Chapter 1
Exploring the Basics
In This Chapter
Exploring investment strategies
Remember Sid? Back in the 1980s and 1990s investing in shares briefly became insanely popular in the UK. Most cynical Brits had grown up believing that shares were a slightly brutish thing, traded by spivs and sleek stockbrokers and only the preserve of the inveterate gambler. The privatisation of the major utilities (Sid was invoked by the Thatcher government to encourage us to invest in the likes of British Gas and British Telecom) changed everything. Suddenly we all seemed to have amassed a small portfolio of privatised companies as well as shares in building societies such as Halifax whoâd chosen to âdemutualiseâ and âlistâ their shares on the stock market. Private investors piled into shares in the 1990s as the stock market reached the mania stage at the tail-end of an 18-year upswing (or bull market: See Chapter 15 for more information on bull markets). Some especially adventurous types even took to investing in the companies of âtomorrowâ â think Amazon or Cisco â pumping up an enormous technology-based stock market bubble that eventually burst in spectacular style in the first years of the new millennium (we call this a bear market â see Chapter 15 for more on these). Share prices tumbled worldwide and everyone declared that they were much the wiser. Now, of course, we all know that that was an illusion. Shares picked up in value again in the first decade of the new millennium, especially as investors piled into bank shares tempted by the juicy dividends on offer. And then the GFC â the Global Financial Crisis â came along and the rest is history. Perhaps this time weâve all learned our lesson . . . or perhaps not! Shares have bounced back in value, which rather suggests that the animal spirits of investing are alive and kicking. One might rather cynically conclude after these serial booms and busts that many investors really hadnât known exactly what they were investing in. If theyâd had a rudimentary understanding of what shares really are, perhaps they could have avoided some expensive mistakes. The purpose of this book is not only to tell you about the basics of investing in shares but also to let you in on some solid strategies that can help you profit from the stock market. Before you invest your first fiver, you need to understand the basics of investing in shares.
Understanding the Basics
The basics are so basic that few people are doing them. Perhaps the most basic (and therefore most important) thing to grasp is the risk you face whenever you do anything (like putting your hard-earned money in an investment like shares). When you lose track of the basics, you lose track of why you invested to begin with. Find out more about risk (and the different kinds of risk) in Chapter 4.
In an old stand-up routine, the comic was asked âHow is your wife?â He responded âCompared to what?â You need to apply the same attitude to stocks. When youâre asked âhow are your shares?â, you may be able to say that theyâre doing well â especially when compared to an acceptable âyardstickâ like an index (such as the FTSE 100). Find out more about indices in Chapter 5.
The bottom line is that the first thing you do when investing in shares is not to send your money straight into a stockbrokerâs account or go to a website to click âbuy sharesâ. The first thing you do is find out as much as you can about what shares are and how you can use them to boost your wealth.
Getting Prepared before You Get Started
Gathering information is critical to your plans for investing in shares. You need to gather information on the shares you are planning to buy twice: before you invest . . . and after. You obviously should become more informed before you invest your first few quid. But you also need to stay informed about whatâs happening to the company whose shares youâre buying, about the industry or sector that company is in and about the economy in general. To find the best information sources, check out Chapter 6.
When youâre ready to invest, you need an account with a stockbroker. How do you know which broker to use and whether to go online or use paper certificates? Chapter 7 provides some answers and resources to help you choose a broker.
Knowing How to Pick Winners
Once you get past the basics, you can get to the âmeatâ of picking shares. Successful share picking is not mysterious, but it does take some time, effort and analysis. This may sound like a lot of work but itâs worth it, because shares are a convenient and important part of most investorsâ portfolios. Read the following section and be sure to âleap frogâ to the relevant chapters.
Recognising the value of shares
Imagine that you like eggs and youâre willing to buy them at the supermarket. In this example, the eggs are like companies, and the prices represent the prices that you would pay for the companiesâ shares. The supermarket is the stock market. What if two brands of eggs are similar, but one costs ÂŁ1 while the other costs ÂŁ1.50? Which would you choose? Odds are that you would look at both brands, judge their quality and, if they were indeed similar, take the cheaper eggs. The eggs at ÂŁ1.50 are overpriced. The same principle applies to shares. What if you compare two companies that are similar in every respect but have different share prices? All things being equal, the cheaper price has greater value for the investor. But the egg example has another side.
What if the quality of the two brands of eggs is significantly different but their prices are the same? If one brand of...
