There was a time when stock market investing was the sole preserve of the affluent and well-connected. Those with money had their ‘man in the City’ – and it was almost without question a ‘man’ back in those days – who invested on their behalf.
The stockbroker was as much a status symbol as the golf club membership and the yacht in Cowes. But much has changed over the past few decades.
Whether you agree with the motives behind it or not, Margaret Thatcher’s decision in the 1980s to privatise the likes of British Gas, Jaguar, British Telecom, the remainder of Cable & Wireless, British Aerospace, Rolls Royce and BP created a nation of shareholders.
The national “Tell Sid” advertising campaign for British Gas ensured mass market interest in the ‘sell off’ – about 1.5 million individuals bought shares in the 1986 privatisation.
For those on a middle to low salaries, these privatisations encouraged participation in the stock market. A further boost to those with limited resources was the arrival of online trading in the late 1990s.
Those on lower salaries were able to start investing because the charges were so much lower than those offered by traditional office-based stockbrokers.
The advantage of online trading is that the low charges for execution-only deals empowered a huge number of people. Arguably the downside with DIY share investing is that traders are acting under their own steam with no advice from professionals.
While that can be a hindrance, investors looking to keep trading costs to a minimum at least have the opportunity these days to do their own research on companies and follow broker recommendations online. There is no shortage of information on the web and most company annual reports are free to download.
How to start investing
Before you invest any money, you need to do an appraisal of your financial health. If you have mounting debts, you should not be considering stock market investing as a way of bailing you out.
You should not be investing money you cannot afford to lose. Nor should you need to rely on selling your stocks if you need money quickly – you should have other savings put by for this.
What can you afford to invest?
Just because you have a modest salary it does not follow that you cannot build a sizeable share portfolio – over time. When considering how to invest in shares, it is a good idea to set a budget of what you can afford to invest in the stock market each month or every six months.
It is easy to get caught up in the get -rich-quick hype that often follows a particular investment theme – the tech bubble of the early noughties is a prime example. The temptation to pile in with everything you have got is sometimes too much to resist for novice investors – but it is usually better to drip feed your money into the market and live to fight another day.
It is better to learn from your mistakes when there is little money invested rather than after you have made a very bold opening gambit. If you lose 40% of the value of your shares shortly after investing a lump sum, you might be discouraged from ever investing again – especially if you decide to take a hit and cash it all in.
Whether you are buying shares individually or in collective funds (unit trusts, OEICs or investment trusts) the advantage of regular investments is that by putting money into the market over time means you don't buy when the price per share/unit may be high.
Regular savings are also flexible in that you can stop and start them when you like and increase and decrease the amounts you invest. Regular savings shares accounts are also a cost-effective way of getting started – with dealing charges as low as £1.50 per stock per month.
Terms for regular share dealing will vary between brokers but typically you could invest as little as £20 per month (with a minimum investment of £5 per stock). Not a huge amount admittedly but it is a start.
Even if you don’t choose to set up a regular savings account, online trading costs are by no means prohibitive.
Online brokers will charge different admin fees and dealing commission depending on whether you choose a standard dealing option or a frequent dealing option. For instance, you could expect to be charged between £5-£6 on a frequent trader account; while on a standard trading account, you might typically be charged between £8 and £12.50.
It is important to look beyond just the trading charges though. For instance, some stockbrokers will charge you £100-plus a year to hold shares on your behalf in a nominee account, this is in addition to a trading fee when you buy shares. Others may charge nothing once you have paid the dealing commission – but that dealing commission might be higher.
It is important to do all the sums and establish what your costs will be, based on your trading frequency and the amount you are investing. For instance, as novice investors become more confident and familiar with share trading they may increase the size of their trades. They might find though that when they do this, their current broker is no longer competitive on trading charges when applied to these higher amounts. It might be time to shop around for a new broker.
How to invest in stocks
The actual buying and selling of stocks is very straight forward. You set up an account with an online broker with your bank details and a debit card (and one you have set up a password), you can start trading almost immediately.
Select the share you want and you will be given a price quote, say 300p. Then you choose the amount you want to spend. You will then receive a real-time quote and have between 10-15 seconds to execute the deal. The money is cleared from your online account assuming you have deposited enough with the share dealer to cover it.
The dealer may require a minimum deposit before you start trading – typically around £100 – once again, not a prohibitive amount.
Share trading transactions are easy - and assuming your service is execution-only - cheap too. It is stock selection that can prove challenging and time consuming. Choosing stocks is not a precise science – even the most highly respected fund managers get it spectacularly wrong at times. But there a few rules that should stand you in good stead.
Always try and invest in something you understand. If a company or sector is not transparent, for instance on where earnings are going to come from or there is no track record to speak of (only lots of ‘talk’ of potential), then you should tread carefully. During the tech boom many dotcom names had huge share price valuations based on ‘potential’
Price to earnings ratios (p/e) where high but many of these dotcom companies had no track record and very little in the way of assets to fall back on. Investors didn’t really understand the businesses but invested on the back of rising prices.
If you have specific knowledge of a sector (for instance, if you work in the civil engineering or mining sectors) then you probably have a clearer understanding of the listed companies within your field of expertise. You may be in a good position to identify a good entry point based on your on-the-ground knowledge.
Investing in a sector you understand is a good policy but even expert knowledge in a particular sphere should not stop you from ensuring there is diversity within your share portfolio.
Even if you have worked for a number of major oil companies and are still employed in this industry, with numerous contacts and valuable insights, you face risks. Your share portfolio will not be insulated if the oil sector takes a sudden pounding and your money is almost exclusively tied up in oil stocks.
From the time you set up your online trading account you should be looking to get a good portfolio spread. For instance, pharmaceuticals, technology, financials, oils, media, mining, consumer/retail, telecoms etc. You may also look to ensure there is a balance between large and smaller companies within your portfolio.
Over time, you will have the opportunity to increase your spread of investments but as you utilise buying and selling opportunities, it makes sense to review the make up of your share portfolio to ensure it remains balanced and fit for purpose.
Regular reviews help to ensure unnecessary risks are not being taken. It is essential to understand the risks of stock market investment – not just over-exposure to one sector but time factors too.
You should generally look to invest over a longer time horizon (3-5years-plus). If you cannot afford to leave money invested in the stock market for this length of time, then you should probably consider lower-risk investment options.
Tax free benefits
Share investments are subject to tax but not if they are within a tax-free ISA wrapper. In the same way as collective funds (managed on the investor’s behalf by a professional portfolio manager) can qualify as ISA investments; so too can individual share choices within a self-select ISA.
You can shelter up to £20,000 this tax year in a stocks and shares ISA. Most brokers will offer a self-select ISA account for investors and the trading charges are typically similar to those on non-ISA trading accounts.
Low income no barrier
Trading need not be a huge investment. Even those on modest incomes can start to grow an investment pot to fund a secure future.