Shares / Direct Investment
Many people in the UK hold direct investments in equities (the majority via the Privatisions of the 1980's and/or buying shares in their employer's company). Many of these investments are still good holdings, but it is still is a minority of private individuals who buy and sell shares / securities on a regular basis. Back in the heady days of late 1990's, many people were considering buying shares in individual companies, and many did so (often in a big way) - but the severe market downturn after the year 2000 taught many people some hard lessons about investing in the securities markets. This article attempts to give a balanced view on direct investment:
This is generally dealing in shares, stocks, bonds and gilts and is conducted through stockbrokers who will buy or sell shares on your behalf for a commission. Terms will vary from one stockbroker to another but commission will normally be charged as a flat fee or a set percentage. Although the idea of share ownership has grown significantly in the last 20 years there is often an inadequate view of the risks and how to minimise them and it is worth looking at the various options.
If you intend to actively manage a share portfolio by regularly buying and selling different shares then the commissions will start to mount up. The shares which offer the greatest potential for high returns may also present the greatest risk to your capital. So unless you intend to invest directly in a broad range of stocks and shares, you should probably consider a collective investment scheme (such as a Unit Trust) instead.
The price of a company's shares is determined by the value of its assets and its potential to generate further revenue. This is often referred to as 'sentiment', but has nothing to do with being sentimental. The trade in stocks and shares, facilitated by market makers whose role is to quote both a buying and selling price for listed stocks and shares, is known collectively as the stock market.
Public Limited Companies (plcs) in the UK are listed on the FTSE All-Share index, with the 100 largest listed on the FTSE 100 which is usually just referred to as "the footsie". Companies who want to issue shares to the public but are not able to go for market flotation may choose the Alternative Investment Market (AIM) but these shares carry higher risk than those listed on the main stock market.
The second principal form of direct investment is bonds and gilts. Bonds are where the investor in real terms loans money to the bond's issuer, knowing in advance the sort of return they will get on their investment. Bonds are generally regarded as a low-risk investment, compared with shares. Gilts are issued by the UK government, so by buying gilts the investor is lending money to the Government. As the UK is regarded as a safe bet to honour its commitment to buyers of its stock, gilts are thought to be the safest forms of investment. The issuer guarantees to repay your capital at the end of the bond's term, and you get a guaranteed income or return throughout the investment period.
Bonds pay a predetermined interest each year to the holder and it important to note that the rate must be competitive with current interest rate levels at the time of issue. However, it should be remembers that if interest rates then rise, the return on your bond might not be as much as a deposits in a Building Society. For tis reason, bonds are regularly traded in the market place. However, it is always comforting to know that you will get your original money back on redemption as, whatever your political views, the Government is a fairly safe bet.
Corporate bonds are similar in structure to gilts - the significant difference is that they are issued by companies as a way of raising additional capital. Again, they pay an interest rate coupled to a promise to repay the capital on maturity.
However, with corporate bonds, the return of capital is not guaranteed. They are therefore a higher risk option, but pay a higher interest rate to attract buyers. So you must assess the guaranteed return of your capital with a Government bond against the potential for higher returns offered by the stock market, and your view of the stock market may be that prices are erratic, and investors cannot rely on all companies increasing the value of their shares.
The major potential pitfall of direct share investment is that any company is at the mercy of conditions in its own particular business sector, and even companies in generally profitable sectors can undergo bad times or harsh trading conditions. It takes experience and knowledge in order to participate sucessfully in direct share investment. Warning against putting all your eggs in one basket may seem a little obvious, but relevant in this context.
You should keep a close eye on how your investments are doing. Potential investors often find the prospect of constantly keeping track on their share portfolio too daunting and many individuals opt to take their first step into these markets via packaged investment plans (such as unit trusts or OEICS) rather than direct stocks and shares investment.
NOTE: This document is intended to provide a brief overview of the subject. It is not advocating direct or indirect investment in any form of securities, nor either is it disregarding it. It should not be read as a recommendation to use any particular product, as it does not take into account individual circumstances and attitudes.