Beginners Guide to Stocks & Shares.
A stock market is the name for the market where the trading of stock(shares) in a companies shares
takes place. A company that you can buy or sell shares in is called a listed company and the shareholders are the owners of
the company.The size of the world stock market is estimated at about $36.6 trillion USD at the beginning of October 2008.
The stocks are listed and traded on stock exchanges. The stock market in the United States includes the
trading of all securities listed on the NYSE, the NASDAQ, the AMEX, as well as on the many regional exchanges. European examples
of stock exchanges include the The London Stock Exchange, the Deutche Borse and the Paris Borse.
The stock market is one of the most important sources for companies to raise money. This allows
businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company
in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell
securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as property.
What causes the price of shares to fall or rise?
The share price of a company is determined by supply and demand.If there are more buyers than sellers
the price will rise and vice versa. Many factors though determine that supply and demand.
Can a member of the public buy shares?
Yes of course provided you have a share dealing account and i will cover this further down. The richest
man in the world today is according to Forbes Warren Buffett (Sage of Omaha) who is worth 63 billion dollars. Buffett
began his investment career with $100, and $105,000 from seven limited partners consisting of Buffett's family and friends.
The stock market though is rarely a place anyone gets rich quick and it is as easy to lose money as make money.
If you want to try and make money at it you need to spend time understanding it and if you are still reading
at this point you are off to a good start.
For further understanding of the world of investing i would recommend some reading.
The 1st is the Intelligent Investor by Benjamin Graham. Warren Buffett described him as the second most
influential person in his life after his father and this book as the best book on investment ever written.
The 2nd is Contrarian Investment Stratergies:The next Generation by David Dreman which is one of my favourites.
The more you read the more you will learn and knowledge can only make us all better investors so these two
should be just the start.
How do i buy shares in a company?
The majority of people will use a stockbroker although you can also use a bank who will use a stockbroker
on your behalf but they are normally over priced.
There are three types of stockbroking service.
Execution-only, which means that the broker will only carry out the client's instructions
to buy or sell and not give any advice.Typically this is done over the internet and you enter the code for the company you
want to buy or sell shares in the quantity you want and then a price is shown and if you are happy with it you click
yes and the trade is done. Because no advice is being given this is normally a lot cheaper than the two below and a typical
trade might cost between £7 and £12.50 depending on the firm.
Advisory dealing, where the broker advises the client on which shares to buy and sell,
but leaves the final decision to the investor.
Discretionary dealing, where the stockbroker ascertains the client's investment objectives
and then makes all dealing decisions on the client's behalf. In addition to actually trading stocks for their clients, stock
brokers may also offer advice to their clients on which stocks, mutual funds, etc. to buy.
Where do i find a stockbroker?
The first question to ask is what type of service you require? For execution only i use Barclays Stockbrokers
and Halifax Sharedealing who i have found fine although others swear by companies like Selftrade or TD waterhouse. There
are a lot around so a search on the internet should show the current pricing structure and users experiences. You could also
go out and buy Investors Chronicle or Shares magazine which are weekly investment magazines and will show a selection of stockbrokers
plus give you the opportunity to read about various investment subjects and comments on individual shares.
How do i decide which shares to invest in?
There are a variety of investing strategies investors follow. And
below i have listed a few.
Value Investing derives from the ideas on
investment that Benjamin Graham and David Dodd began teaching in 1928. Although value investing
has taken many forms since its inception, it generally involves buying shares in a company that appear underpriced
by some form(s) of fundamental analysis As examples, such securities may be stock in public companies that trade
at discounts to book value or tangible book value, have high dividend yields, have low p/e's or have
low price to book ratios.
Proponents of value investing, include Warren Buffett who has have
argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market
price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted
value of all future distributions.
Along the same lines is Contrarian Investing,
High Yield Investing and The Dogs of the Dow Theory. I won't cover them all but as
an example the Michael O'Higgins' Dogs of the Dow stratergy is very
simple, buy the 10 Dow stocks whose dividend is the largest as a percent of the share price. The idea seeks to gain in
two ways. First and most obvious is the large dividends. The second means of gains assumes that the dividend is
such a large percentage because the stocks are out of favor (similar to the Contrarian idea), and that they will appreciate
and regain their strength over time. You hold these high-yield Dow dogs for a year and then repeat the process by selecting
ten new dogs. O’Higgins showed that over the 17-year period from 1973 to 1989, his Dogs strategy averaged a return
of 17.9% annually, compared to 11.1% for the Dow.
Another Investment theme is Technical analysis. Many books have been written
about it but very simply it can be defined as the art of identifying a trend reversal at an early stage and investing in it
until evidence shows that this trend has reversed. The areas of this can be sentiment indicators, flow of funds indicators
and market structure indicators.
How have shares performed against other investments?
Norwich Union produced some figures early in 2008 which showed the following annual growth over the last
15 years and not unsurprisingly both the FTSE100 and FTSE250 had outperformed UK domestic property prices.
FTSE 250 11.7%
UK Commercial Property 11.3%
FTSE 100 8.5%
UK House Prices 8.4%
A Warning about Boiler Room scams
A boiler room is a bogus stockbroking firm which calls
unwary investors and persuades them to buy shares in dodgy firms that subsequently turn out to be worthless. They
are usually based from overseas have impressive names and addresses in the UK, which invariably turn
out to be forwarding address, concealing an operation in Spain, the US, Switzerland, etc.
They are actually fraudsters who get the names of
their victims often from share registers (although not always as i have had them call me on my work mobile phone
and to this day i don't know how they got hold of it) and they cold call with details of great deals. The Financial
Services Authority (FSA), warns that the first time you hear from a boiler room could be by post or e-mail, or they might
advertise their services over the internet. They may offer you a free report on a company in which you hold shares.
A survey by the FSA found that the average loss
to a boiler room scam was £20,000. The survey also found the fraudsters tend to target older people,
with over half of the conned individuals over 50. 80% were male and most were experienced investors.Nathan
Phelan, Head of Retail Enforcement at the FSA, said: "Sadly, victims are unlikely to see their money again, because their
shares will have been overpriced and nearly impossible to sell. Boiler rooms are not authorised by the FSA, and are based
abroad outside our reach, so victims are not protected by the financial services compensation and complaints schemes. Our strongest tool is to make people aware of the scam."
He added: "If you get a call out of the blue, be wary. Check
with the FSA whether the firm is authorised, and remember that you are not protected if you deal with an unauthorised firm.
The message is clear: if in doubt don't be polite, just hang up!"
Financial firm work to very strict rules and under UK
law are not allowed to cold call you without permission. No UK company would call you and put pressure on you to
buy shares in a company you had never heard of. If you receive such a phone call, put the phone down and always
check with the FSA whether a firm is authorised to do business in the UK
You can find out if the operation is regulated by
checking on the FSA website or calling 0845 606 1234.
So remember if it sounds to be good to be true it probably
Governments need to raise money and to do this they issue what is known as a gilt. This is like
a bond that you buy from the government and in return the government gives you a guaranteed rate of interest.Gilts
are considered a safe investment, as the only way that the government would not pay you back is if it went bust, which
is highly unlikely. You hold the gilt for a predetermined period, like five years, and then the government will return
the capital that you initially invested. In the meantime, you will have been paid an income from the gilt, known as a yield.
At the end of the term, you will have your investment returned in full. Gilts can be bought and sold during their term
What is a dividend? What is a dividend yield?
Dividends are payments from a company that in the UK are often paid to the shareholders twice a year (the
interim and final dividend). When a company announces its results it will advise if it is paying a dividend and the amount
e.g 5p for each share held and the ex-dividend date (the date from which new buyers of the shares will not be entitled
to the dividend this is typically a wednesday in the UK) and the date the dividend will be paid.
The dividend yield on a company is dividend per share divided by the price per share. It is often
expressed as a percentage like 5.5% yield. Some investors choose to invest in high yield shares only. This is covered
more in David Dremans book Contrarian Investing.