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Feature: Investigating investment

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13/03/2008

Investing in stocks and shares doesn’t have to be reserved for those fluent in financial jargon. With a little research, you could reap the benefits too. Kate O’Raghallaigh takes a look

So, you’ve decided that your hard earned cash is no longer worthy of a bog-standard savings account. Intent on injecting a little excitement into your finances, you’ve decided that stock market investment is the way forward – but where do you start?

Starting out in the stock market presents an array of baffling options. And it will remain baffling, unless you do your research, says Mark Dampier, spokesperson for independent financial advisors Hargreaves Lansdowne. He says: “Knowing nothing at the beginning may seem daunting, but everyone has to start somewhere.”

Where to start?

If you have money to invest, you can choose to either invest directly in equities (also known as shares) by researching companies listed on the UK-based FTSE 100, the US-based Dow Jones Industrial Average or a wealth of other world markets. Alternatively, you can put your cash into pooled investments called funds, of which there are many different types.

Novices taking the direct approach shouldn’t be too intimidated, Dampier says. He continues: “If you’re picking your shares yourself, you need to be careful where advice is concerned. Don’t buy the same shares as your mate did just because he says they’re great. Similarly, don’t rush into using tips in the newspapers – normally by the time you go to buy the stock, the price will already have risen.”

There is a wealth of information online and in daily newspapers’ financial pages on companies’ performances in the UK stock market, so if you’re thinking of taking the plunge, it’s a good idea to familiarise yourself with the markets – and the jargon – by flicking through the pink pages a few times a week. According to research from Abbey, 52% of investors decide what to invest in by reading the newspapers. A further 36% take advice from a financial adviser, 12% ask their friends what to invest in, 10% rely on their families to tell them where to invest and 5% pick their shares at random.

While picking at random isn’t advisable for those who don’t want to throw away money, sometimes it’s good to come at investment from a personal angle. Dampier adds: “If you want to select shares yourself, you can look at companies with products or services that you use, that you like or are familiar with – sometimes you can wind up being ahead of the professionals.”

Risky business

But are you putting your money at risk by investing in equities? While there are ways of minimising risk, investors cannot lose sight of the fact that no investment is risk-free. Jane Holligan, spokesperson for mutual fund provider Alliance Trust, says: “Novice investors should always assess their objectives against the risk they are prepared to take. Some types of investment carry more risk, for example, shares are much riskier than government bonds.

“Cautious investors who are prepared to sacrifice some potential investment return generally seek to moderate any risk by investing across a range of sectors, so when shares in one do less well, shares in other, better-performing sectors balance the risk across the individual’s combined investment.”

For those who are averse to having direct contact with the stock market, investing in funds is a sound option. A fund can allow you to spread your money across a number of different companies, sectors and perhaps even types of investment depending on the fund in question.

Holligan explains: “You can invest in funds that spread their investments, for instance across different asset classes, regions and sectors. Some of these are investment trusts, open-ended investment companies (OEICs), unit trusts, gilts or tracker shares such as Exchange Traded Funds (ETFs). All of these instruments give you exposure to more than one underlying company and are therefore generally less risky than investing directly in a single company. These funds can specialise in single sectors or kinds of companies, so you would have to find out how widely each company or fund diversifies its investments.”

Counting the cost

Investing, both in equities and funds, doesn’t come for free. Each time you buy shares you are required to pay Stamp Duty of 0.5% on the amount invested, and a separate fee for carrying out the trade, which varies depending on the kind of sharedealing or brokerage service you use.

If you deal in funds, it’s worth considering using a broker, as this can be cheaper than going direct. Dampier says: “People often assume that it’s cheaper go to a fund manager without consulting a broker, which isn’t the case. Going to a fund management company straight away will set you back an initial fee, which is usually a percentage of your initial investment and there will then be an annual management fee, which is another percentage charge of your investment.” Discount brokers arrange a discount off the initial fee with many fund management firms, so if you want to invest in one of the funds covered by those firms, you could be charged a much lower initial fee. A discount broker could also offer you cheaper management fees.

Making a saving

Investing in funds is not the way to make a quick buck, and investors should ideally aim to commit to a savings plan for at least 10 years. Dampier continues: “If you don’t commit yourself to a regular savings plan, that is, invest in your fund on a monthly basis, an initial deposit of £500-£1,000 is normal practice.”

Investing in shares over time can reduce the overall cost, because you ride out any market volatility, according to Holligan. She says: “Investing small amounts regularly and often, allows investors to build a portfolio over time and therefore take advantage of ‘pound cost averaging’. This is the effect of buying shares regularly over time – as the price fluctuates, this continuous drip-feed method of purchasing your investment means that the average purchase price paid over any given period may be lower than the arithmetical average of the market price.”

Investing in funds isn’t a sure fire way of avoiding risk altogether, though, says Dampier, but investing in more than one fund is often a more risk-averse approach. “Investing in more than one market, while spreading your risk somewhat, still won’t guard you against market falls having a knock-on effect on one another. Nowadays a lot of global markets are fairly correlated – if one goes down, the likelihood is, lots of them will. So investing in a couple of funds will give you better exposure”, he explains.

Investing in the stock market, either directly or via a fund, can be an exciting and financially rewarding endeavor. As with a lot of things in life, however, the benefits may take time to reveal themselves. But as long as you are prepared to ride out any bumps along the way, you stand as good a chance as any of reaping the benefits.

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