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.