shares will be.

The share price is, therefore, like a barometer of investors' confidence in a company's prospects.

There are over 900 companies listed on the London Stock Exchange, but only 100 of the biggest account for about 90% of the entire stock market's value. The daily share price performance of these companies is measured by an index called the FT-SE 100 (Financial Times - Stock Exchange 100), also known as 'the Footsie'.

Big so-called 'blue-chip' companies are far less risky than small, recently-formed companies whose strength hasn't really been tested in the market place, but tend not to grow as fast.

You make money from shares in two ways: Capital growth - where the share increases in value, and dividends - payments taken from profits the company makes to its shareholders, usually every six months.

LESSON TWO - BASIC RESEARCH

The first stop should be the company's annual report and accounts. Also look at the financial pages of newspapers and magazines - essential reading for investors. When you buy can be as important as what you buy, so it pays to keep up-to-date with the news.

This Is Money offers a complete list of company information and near-live share prices in its MARKET DATA section.

LESSON THREE - SETTING UP AN ACCOUNT

These days you can deal in shares by post, by telephone, and via the internet. There are three levels of service brokers can offer: execution only (they will do only what you ask), advisory (where they will give you tips and advice) and discretionary (they'll invest it for you).

Stockbrokers usually charge commission of 1% to 1.5% on each deal they carry out on your behalf, subject to a minimum of around £10 to £25. In the UK, you also have to pay Stamp Duty of 0.5% on every share purchase.

Decide what kind of investor you are before you choose a broker. The answers to these questions should help you decide what level and type of service you need.

LESSON FOUR - DEALING ON THE INTERNET

Internet dealing simply means buying and selling shares using your computer linked up to the world wide web.

Here's a list of questions to ask when checking out brokers:

  • Will you be able to deal in all stocks over the internet including AIM shares and warrants?
  • Does the broker offer real-time dealing or is the service e-mail based (and therefore potentially slower and less reliable)?
  • Is the service nominee based, sponsored Crest membership or fully certificated?
  • Can you get free access to news, share charts and online portfolios?
  • What are the initial set up costs, dealing charges, and annual administration fees?
  • Will you still receive dividends, reports and accounts, and any shareholder perks?
  • What are the costs if you want to move stocks in or out?
  • If the broker sets up a separate bank account for you, what interest is paid on credit balances?
  • Is the service fully compatible with all computers and browsers including Netscape and Macintosh?
  • What other services are available e.g. buying mutual funds online, dealing in European and US shares, dealing via WAP phone?
  • Is there a free customer helpline and what hours is it open?

This is Money offers a SHAREDEALING SERVICE, and For more on internet sharedealing, see our guide.

LESSON FIVE - UNDERSTANDING YOUR TRADING ACCOUNT

A broker will usually hold your shares on your behalf in a nominee account. Your name doesn't go on the share register when you buy shares in a nominee account, you still remain the beneficial owner of the shares, eligible for all income, capital gains, perks and other shareholder rights as normal, rather than holding the paper certificates.

Settlement time period is often denoted as T + x, where 'T' is the day of the transaction and 'x' is the number of days before the settlement day. Traditionally settlement could be 25 days. But with increasing automation this has reduced to T + 5, and some brokers are already operating T + 1.

LESSON SIX - CHOOSING YOUR SHARES

How do I decide what to invest in?

There are three things you need when selecting shares: common sense, research, and luck. In doing your research you should ask the following questions:

  • Is it in a sector you think will do well? What are your reasons for thinking this?
  • Does the company offer something unique, or are there many competitors in the same field?
  • What kind of track record does the company have to date?
  • Is the company growing? (Look at its year-on-year performance figures)
  • How much cash does it have in the bank?
  • If it is not yet in profit, is it at least increasing its revenues in a healthy way?
  • Is it showing growth in the dividends it pays out?
  • How highly valued is it? (The price-earnings ratio is one measure of this - see Part Two). Is this based largely on future expectations or on past performance?
  • How volatile is the share price? (Study its share price charts over different periods)
  • How is the company viewed by City analysts, the press and other commentators?
  • Is it considered to be a high-growth, high-risk sort of company, or stable and slow-growing?

How much should I invest? No less than £1000, in order to minimise damage to your capital from fees and commission, but no more than you can afford to lose. Spread your risk.

LESSON SEVEN - GETTING DOWN TO BUSINESS

What kind of investor are you?

Are you investing for the long-term, or are you hoping to make money fast by playing the markets, speculating and daytrading?

Long-term investors will buy and hope to leave well alone for maybe five years. Short-term volatility in share prices won't bother them and they won't feel the need to monitor their portfolios on a daily basis.

Traders, on the other hand, want to know if the share price is likely to rise or fall over the next day or week. So they are much more concerned about the behaviour of stock markets and the impact of events on share prices. This kind of approach takes almost constant attention.

Building up a portfolio

After a period of rising prices, investors tend take some profits, and the share price can fall, even if there is nothing fundamentally wrong or changed about company. This is a good time to buy. The trend is still upwards, but you've managed to buy the shares when they were a little cheaper.

Of course, this theory only works when the markets are fairly stable. In volatile times, trying to time buying decisions correctly is almost impossible.

Income, growth or both?

When building up a portfolio, it is also important to decide what you want from it. For example, if income is important to you, you should look for fairly stable shares that pay out high and growing dividends. The dividend yield figure is an important indicator of this. But really, if income is that important - if you're looking to supplement pension income, for example - you would probably be better off looking at alternative investments, such as gilts and corporate bonds.

Investing in the stock market is really a capital growth game, whether you're a trader or an investor. What you have to decide is what level of risk you are prepared to take in return for what level of reward.

LESSON EIGHT - INVESTMENT STRATEGIES

Spreading your cash between several companies, even countries, as your portfolio grows, can reduce risk. Setting a stop-loss means deciding at what point you sell if the share price falls - 10% is common.

Taking profits is a good discipline, because until the money is in the bank any profit is just notional. One strategy is to hedge your bets, sell half your holding, and leave the rest, just in case they do carry on rising.

Advanced investment strategies

There are two main schools of thought when it comes to investing. There are those who believe that the fundamentals are most important - how much cash is in the bank, how fast its profits are growing, and so on.

Technical analysts believe company fundamentals have little to do with share prices and that sentiment, the herd instinct, fear and greed have more to do with the behaviour of stock markets.

LESSON NINE - OTHER WAYS OF INVESTING

• Funds: unit trusts or open-ended investment companies
• Funds: Investment trusts
• Tracker funds
• Investment clubs
• Individual Savings Accounts
• Bonds and gilts
• Venture capital trusts
• Exchange Traded Funds

LESSON TEN - TAX-EFFICIENT INVESTING

The aim of investing is to make money over the short- or long-term. Unfortunately, the Inland Revenue is only too keen to share in your success, levying income tax on dividends and capital gains tax (CGT) on profits.
This is on top of the mandatory 0.5% stamp duty we pay each time we buy shares.

For more tips on investing...

- Last updated: May 2009, Adrian lowery

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