Stockmarket Investment

If youre serious about growing your savings you really have to understand how the stockmarket works and why you should consider investing in stocks and shares. Over time cash savings accounts have been frequently outperformed by the returns generated by investing in the stockmarket.

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What are stocks and shares

Shares are exactly what the name implies that is to say they are shares in the ownership of the business. As a shareholder you are a part-owner of the company and can expect to share in its profits but should also be prepared to share in its losses.

 

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Ordinary shares are known as equity and are the risk-sharing portion of a companys funds as distinct from stocks which represent long-term loans and do not necessarily confer any rights of ownership. The ordinary share holders own the company they can vote on company policy appoint and dismiss directors and if the company makes a profit they can expect to share in that profit in the form of a dividend.

 

Companies may issue many different types of shares and stocks and you should make sure that you understand exactly what kind of investment you are making and what kind of return you may get and in what form it will come.

How do I decide whether stockmarket investment is for me

Sometimes it is easy to be overwhelmed by the image of the City and forget the fact that stockbrokers are really no different to anyone else buying and selling goods and services. You might prefer to think of them as pin-striped barrow boys! Remember that the primary function of a market-place for shares is actually to provide companies with a place for them to raise money to invest in their businesses.

 

Of course for there to be a ready market for such new shares there has to be a ready market for second-hand shares. Nobody is going to want to invest in something that they are not going to be able to sell when they want to do so.

 

The vast majority of trading on the worlds equity markets is secondary trading. That is to say it is the trading of shares previously held by one or more other investor. To succeed in attracting companies the market must also be attractive to investors.

 

Stockmarket investment offers you the potential for greater returns than could ordinarily be achieved by leaving your money on deposit in a bank or a building society. However that potentially greater return comes with a concomitantly greater risk. You may feel lured into the market by the bright lights of the City and the prospect of juicy capital growth as your share prices soar and a nice income from fat dividend cheques. Just remember you can also see your investment evaporate as share prices fall and companies can cut or fail to pay dividends just as easily as they can increase them.

 

Broadly speaking the higher the potential return from any investment the greater the risk of loss. Funds committed to the stock market need to be invested for say between two and five years. Money that you may need back in a hurry should never go into equity investments.

How risky is the stockmarket and how can I minimise the risk

Share investment is risk investment. That being said by purchasing a balanced selection of shares it is possible to limit the risk profile of your investment portfolio. Somebody approaching retirement is likely to arrange their share investments to minimize risk while a young professional may be willing to take greater risks in the hope of securing higher returns.

 

One basic rule of thumb suggests an inverse ratio of age to stockmarket exposure. Thus at age 30 70 of your investments would be in the stockmarket or related collective investments but by age 65 only 35 of your investments would be equity-based. This is a very rough and ready measure that takes no account of your attitude to risk. Highly paid risk managers are highly paid to go into much greater detail do you prefer a cautious balanced adventurous approach but it provides a starting point for you to think about your portfolio and about the kind of risks you may or may not be prepared to take with your investments and your financial future.

 

Analysis by Barclays Capital of the performance of different types of assets shares gilts corporate bonds index-linked and cash shows that equities generated a real investment return of 11.4 in 2006. The next best performing asset class was cash which showed a real return of 0.4.

 

Real investment returns by asset class pa

 

		2006		10 Years		20 Years		50 Years		107 Years
Equities		11.4		4.9		6.9		7.1		5.3
Gilts		-4.4		4.6		5.6		2.2		1.1
Corporate Bonds		-4.5		6.7
Index-Linked		-2.1		4.5		4.5
Cash		0.4		2.6		3.7		2.0		1.0

		Nominal Value		Real value
Equities		£13311		£213
Gilts		£45		£1

		Nominal Value		Real value
Equities		£1561732		£25022
Gilts		£20132		£323
Cash		£17856		£286

2009-02-17 00:00:00 © Moneyextra.com