Your coffee break investment plan - Day 8: Are you ready for company shares?
While investment funds offer the benefit of instant diversification, many plucky investors prefer to take the bull by the horns and create their own portfolio.
There is no shortage of Britons out there with an appetite for buying shares in UK companies. In 2013, throngs of small investors piled in to snap up shares in Royal Mail when it floated on the stock market. More recently thousands have registered their interest in buying Lloyds Banking Group shares when the government eventually sells-off its remaining stake.
When you purchase a company’s shares you become a part owner, albeit a tiny one, of that firm. This gives you with the chance to profit from the firm’s future successes. But it is not for the faint-hearted, as share prices can move down as well as up very rapidly.
Doing your homework is key and you need to keep a close eye on how your investments are doing. Luckily these days you can access a wealth of company information, such as company annual reports, at the click of a mouse, which should give you an idea of a firm’s health. In addition DIY investment platforms and stockbrokers such as Hargreaves Lansdown, Interactive Investor and The Share Centre offer plenty of research tools and tips to investors.
For first-timers, investing in UK blue-chip stocks, such as the companies that make up the FTSE 100 index, makes sense. Helal Miah, investment research analyst at The Share Centre advises investors to “buy what you know”. He says: “Investing is for the long term. Diversify as much as you can across different sectors.”
Before you get started, ask yourself what do you want to achieve? If you are looking for income, seek out the dividend paying firms, in others words, companies that share their profits with investors. If you are looking for capital growth, check out corporations that are aiming to expand their business. For the majority, a combination of both styles makes sense.
When it comes to picking stocks, a firm’s price-earnings (P/E) ratio is a good benchmark to consider. This information can usually be found on stockbroker websites. The idea is the higher the P/E, the better the prospects, as this points to rising earnings. But while a low P/E, could be seen as a bad sign, it could however be viewed as offering good value. One way to decide whether something is worth a punt is to compare the P/Es of companies in the same arena, such as HSBC versus Barclays, for example.
Remember if a company reports a poor set of results and/or is suddenly facing some extreme headwinds, do not be afraid to cut your losses.
As time moves on, the make-up of your portfolio will alter, and it could fall significantly out of tune with your risk appetite. This means banking some profits and/or reinvesting into other stocks, so you can be comfortable with your portfolio’s make-up - this is known as rebalancing.
In terms of getting started, it is worth noting that many online services offer practice accounts where you can get a feel for trading, free of charge.
In terms of costs, most brokers charge around £10 - £15 per deal.
Interactive Investor for example charges a standard fee of £10 per trade, or for £5 for very frequent traders. With all brokers there is 0.5% stamp duty charge.
If you missed them, make sure you read the first articles in this series.
Also watch Moneywise editor Moira O’Neill interview Andy Parsons from The Share Centre about why you should start investing.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).