Shares: What should you buy and how do you trade?
A sensible starting point for a new investor is a portfolio of funds, but once you’ve found your feet and are prepared to take a little more risk with your money, shares could offer the potential for greater rewards and a more exciting portfolio.
But with a choice of thousands of investments at your fingertips, where do you start in building a portfolio? Smaller companies or blue chips? Growth stocks or income-payers? Investors need to decide on a strategy and work to perfect it.
First thing's first...
The first thing to decide is what the investment should achieve. Does it need to generate an income? Is it just for out-and-out capital growth? Is it for 30 years’ time or will the cash be needed next year?
James Daly, investor services representative at TD Waterhouse, says: “It is always good practice for every individual purchase to ask why you are buying it. This also helps you to decide when to sell it.”
Another important consideration is what sector you want to invest in.
Getting into the right sector at the right time can lead to huge rewards – just ask anyone who bought natural resources stocks 10 years ago – but timing the market so that you buy at the bottom and sell at the top is almost impossible.
A good approach is to buy a selection of stocks in different sectors so you are not just relying on the performance of one sector, says David Jeal, product manager at Selftrade. And just because you want to build a share-based portfolio, doesn’t mean you should sell your funds. Many investors use funds to access less familiar or hard-to-reach markets while selecting individual stocks in the UK.
Ultimately, how you balance your portfolio will depend on your confidence in your abilities to research and access different markets.
When you are building a share portfolio there are four main strategies you can employ, says Daly – income investing, growth investing, value investing and momentum investing.
Income investors look for companies paying out high dividends. Growth investors are on the hunt for firms that aren’t paying much yet but are enjoying rising earnings per share, so their share price could rise. Value investors search out firms that are trading below the fair value of their assets.
Finally, momentum investors tend to invest in shares that are already on the rise.
Of course, investors also need to be adaptable, shifting their portfolios according to what’s happening in the world, says David Coombs, head of multimanager investments at Rathbones.
“The most important thing in portfolio construction is to identify the risks and work to manage them. We may not be able to predict an earthquake in Chile, but we can see a change of government in China, the nuclear threat in Iran or a spike in the oil price.
We ask ourselves what investments we can buy to protect ourselves if those risks hit. For example, we can buy Norwegian bonds or energy equities to protect ourselves against an oil-price shock.”
Then it’s a matter of selecting and opening an account with a broker, depending on how much professional help you want in selecting shares. A discretionary broker will take over the running of the whole portfolio and make decisions on your behalf. If you opt for an advisory service, you’ll be given ideas by the broker but they won’t buy or sell unless you instruct them to.
Both these services generally stipulate a minimum investment level, which may be as low as £25,000 but is often £50,000. However, some brokers have introduced ‘halfway house’ alternatives for clients with smaller sums. Redmayne Bentley, for instance, offers a managed ‘value investment portfolio’ of UK stocks, bonds, ETFs, funds and cash, with an entry level of £10,000.
If you want to make your own stock selection, you have a wide choice of execution-only brokers from which to choose.
It’s important to understand that you won’t get tailored advice if you take this route, but some online brokers produce a lot of background research and analysis of individual stocks for their clients’ use, as well as various technical tools. It’s therefore a good idea to explore the website of any online broker before you open an account with them.
Another consideration in choosing your broker is the range of investments on offer. You may only be thinking of individual UK stocks and funds at the moment, but as your portfolio develops you might want to be able to try spreadbetting or diversify into international equities. However, cost is generally the deciding factor.
Online sharedealing services
Account types: Sharedealing, self-select ISA and SIPP, spreadbetting, CFDs, forex
Administration fee: None
Commission: Sharedealing – £1.50 per trade in a regular investment plan. £10 in all others
Account types: Marketmaster, International Trader, Investment ISA, SIPP, BARXdirect (forex, CFDs, spreadbetting)
Administration fee: Marketmaster – £12/quarter if no trade
AMC: Portfolio value of £7,500 or less – £30 per year plus VAT. Portfolio value of more than £7,500 – £50 per year plus VAT.
Commission: Online – one to 14 trades per month, £12.95; 15 to 24 trades per month, £9.95; 25 and above trades per month, £6.95
Account types: ISA, SIPP, share and fund account, junior ISA
Administration fee: None
Commission: From £5.95 to £11.95 per trade, depending on the number of trades in the previous month. Telephone and postal dealing: 1% (£20 minimum, £50 maximum)
Account types: advisory broking, advisory ISA, advisory CFDs, online trading, spreadbetting
Administration fee: None
AMC: £50 a year – first year free
Commission: Online trading – £12.50 or £8.95 if more than 15 trades in previous three months. Phone – £52.50 or £48.95.
Advisory broking: 1.6% per trade below £10,000, 1% per trade £10,000 plus, minimum £20
Account types: Dealing account, ISA, SIPP, CFDs and spreadbetting
Administration fee: None
AMC: £35 plus VAT, includes three free trades
Commission: Online – £12.50 per trade, £6 each after 100 trades in a quarter. Phone – £17.50 per trade below £2,500, £40 per trade between £2,500 and £100,000
The Share Centre
Account types: Sharedealing, ISA, pensions, CFDs
Administration fee: Quarterly – £2.50 plus VAT
Commission: Sharedealing – 1% (£7.50 minimum), trader option £7.50 per trade
Account types: Trading, Trading Plus, trading ISA, SIPP, trading offshore, regular savings, derivatives
Administration fee: ISA – no administration fee for accounts over £5,100 (£30 below this level); £12.50 per quarter plus VAT for inactive accounts
Commission: Online – £12.50 per trade, or £8.95 if 15 or more trades in the previous three months. Regular investment account £1.50 per trade
Sometimes known as a trading ISA, a self-select ISA gives investors full control over which assets to include in their ISA, allowing them to choose individual shares and bonds rather than investment funds. Aimed mainly at experienced investors and subject to the same investment limits of a regular ISA, a self-select ISA will usually be managed by a stockbroker on an investor’s behalf.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Describes the relationship between a client and a stockbroker or independent financial adviser whereby the broker or adviser acts solely on the client’s instructions and doesn’t offer any advice on which shares to invest in or financial products to buy and simply “executes” the wishes of the client, regardless if they are judged to be sound or wrong. Other types of broking service offered are advisory (whereby the client/investor makes the final decisions, but the broker offers advice) and discretionary (whereby the broker manages the portfolio entirely and makes all the decisions on behalf of the client).
Posh-sounding word for the FOReign EXchange market – the global market for trading currencies. The primary purpose of Forex is to assist international trade and investment by allowing businesses to convert one currency to another. The Forex market is one of the biggest markets in the world, and includes banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).