Risk avoidance for small investors, for people with larger portfolios, risk can be spread across individual companies, including different sectors and even countries but investors with smaller available funds can tackle the same problem using ‘collective investment vehicles,’ such as Unit Trusts, Investment Trusts and also Exchange Traded Funds which track a variety of market sectors, indices and commodities.
Of course some shares rise and fall more frequently than others. This is known as ‘volatility’ and, like many other things, is a double-edged sword. If a share is volatile and rises very quickly, holders will be delighted, but if it falls sharply they will not be so happy. In general, smaller companies tend to be more volatile than larger ones which tend to be well established, often have a large number of different products and may operate in many market sectors or countries.
If a global giant like Vodafone has a great success (or failure) in one area, it is likely to have a limited impact on the company as a whole, whereas the same event may make or break a small company. For this reason, conservative investors who are in it for the ‘long run’ will often have a proportion of their investments in the larger companies, whereas more speculative investors often prefer smaller companies in the hope of ‘making a killing’ (but running the risk of a rapid loss).
Stock market crashes are much talked about, well-publicised events. Like typhoons and tornadoes, they are even awarded names by the world’s press - Black Monday, for one, and the Credit Crunch. But what’s much less well- known is how quickly stock markets tend to recover from major falls.
In 1998, two crises hit the stock markets, both based on fears of economic downturn worldwide. But though the falls were huge, the markets clawed their way back to their all-time record highs in just three months, and set new all time, highs six months later. After the September 11th terrorist attacks in 2001, the UK market immediately fell 12.5 per cent, but regained this loss within two weeks.
It’s easy to say with hindsight, but the tech market boom of 2000 wasn’t an intrinsic fault-line in the markets, but a typical example of greed overcoming common sense. At the heart of it was a solid truth, that technology and the internet are major factors in our future and would, in time, produce some high-priced, high-performing companies and products.
Carried away with the hysteria of the moment, people were prepared to invest in companies with no track records, and no guarantee of sales and profits. As in all such cases, realism eventually kicked in. As prices went down, a lot of people lost the money they’d made on the way up, and some lost more besides.
The Credit Crunch of 2008 caused confidence in lending to decrease sharply and consequently liquidity dried up as banks became uneasy with lending to each other. With banks starting to report major losses, the valuations of shares across the globe began to fall.
Events took a significant turn for the worse following the collapse of Lehman Brothers, helping to drive the majority of stock markets to their lowest points since 2003 and paving the way for the recession that commenced in 2008. This was, perhaps, a once in a century event.
Still to this day the origins of where the market crash of 2009 originated is debated, but most analysts have identified the collapse of the US sub- prime lending market as the catalyst. For years, US citizens were following the American dream of buying their first home which the mortgage lenders were happy to authorise. However, many of the new home owners had poor credit records and could barely afford the monthly payments. Between 2004 and 2006 interest rates started to rise which eventually led to mortgage defaults. These mortgages had been sold to other banks across the globe causing bad debts to be distributed across the global financial system.
Today, more than ever before, people of all ages and backgrounds are keen to save and invest for their futures. But for many people, the world of stocks and shares, stockbrokers and stock markets is still a mystery.
We have written this booklet to help you understand how share dealing works and to help you on what can be a fascinating journey. We have included details on how to benefit from your investments, including how to make the most of the tax breaks offered by the government’s tax-efficient savings plans that invest in shares, like Individual Savings Accounts (ISAs) and Self Invested Personal Pensions (SIPPs). Sadly, we don’t have a magic formula that will guarantee you a fortune from share dealing, but we hope we can help make the experience of being a shareholder enjoyable as well as rewarding.
Sound, intelligent investing requires knowledge, discipline and professional skills. Above all, we believe that adherence to investment disciplines is the key to successful investment results. We focus our skills and resources to provide our clients with the highest level of personalized services and custom solutions, while consistently applying proven disciplines.
Shares can be held by individuals like you or by banks or insurance companies who invest money on behalf of their customers. The law protects shareholders from unfair or illegal practices and ensures that the companies report any significant information. Shareholders are also entitled to attend a company’s Annual General Meeting (AGM) where they can vote on directors’ pay and important decisions about the company’s future.
The individual share prices listed on the market can change from second to second, depending on how many people are buying and selling each share, and what the last buyer was prepared to pay. By following the movement in the share price, investors can not only judge whether they want to buy or sell the shares of a particular company but can also judge how well it is doing in the eyes of other shareholders.
'Shares' are simply a share of the value of a company. Every company needs money to invest in the business if it is to grow - whether it is a single market trader who needs to buy a stall or an international corporation like Marks & Spencer that wants to expand their store offerings.
When you’re ready to begin, you’ll normally contact a stockbroker by telephone.
Some stockbrokers offer online dealing services however, as part of our values we aim to provide a personal, professional and client focused service. Therefore, we offer a telephone-based share dealing service, always providing the option to talk to a qualified stockbroker and not just an order taker. This means you can be confident that the information you get is from someone who is an expert in their field.
A stock market is like a market stall where all the various shares are put on display. The prices of these shares depend on what price people are prepared to buy and sell at.
On the London Stock Exchange there are more than 3,000 companies, large and small. As an example to be ‘listed’ on the London Stock Exchange a company has to overcome several hurdles to prove that it is properly funded, properly structured and that it will abide by the rules of the market.
The second return you might hope to get from your shares is growth in the value of the shares themselves. If a company is successful and its future is bright, the value of its shares ought to grow. This is called capital growth. Share prices go both up and down, not just as a result of the companies’ success but in response to many other economic factors and the general sentiment of other shareholders.
There are two possible forms of return on your shares. The first is the dividend - which is part of a company’s profits divided up and distributed to shareholders. The total amount of the dividend is usually split into two parts - decided at the end of each half-year.
Stock markets are vital to the economy. They provide one of the key mechanisms for companies to raise the money they need to finance new projects and businesses which, in turn, provide employment and services throughout the economy.
We all owe it to ourselves to make our hard-earned money work harder for us. As we save for our futures the stock market can make a huge contribution to our prosperity. While we should spread our savings over different forms of investment to keep them secure, the stock market has an important role to play and should be included in your strategy.
Furthermore, as the government backs away from universal pension provision, more and more of us will be dependent for our pensions on the stock market. Whether we make pension contributions ourselves, or our employers do it for us (now or in the future), the size of our retirement income is likely to depend on how the stock market performs.