The Market

Stock market investing 101 part 3

Filed in: , tax, fund managers, ftse, etf, stock market, stocks, income, trader, isa

Before starting to invest in stocks and shares it is as well to decide why and how. The right strategy can help investors through thick and thin because no one said stock market investing was an easy ride.

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Before starting to invest in stocks and shares it’s as well to decide why and how. The right strategy can help investors through thick and thin because no one said stock market investing was an easy ride.

In our first two articles we looked at why the stock market exists, what the costs and benefits are, how to go about researching stocks and how to get to grips with some of the key terms and concepts. But why invest at all? What is your goal?

A key reason that investors have returned to the stock market after the crash of 2008 is that leaving their money with a bank or a building society yields them nothing. In fact worse than nothing, because even the best savings rates at around 3% produce a loss in real terms with inflation running at a higher rate than that. So investing in stocks that produce dividend income at more than 4% looks attractive and they may also produce capital growth if their share price rises.

But remember “caveat emptor,” the motto of the London Stock Exchange – “the buyer beware.” Neither the dividend nor the capital gain are certain. So it is worth considering which investment strategy to use to lower the risk and/or increase the return.

Day trader
For some, stock market investing is a sort of sport. They engage in it with great intensity, prepared for the thrills and spills of fluctuating prices. Sometimes they win and sometimes they lose. There are plenty of people who claim to have made money buying and selling shares in quick trading, holding their shares for a few days, hours or even minutes before selling to reap a profit as the price rises. There have also been plenty of people who have lost money too. Day trading is a strategy requiring great dedication and plenty of research and analysis of the market and the trends that affect it. This may be for you or it may not be.

Investing for income
Investors in search of a steady stream of income and with less of an appetite for trading may choose to invest in stocks that pay a steady half yearly or quarterly dividend. They are not kept awake at night worrying whether share prices will move against them but they also need to be aware that dividends can be cut or cancelled altogether. Recent investors in BP, Royal Bank of Scotland, Lloyds Banking Group and Northern Rock know this only too well.

Investing for income is a valid strategy but it is as well to hold a variety of stocks to spread your risk. Indeed one way to do this is to buy a tracker fund, one that invests in stocks within a particular stock market index such as the FTSE 100 or the FTSE All share. And a good, cheap way of doing this is to buy shares in an exchange traded fund or ETF. These are quoted on stock exchanges just like the shares that these funds invest in. It’s important to read the prospectus for the ETF you’re considering investing in, to make sure of its terms and whether it provides income or whether the dividends on the fund are reinvested. An appealing aspect of ETFs is that shares in them can be bought and sold at any time the market is open and apart from the dealing costs, there are no other fees to pay. Managed funds incur management charges and need studying carefully. They are valued much less frequently and getting out of a fund is not as quick.

DIY or employing a manager
Whether to buy individual stocks or funds is an important decision to take and you can of course buy some of each. But it also raises the question of whether it might not be better to hire someone else to manage your money for you.

Stockbrokers, independent financial advisors (IFAs), banks and fund managers offer such services in one form or another. Stockbrokers in particular may offer “discretionary” services. If they are “execution only” they merely carry out instructions that you give them, buying, selling and holding the stock for you. A discretionary service is one where you agree with the broker his terms of reference – how much discretion you want him or her to use - and they report back to you periodically on the results they have achieved from investing your money for you. Make sure you understand their charges and when they are payable. Inevitably there are able brokers and not so able ones. It’s as well to research them in advance by searching the web, speaking to friends and reading their prospectuses and reports.

It’s also worth spending time thinking about how to avoid paying tax on your hard earned investments. After all, most people will be investing income on which they have already paid income tax and national insurance contributions. So what are the options and allowances?

Firstly, remember that each individual has a capital gains tax (CGT) allowance of £10,100 each year. So if your gains from buying and selling shares are lower than this figure in any tax year then you can avoid paying CGT.

Stocks and shares ISAs are a second option. The over all ISA limit for this year is £10,200, which can be invested in a cash ISA up to £5,100 with the balance in stocks and shares. Alternatively the entire allowance can be invested in stocks and shares. Again, stockbrokers, banks and IFAs will all advise you or offer you stocks and shares ISA arrangements. Go to a comparison web site such as or and do your homework or terms, conditions and costs. The great thing about ISAs is that you (and also your partner) get a new allowance every year and they save you paying income tax or CGT on your profits.

Lastly, consider a SIPP. Self invested personal pensions insulate you from taxes and also benefit from receiving a cash tax credit of 25% of the amount you invest. If you’re a higher rate taxpayer you will also get an additional tax break via your tax return.

Unlike ISAs however, although you can trade in and out of stocks within a SIPP you can’t take your money out until you retire. There are also management and dealing charges to take into account. There is a lot that is good about opening a SIPP, but just make sure you read the terms and conditions carefully so you understand the restrictions they impose as well as the benefits they offer. The investment options of buying individual stocks, funds, ETFs and discretionary investment services are usually available to SIPP investors

Above all, once you have digested the possible choices, checked the prices and charges and considered your strategy, take your time. Yes you may miss some investment opportunities but the chances are you will be able to seize others as they come along. Some of the most successful investors, such world famous Warren Buffett, take their time and invest long term in companies they understand and which have scope for growth over the long term.

Stock Market Investing 101 part 2

Filed in: , banks, tax, shareholder, ftse, shares, bp, investing, stocks, pe

"At close the FTSE was up 100 points on the day. Blue chips held up well despite profit taking and gilts taking a bashing.” Any the wiser?

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Stock Market Investing 101 part 2

“At close the FTSE was up 100 points on the day. Blue chips held up well despite profit taking and gilts taking a bashing.” Any the wiser?

As with most matters connected with financial services, when you invest in stocks and shares you find that relatively simple concepts are wrapped up in jargon that seems designed to cloud and confuse.
A good lesson to take on board therefore, is not to invest in anything you do not understand, or which has not been properly explained to you. However, at the same time, it is important to make the effort to get to know the language and do the research, in order to be well enough informed, to be able to make an investment decision.

Companies quoted on the stock exchange are broadly grouped together for ease of reference and comparison. For example health care, industrials, oil & gas and utilities among others. If we take a look at the banking sector, it does not take long to figure out which of the major high street banks’ shares are worth more and which pay dividends.

But share prices are just the tip of the iceberg. Unless we are going to take a complete shot in the dark we need to reach an understanding of the company we are considering investing in. First stop is the company’s annual report.

These are mines of information about what companies do, where, how and why they do it. Bear in mind that they only provide a picture of the company as it stands at the end of the company’s financial year. Quoted companies are also obliged to produce half yearly and quarterly results as well; these are worth looking at too. The key financial reports are: the balance sheet which records what a company owes or is owed, and how much cash it had in the bank at the end of the period; the profit and loss account or income statement, which shows how much money it earned and spent in its activities; and the cash flow statement, which shows what the company did with its cash during the year.

Reading and understanding financial statements takes time and practice. However, looked at in conjunction with the written statements in the annual report and especially the notes to the accounts, it should not take too long to figure out what the company does and how it is faring. Remember that apart from being a document required by law, an annual report is also a sales document for the company. For this reason it should only ever be one source for our research, especially as it is largely backward looking and therefore out of date by the time it is produced.
Fortunately there is a vast amount of other information available in print and online such as, Interactive Investor Citywire and a great many others whose job it is to generate new stories about companies. There is also a lot of research produced by stockbrokers, rating agencies and banks; all useful as sources to a greater or lesser degree. However, all should be treated with scepticism because none of them get all of it right all of the time and usually they have some kind of agenda. But if you research enough, and keep up-to-date with the latest news on the companies you are interested in, you will be in a better position to decide what is in your best interest as an investor.

Reading through the research, some terms and ratios come up repeatedly. What do they mean? “Earnings per share” (EPS) is a common one. It is arrived at by dividing the net profit, the “bottom line” shown in the profit and loss account, by the number of shares in issue. This indicates how much money the company is generating for its shareholders. “Price/earnings ratio” or PE, another measure, is arrived at by dividing the current price of the share by the EPS. This number, also referred to as the multiple of earnings, alongside EPS, is useful to compare with those of other companies to see which is producing the best result for the investor.

This does not mean that companies with low EPSs or PEs are necessarily bad investments. Perhaps they have room for growth, perhaps companies in their sector tend to have low EPS and PE ratios. If the PE is very high it suggests that the company’s shares are expensive, some hi-tech stocks are like this, but their potential for growth may be very great, like a Google or an Apple for example.
There is no substitute for getting to know a company, its products, how it conducts itself, whether it values shareholders, how it behaves towards its other stakeholders, whether it pays its management in proportion to their abilities and what its strengths, weaknesses, opportunities and threats are. But, other important considerations are things like the state of the economy as a whole, inflation, unemployment and, if they buy or sell goods or materials abroad, the effect that exchange rates may have on their costs or revenues.

For example, if you were to look at a graph of the share price for just about any company quoted on the London Stock Exchange covering the last five years, in almost every case you would notice a massive price fall following the collapse of Lehman Brothers, the New York investment bank, on 16th September 2008. It was a moment of panic in the financial markets when investors sold their shares to salvage their cash. Fortunately disasters of this sort do not happen too often, but this example does show how factors outside a business can radically affect its share price. No company is an island. All companies ply their trade within local, national and international economies, which affect them for better or for worse.

The same approach should be taken with all companies; do your research. Spend time studying the investment opportunity until you understand it and feel confident that you have reviewed as far as possible the risks involved and whether or not the likely return is fair compensation for taking that risk. No one can read the future with any great degree of certainty. So at times, as with any investment, even leaving your money with the building society, you have to make your decision. Because stuffing your cash under your mattress is probably not a worthwhile option!

Stock Market Investing 101 part 1

Filed in: banks, tax, shareholder, shares, stock market, bp, investing, stocks, isa, sipp

Richard Willsher shows, how with a little homework and a bit of cash, anyone can learn how to trade

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Stock Market Investing 101 part 1

Richard Willsher shows, how with a little homework and a bit of cash, anyone can learn how to trade.

On 6th March 2007 Royal Bank of Scotland shares were worth 602 pence each. By 20th January 2009 their price had fallen to just 10 pence and the government had had to step in and rescue the bank.

Lesson number one, investing in shares can be a rough ride. On the other hand, if you had bought your RBS shares on the day they bottomed out then by now, as the price sits at 49p, you would have more than quadrupled your money in not much more than 18 months.

Why have a stock market?
This may not be quite as dumb a question as it sounds. The original reason is to enable businesses to raise money though issuing shares. By buying them, investors become owners of these companies, in exchange for various benefits, which we’ll look at in a moment. However if the management of the business you invest in does not do a good job, does not make profits or grow the business, the shareholders may receive no benefits at all and may lose their money.

Therefore a key concept is that owning shares means sharing risk. And that is also why companies issue shares on public markets; to get shareholders to share risk or reduce their own. When a company issues shares it may use the capital it raises to grow its business. But it may also represent a big payday for the existing shareholders of the company, a time for the existing shareholders to cash in their chips. For them the stock market represents an“exit.” The new investor needs to decide if this means the company has really run out of steam and that its best is already behind it.

Some shares pay no dividend at all. Take a look at BP in this table. It formerly paid dividends at roughly the same rate as Royal Dutch Shell but because of the explosion at its Macondo well in the Gulf of Mexico it suspended its dividend payments. Others pay no dividends because they have no profits or they prefer to retain profits to grow their business. If their businesses do grow and there is demand for their shares then their shareholders may be well compensated by….

Price growth; the reason many investors choose to invest in shares. Let’s look at the same shares again:

Not very impressive. In fact, in the case of BP shares, pretty disastrous. Other, faster growing companies may see their share prices grow very rapidly in a short space of time. But there are several lessons to learn from this. Firstly, this is only a snapshot of the price progression since the beginning of 2010. If, for example, the similar snapshot were taken for the first 9 months of 2009 the result would be quite different, because the stock market as a whole reached its nadir in March of 2009 following the financial crisis. Secondly, prices go down as well as up. Thirdly, buying and selling shares at the right times is vital for achieving profits. Fourthly, it pays to invest in companies you understand and can reasonably expect to do well but… The unpredictable happens.

Buying shares involves costs as well as benefits. Firstly, dealing costs. These vary depending on which broker you use and can be as low as £6 per trade but as much as £15. Use comparison sites such as www. and savings-and-investments/ guides/stockbrokers- explained/the-cost-of- stockbrokers-compared/ to check on this. Such sites will also indicate administration charges payable to brokers for looking after your shares.

There will also be stamp duty to pay at a flat rate of 0.5%, which will be deducted by the broker. Then dividends will be taxed at 10%, 32.5% or 42.5% depending on your over all taxable income. Capital gains tax is payable on gains above the annual personal CGT allowance, which is currently £10,100. All told it can be expensive as compared with the profits made, although if the shares are held in a Stocks and Shares ISA or a Self Invested Personal Pensions, at least the investor can avoid the income and capital gains taxes. Charges are also disproportionate for smaller deals. The bigger the
trade, the lower the percentage cost.       

What Do share prices mean?
What moves a share price up or down can be divorced from the performance of a company. For example, in the case of Royal Dutch Shell, its business has not changed much since the beginning of the year yet its share price has been affected by events over at rival oil major BP.

Press reports, notes put out by stockbrokers’ analysts, the buying or selling behaviours of large shareholders, the general state of the economy and sentiment can all affect prices; quite apart from any positive or negative news from the company itself. The investor has to make up his or her own mind about an investment and not be swayed too greatly by the views of those who provide the noise surrounding the stock market. In a later article we will look at how to analyse stocks, what various ratios mean and how to arrive at buying or selling decisions.

One early decision to take is whether to invest in individual company shares, buy a basket of shares in the form of an index tracker or whether to let a fund manager look after your stock market investments for you. We will look at these in a later article too but for the time being something you might like to try is running a dummy or virtual portfolio. There are a number of websites, publications and iPad or phone apps that let you play around without having to spend any money. Try looking at The Financial Times, Interactive Investor The Share Centre or Hargreaves Lansdown This is fun but don’t forget that unless your goal is to be a day trader, buying and selling shares all day long, with all the stress that that involves, you will probably
be better off taking it slowly, analysing carefully what you want to invest in and waiting till the time is right to make your purchases or sales. There is no hurry. If you miss one opportunity,
there’ll be another along sooner or later; just keep your (virtual) cash and wait.

Next month Richard Willsher breaks through stock market jargon and examines how economy, inflation and exchange rates affect share prices

Diamonds are Forever

Filed in: london, sierra leone, war crime, ivory coast, ingle & rhode, boodles, commodities, angola, africa, hirsh

When the media spotlight fell on the recent war crimes’ trial of Liberia’s former president Charles Taylor it illuminated ethical concerns over the origin of diamonds. Has it made their sparkle much less attractive?

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Diamonds are Forever
Richard Willsher

When the media spotlight fell on the recent war crimes’ trial of Liberia’s former president Charles Taylor it illuminated ethical concerns over the origin of diamonds. Has it made their sparkle much less attractive?

“Blood”, “conflict”, “war”, “hot” or “converted” diamonds are those used to finance war and conflict. Angola, Ivory Coast, The Democratic Republic of Congo (formerly Zaire), The Republic of Congo (Congo Brazzaville), Sierra Leone and Zimbabwe are all countries that have been reported to be sources of such stones. Until 2003 when the Kimberley Process Certification Scheme (KPCS) was introduced under United Nations General Resolution 55/56, there was no system to assure buyers of rough diamonds that they did not originate from war zones.

The KPCS set out a series of warranties for consignments of stones and established principles by which the diamond industry was to regulate itself. These include, among others, only trading with counterparties that provide KPCS declarations on their paperwork; not buying diamonds from suspect sources and not assisting in buying or selling diamonds from such sources. But while the KPCS has been largely successful, with the exception of two Canadian brands, Polar Bear and CanadaMark, which carry a minute laser engraved serial number, the origins of diamonds cannot be proved.

What of those which came to market before 2003? And how ethical do we want to be? People who dig for precious stones, gold and many other commodities, including oil are often in remote, lawless regions of the world. If human rights, health and safety, the environment and local political regimes are issues we care about, then we would need to examine our conscience before engaging with any of these substances, that are woven into the fabric of most lifestyles across the globe.

Diamonds remain objects of desire and perhaps also worthwhile investments. As Michael Wainwright one of the latest generation of the family that owns Boodles, the 200 year-old London based jeweller puts it, “Items of diamond set jewellery are beautiful things to own and wear and may turn out to be not a bad investment.” He adds that no rate of return can be placed upon such “investments” though the better the colour and the quality the better they fare. That is consistent with other collectable investments such as art, wine and furniture.

There is evidence, published by Antwerp diamond dealers Ajediam that over a period of 50 years the price of wholesale diamonds has consistently risen and produced quite reasonable returns. A visit to is essential however to grasp the detail and very strict definitions of the diamonds which fall within their price trend graph.

Four Cs
Buying cut diamonds boils downs to “four Cs”. The “cut” or quality of craftsmanship used to shape the stone. The colour. White diamonds are most common but as Jason-Paul Hirsh of London jewellers Hirsh points out, other natural colours such as pink, blue and yellow are rarer and can be extremely valuable.

Clarity is the third C and refers to whether there are blemishes within the stone. Fourth is carat, the weight of the stone. One carat equals 0.2 grammes. While it is generally true that the bigger the stone the higher the price, there are certain key price points. A one-carat stone is likely to cost significantly more than one weighing fractionally less than one-carat.

Hirsh goes on to say that diamonds are not like any other commodity; the market has characteristics that do not commend it for investment. “There is a massive stock of diamonds that is not being released. In other words it is being held to keep the price inflated.” The control of the market is largely in the hands of the Diamond Trading Corporation, formerly De Beers, which has agreements in place with producer countries such as Russia, Canada and Australia. “The second reason is that diamonds have been artificially made since the 1960s and the manufacturers are getting better at it. This will also have an effect on the market that no one can really predict.” He adds however, that those rarer pink and other natural coloured diamonds can produce good investment returns as supply cannot meet demand.

The investor still needs to square his or her ethical concerns. A jeweller with a specialist, ethical approach is Ingle & Rhode, based in London’s West End. This firm uses fair trade gold and buys its diamonds direct from producers rather than through wholesalers.

David Rhode points out that the greatest investment returns are likely to come from diamonds that form part of highly collectable pieces of jewellery. Such pieces might be from a well-known designer such as Cartier and may have been owned by celebrities in the past. Such jewellery fetches high prices at auction.

Investing in diamonds is highly subjective and requires a lot of background knowledge and good advice. Diamonds do not pay interest and need to be securely stored and insured, both of which cost money. But they can be passed from generation to generation and they are also easily transported. This explains why refugees have often taken their stones and jewellery with them and left their more cumbersome possessions behind. Diamonds have many appealing features and are an asset class that many treasure, despite the uncertainty of their origin and of the investment returns they may produce.

Golden Opportunity?

Filed in: hsbc, gold, etf, american eagles, world gold council, bullion, commodities, investing, kruggerands, britannias

It is easy to invest in gold. Knowing whether now is the right time to do so, is not quite so clear.

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Golden Opportunity?
Richard Willsher

It is easy to invest in gold. Knowing whether now is the right time to do so, is not quite so clear.

Over the last month the price of gold has set a series of new records. At the time of writing, the price set daily in London is US$1,341 or £852.78 per ounce. Looking at the bigger picture, research from the World Gold Council (WGC), which represents the world’s leading gold mining companies, suggests that the long-term trend for the price of gold is upward. However, as the graph shows, it is not necessarily a smooth ride. Between 1980 and 2000 the price shows a marked downward swing.

Given the rate at which the gold price has risen lately, investors may be asking themselves whether they should buy some; but why would one want to? Charles Morris, Head of Absolute Return at HSBC Global Asset Management (UK) Ltd has some answers. “You don’t buy gold to become rich,” he says. “You buy it to preserve wealth. At a time when we are in a wealth destruction cycle, gold comes into its own. The case for gold is that it is real money and if there is any problem in the financial system then that gold will become very valuable indeed. There are lots of things to worry about out there and there are still some long-term problems in the economy and in the financial sector. We want to own things that can survive these environments; and gold is a very liquid asset.”

How to invest
The easiest way to invest is to buy either coins or small bars. Coins include South African Krugerrands, British Britannias or American Eagles for example. These vary in price depending on the size of the coin and the state of the market at any time. Coins range in size from one twentieth of an ounce to as much as 1,000 grammes, with various sizes in between. They can be purchased from bullion dealers and should not be confused with numismatic coins collected by coin collectors.

Bullion dealers also sell bullion bars, which range from as little as one gramme to 1,000 grammes. A good source of information on this is which lists the details of accredited gold bar manufacturers. To find a bullion dealer for coins or bars, a good place to start is the WGC’s directory at

The WGC adds this useful advice, “Bullion bars and coins are priced on the basis of their fine gold content. However, different premiums may be charged by the same dealer, depending on the availability of each type of bar or coin. You may also want to check, at the time of purchase, how much commission would be charged to buy back any bars or coins should you wish to trade them in the future. Apart from your individual preferences for the way bullion coins and bars look, the premium charged over and above the gold price would probably be the deciding factor.”

Gold accounts and funds
Other ways to invest in gold include opening a gold account. The investor buys gold through a bullion brokerage, which is then held by a bank. These accounts are termed “allocated” or “unallocated,” with an allocated account, the bank stores the gold and the investor has title to it. The bank will charge a fee to cover storage and insurance. Unallocated accounts do not hold specific pieces of gold bullion allotted
to particular clients but clients hold part of a larger quantity. These accounts do not incur the same charges but the bank may reserve the right to lease out the gold.

A third and increasingly popular route to owning gold is to buy a share in a fund that has invested in gold. These can include unit trusts and investment trusts but these invest in the shares of gold mining companies whose prices tend to be influenced by the rises and falls of the gold price. However, as with other share prices, they are also affected by factors that may have little to do either with the price of gold or the performance of particular funds.

Buying shares in exchange traded funds (ETF), which are quoted on the Stock Exchange, provides a more direct link to the price of gold. These track a gold price index and apart from normal share trading costs do not bear any other management charges or commissions which unit trusts and investment trusts typically do.

One of the downsides with investing in gold is that while you hold it, it provides no income; no interest or dividend for example, which other investments do. Therefore whether or not gold is good to invest in will depend purely and simply on its price. Looking at the graph shown above, one question sticks out like a sore thumb: is this the time to invest? Some commentators argue that in real terms, allowing for the rate of inflation, gold is still a good buy. Others, who have charted the gold price in relation to previous recessions, say that the price tends to bubble in these periods and then fall back and that this may be happening now.

For sure there will be price fluctuations whenever you buy. Gold is an ungoverned market where supply and demand determine the price. Right now there is plenty of demand but how long this may persist is anyone’s guess. In the final analysis a couple of facts about gold are enduring, one is that it has been prized by human beings for millennia and this looks unlikely to change just yet. Moreover, gold is generally in short supply and becoming increasingly difficult to mine or recover by recycling. These support the case for investing in gold, but as with so much successful investing, timing has a very big part to play.