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investment in shares
Shares - A Beginners Guide
to Making Money
How best to invest in stocks and
shares
SHARES
(Also called Traded Options, LIFFE Equity Options, Options)
You invest in a contract which gives you the right to buy or sell a certain number of shares at a fixed price before the option expires in up to 3, 6 or 9 months time for options in shares and 12 months for options on a share index. A contract to buy shares is called a call option; a contract to sell shares is called a put option. With a call option you make money when the share price rises; with a put option you make money when the price falls. If you take a put and a call option at the same time it is called a straddle. You can buy options in 73 popular individual shares - like Abbey National, HSBC, Marks & Spencer, Shell. You can also trade in options in the FTSE 100 Share Index and the FTSE 250 Share Index. You rarely exercise the option (i.e.. buy or sell the shares); to make money you sell the option at a higher price than you bought it for.
You have to be an active investor with options and follow the prices every day - more than once a day when share prices are moving quickly. If you don't have the time or are not prepared to do this, forget them. You can also invest in traded options in government stocks.
Who can invest Anyone 18 or over.
How worthwhile Potentially good value if you like to speculate. You can lose all of your investment very quickly if you predict share prices wrongly. If you are right you can double or treble your money in a short time too. Dealing in options needs regular attention and to deal effectively you probably need access to share and option prices on a screen. These are available on Ceefax and Teletext but may not be completely up to date. You can also see them at the LIFFE web site where they are updated every 15 minutes. You can subscribe to sites with up-to-the minute prices.
Minimum One contract which for UK traded options is 1,000 shares at the option price: £1 to £220 depending on the share chosen and how likely the outcome is expected to be. Like betting, the option costs less if the predicted value of the share is unlikely to be achieved in the belief of the markets. Before you start trading in options your stockbroker will usually expect you to send him a deposit or margin to cover some or all of your options.
Maximum None.
Suitable Lump sums.
Money back When you sell the option before its expiry date in up to 3, 6 or 9 months (12 months for an index option). You get the current option price which may be more or less than you paid.
Interest None.
Interest paid Not applicable.
Tax Any profits you make count as capital gains and are taxable. Any losses can be set against other capital gains.
Fees to pay Stockbrokers' commission 1½% to 2¾% of what you pay on the 1st £5,000 plus £1.50 to £2.25 per contract; minimum £17 to £40; same when you sell.
Passbook You receive a contract note from your stockbroker giving details of each transaction.
Children Unsuitable.
Risk High .
How to invest For a free booklet and a list of stockbrokers which specialise in traded options, phone or write to Publications Department, LIFFE.
Where from A stockbroker which specialises in options. These are also offered by some on-line brokers. However because of problems with slow access, it would not be advisable to trade in options via the Web unless you have a permanent connection such as ADSL.
Other types of direct investment
in shares
Shares - A Beginners Guide to Making
Money
How best to invest in stocks and
shares
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Last updated or checked 16 August 2001