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www.InvestmentGuide.co.uk The aim of making a profit from shares is to buy when they are cheap and to sell when they are expensive. So don't be downcast when the market and share values are down. If you are a new investor, this could be an excellent buying opportunity. There are two strategies for share buying and selling:
Buying new issues
Many people started to build up a portfolio of shares by investing in the Government privatisation share issues or inherited these shares from their parents. You could have built up quite a wide portfolio consisting of BAA, British Airways, British Aerospace, British Gas, BP, British Telecom, Cable & Wireless, and the electricity and water companies.
Then there were the conversions of building societies to banks such as Abbey National, Alliance & Leicester, Halifax, Northern Rock, Woolwich and mutual insurance companies to quoted ones such as AMP and Norwich Union.
You might also have bought other recommended shares which were offered for the first time some of which did not do so well like lastminute.com or even got into real trouble like RailTrack.
With these offers it is easy to buy because all you had to do was fill in a form and send off your money. You also have the advantage of not having to pay stockbroker's commission which is now normally a minimum £15 to £20 per transaction (or 1% to 1.9%) and stamp duty of ½ %. But there remains little left to privatise as most State industries in the UK have already been sold off.
Had you held on to these shares, in many cases there have been takeover bids and you would have then cashed in on your profit.
Buying individual shares
You may want to buy individual shares other than on a new issue. Which ones to buy and when to sell is something even the experts don't agree on, so there is an opportunity for individuals to use their judgement and luck to choose shares themselves. There is no shortage of advice. Most newspapers and specialist magazines like Investors Chronicle (weekly) and Money Observer (monthly) regularly tip share purchases. There are special newsletters which give share tips and stockbrokers often give their clients recommendations.
If you just follow the published advice, you will often find that the share price has risen by the time you get round to buy the shares. That is because whenever a share tip is published, all stock market dealers automatically raise the price. If the tip is found to be correct, then the price will probably rise further.
But if it's a dud, the price will fall back to the original level, and you can end up paying more for a share than you need have. You can follow the performance of all UK shares in tables published in Money Observer each month. The average performance of shares is measured by an index. Click for up to date figures for share indices in the UK and overseas from many web sites and there are many free sites on the internet giving information about shares. Do a search using Google.
You should have a portfolio or spread of investments in different companies at least seven. If you have too many you may not be able to keep track of them. The minimum of seven is so you don't suffer unduly if a single company you invest in goes bust or the shares fall very steeply. So a maximum could be between 15 and 40. If you have £45,000 to invest, you might consider investing in 14 share holdings of £3,000 each. If you have £300,000, you might consider 42 of £7,000 or 30 of £10,000.
Buying and holding
If you decide you want to buy shares and hold on to them for a long time, you may be better off investing in shares through an open ended investment company (OEIC), through a unit trust or through an investment trust. You certainly will be if you have less than about £6,000 to invest. The problem with these, especially OEICs and unit trusts , is that there are almost as many funds to choose from as there are actual shares to invest in and except for tracker funds there is no logical method of choosing which will do best.
More details are given under the headings:
Unit Trust or OEIC Index Tracker
Unit Trust or OEIC Maxi ISA
Investment Trust Maxi ISA
Unit Trust or OEIC Invested in Shares
Investment Trust Shares
In March 2006 most share markets (including the US and UK) are near their all time highs but not much higher than the previous market peeks. There is no doubt that since 2004 the markets have been in a bull market when shares tend to rise after the bear or downward phase. The markets also tend to fall back in the six months before an expected election, especially in the US and the UK. A presidential election isdue in the US in 2008 and in the UK possibly in 2009 or 2010. Regardless of the outcomes, markets tend to recover after the election result. Similar trends are shown in currencies so one can expect the US$ to remain weak in 2008 ahead of the November 2008 election.
As an investor of the market as a whole, you need to try and predict when the market has finished rising and is likely to move sideways or fall significantly. There can be wide differences in the performance of individual shares and between different sectors so you will need all the skill and luck you can get to invest successfully. Often one sector can be in an optimistic bull stage when another is in a pessimistic bear stage.
Regular investment in shares
If you don't want to keep following the share market waiting for the
right time to invest, your best bet is to invest on a regular basis month by
month. Over the years you will accumulate money in shares through unit or
investment trusts but you should wait until share prices are high before you
sell. you can invest regularly through the following which have full details
given in:
Investment Trust Maxi ISA
Investment Trust Savings Plan
Unit Trust or OEIC Maxi ISA
Unit Trust or OEIC Savings Plan
You can also link a regular investment to shares through Life Insurance Unit-Linked Savings Plan but such plans generally have high charges and are less flexible than the other alternatives unless you wish to use them for inheritance tax planning with the proceeds to go in trust to your children or grandchildren on your death.
Finding a good stockbroker
If you want to follow the market and buy and sell shares then you need a good stockbroker who you can deal with direct and who can give you trading buy and sell prices for your shares by phone. Alternatively many people now prefer to buy and sell shares using one of the on-line brokers over the Internet.
The best way to find a good traditional stockbroker is by recommendation. If you don't know anyone who is pleased with theirs, the Stock Exchange will send you a list of brokers willing to take on new private clients. You can also ask your bank to introduce you to their own stockbroker.
However if you don't want advice and merely want an execution only also known as a low cost dealing service, then the broker which charges a small commission will be your main criteria. The cheapest way to buy and sell shares today is by using an on-line broker on the Internet. There is often a fixed commission rate of £15 to £30, which means that if you trade in amounts of less than £2,000 to £3,000, you pay a disproportionally higher commission rate but on larger trades you pay much less.
By phone commission rate is likely to be 1% to 1.9%, for transactions of £5,000 or less. Buying and selling Gilts, British Government Stock, is cheaper, usually 0.5%. But other fixed interest stocks are often charged at the same rate as for ordinary shares.On-line the rates are very much less.
Fixing the price
When you buy or sell shares, the deal is often not actually made on the phone when you are speaking to your stockbroker. It's therefore very important that you place a limit on the transaction. A limit is the minimum price you will sell at or the maximum price you will buy at.
When you consider the selling price is too low, or the buying price too high, you can ask for the limit to be held for a week or longer. The stockbroker must then sell shares at the limit price or better if the shares reach the limit within the period stipulated. Some stockbrokers are reluctant to accept limits beyond the same day.
When you make transactions by phone, especially with limits, you should make a note of the conversation and date it. Stockbrokers usually make tape recordings of phone transactions and they may be able to play back the conversation in the event of disagreement over what was intended. There are an increasing number of stockbrokers with sites on the Internet.
When you use on-line trading, instead of a limit, you are often shown the price at which the transaction will take place and have 15 second to say Yes or No.
Be an active investor
There is a lot more you can learn about share strategy. Most large bookshops now have an investment/financial section where you can find other more advanced and detailed books on share strategy. You also need to regularly read the financial pages of a newspaper. You can make a start with our companion site Shares A Beginners Guide to Making Money.
Look up your share prices
If you subscribe to an on-line stockbroker, you can access real time prices (or see the value of your portfolio with a 15 minute delay). You can also set up your portfolio on other sites.
The more old fashioned way to keep track is to buy a daily newspaper which lists your shares or check them out on BBC2 Ceefax service
Be a speculator
Consider gambling with traded options or warrants. Details are summarised under the heading Shares Traded Options and Investment Trust Warrants. If you are a pessimist you can still make money while share prices crash by using put options.
Since July 1996 the UK Stock Exchange has been trying to do away with share certificates using Crest. As a share certificate is evidence of ownership of the share bought, this seems a rather alarming development. It requires one more layer of trust which you may not feel is worth it. Stockbrokers refer to the change in a number of quaint ways such as dematerialisation or paperless transfers or uncertificated transfers.
In the past when you bought shares in a company you received a contract note giving details of the transaction. A contract note is evidence that you have contracted to buy the shares but not that you have actually paid for them or have gained ownership. If you bought 200 shares, you would later receive a share certificate from the company you have invested in for 200 shares and there would be an entry on the company's share register showing, for example, J.W. Jones 200 shares.
Under the Crest system, when you buy you receive a contract note. But instead of a share certificate for each share holding you buy, evidence of ownership is a statement from your stockbrokers who hold the shares in a nominee name.
Depending on the stockbroker, this nominee holding can be one of two types:
In either case evidence of ownership would be a statement from your stockbrokers showing all your holdings and transactions, rather like a bank statement. You should be aware that having shares held by a nominee subjects you to extra risk.
The nominee may be able to misuse your share holding by selling it without your signature. Or by using it as security for a loan without your permission. Such misuse would be a crime - but a crime which you would not know was being committed. This is especially so in the case where there is no designation, as you have no independent proof that it is your share holding which has been misused.
Many of the recent financial scandals have involved the misuse of securities held in nominee names (although not so far as a result of the Crest system). Your protection under the Financial Securities Act Investors Compensation Scheme is limited to £40,000 per person. Stockbrokers also have insurance against fraud by staff.
It is therefore strongly recommended that you only deal with a stockbrokers which allow sponsored membership of Crest . Crest is not compulsory, so in theory you can continue to buy shares with certificates. However it is likely that most stockbrokers will soon only deal using Crest or make extra charges if you don't comply.
Another difference with nominee holdings is the way dividends are paid. In the past you received dividends direct from the company concerned when they were paid. With nominee holdings you are likely to receive dividends half-yearly or quarterly in one payment for all your holdings from your stockbrokers. With Crest you get them at the usual time direct from the company.
Some people buy shares for the fringe benefits. Surveys listing companies which offer perks are published from time to time in magazines. You can view a list at Hargeaves Lansdowne.
Some companies don't let you have the perks if you buy shares using a nominee service.
 Last updated 24 March 2007. |
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