Investing in Shares For Dummies, UK E-Book

David Stevenson

• Herausgeber: John Wiley & Sons
• Kategorie: Ratgeber
• Sprache: Englisch
• Veröffentlichungsjahr: 2021

Seitenzahl: 687

Beschreibung

Get your slice of the economic pie and then some, in the UK and beyond

Investing in shares can help build anyone's financial standing—move over, economic elite! People from all walks of life can easily grow their wealth and secure money for the future. Investing in Shares For Dummies takes a friendly, non-jargony approach for new and not-quite-advanced-yet shareholders. This book walks you through the investment orchard so you can cherry-pick shares that will turn you a tidy profit (mmm, tasty.) You'll also learn to stay calm and ride the unavoidable waves of the markets. Over the long term, you stand to earn greater returns (translation: more money) than if you invested in real estate or bonds alone. And who isn't keen on the idea of more money?

This latest edition is up-to-date with the top investing apps, investing with ETFs, thematic investing, trading shares in the US and other nations, and everything else you might be curious about as you start building a rock-solid portfolio. With Investing in Shares For Dummies, you will:

• Get to know the stock markets to decide if shares investing is right for you
• Plan your investing strategy and take risks that make sense for your financial situation
• Research shares before you buy: analyse industries, read stock charts and find company data
• Make investment decisions that maximise profits, lower costs and minimise your tax bill

Investing in Shares For Dummies gives you the sound advice and proven tactics you need to play the markets and watch your profits grow.

Leseprobe

Investing in Shares For Dummies®, 3rd Edition

Published by: John Wiley & Sons, Ltd., The Atrium, Southern Gate, Chichester,www.wiley.com

© 2022 by John Wiley & Sons, Ltd., Chichester, West Sussex

Media and software compilation copyright © 2022 by John Wiley & Sons, Ltd. All rights reserved.

Registered Office

John Wiley & Sons, Ltd., The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book, please see our website at www.wiley.com.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the permission of this publisher.

Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book.

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: WHILE THE PUBLISHER AND AUTHORS HAVE USED THEIR BEST EFFORTS IN PREPARING THIS WORK, THEY MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES REPRESENTATIVES, WRITTEN SALES MATERIALS OR PROMOTIONAL STATEMENTS FOR THIS WORK. THE FACT THAT AN ORGANIZATION, WEBSITE, OR PRODUCT IS REFERRED TO IN THIS WORK AS A CITATION AND/OR POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE PUBLISHER AND AUTHORS ENDORSE THE INFORMATION OR SERVICES THE ORGANIZATION, WEBSITE, OR PRODUCT MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING PROFESSIONAL SERVICES. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR YOUR SITUATION. YOU SHOULD CONSULT WITH A SPECIALIST WHERE APPROPRIATE. FURTHER, READERS SHOULD BE AWARE THAT WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ. NEITHER THE PUBLISHER NOR AUTHORS SHALL BE LIABLE FOR ANY LOSS OF PROFIT OR ANY OTHER COMMERCIAL DAMAGES, INCLUDING BUT NOT LIMITED TO SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR OTHER DAMAGES.

For general information on our other products and services, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax [phone]. For technical support, please visit https://hub.wiley.com/community/support/dummies.

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

A catalogue record for this book is available from the British Library.

Library of Congress Control Number: 2021950170

ISBN: 978-1-119-83221-8

ISBN 978-1-119-83222-5 (ebk); ISBN 978-1-119-83223-2 (ebk)

Investing in Shares For Dummies®

To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Investing in Shares For Dummies Cheat Sheet” in the Search box.

Table of Contents

Cover

Title Page

Copyright

Introduction

About This Book

Foolish Assumptions

Icons Used in This Book

Beyond This Book

Where to Go from Here

Part 1: The Essentials of Investing in Shares

Chapter 1: Exploring the Basics

Understanding the Basics

Getting Prepared before Starting

Knowing How to Pick Winners

Boning Up on Strategies and Tactics

Getting Good Tips

Chapter 2: Sizing Up Your Current Finances and Setting Goals

Establishing a Starting Point

It’s All about the Cash … (Flow)!

Setting Your Sights on Your Financial Goals

Chapter 3: Defining Common Approaches to Investing in Shares

Matching Shares and Strategies with Your Goals

Investing for the Future

Investing for a Reason

Investing in Your Personal Style

Chapter 4: Assessing the Risks

Exploring Different Kinds of Risk

Minimising Your Risk

Weighing Risk against Return

Chapter 5: Getting to Know the Stock Markets

Knowing How Indices Are Measured

Using the Indices

Checking Out Major Markets

Identifying Markets for Smaller Companies

Part 2: Before You Start Buying

Chapter 6: Gathering Information

Looking to Stock Exchanges for Answers

Understanding Shares and the Companies They Represent

Staying on Top of Financial News

Reading (and Understanding) the Financial Pages

Using News about Dividends

Evaluating (Avoiding?) Investment Tips

Chapter 7: Finding a Broker

Defining the Broker’s Role

Identifying the Options: Online, Offline, Advisory and Leverage

Free Share Dealing: What’s the Catch?

Choosing a Broker

Discovering Various Types of Brokerage Accounts

Judging Brokers’ Recommendations

Robo Advisers: Letting the Machine Carry the Load

Chapter 8: Investing for Growth

Becoming a Value-Orientated Growth Investor

Getting Tips for Choosing Growth Shares

Exploring Small-Caps and Speculative Shares

Chapter 9: Investing for Income

Understanding Income Shares

Analysing Income Shares

Exploring Typical Income Shares

Chapter 10: Using Basic Accounting to Choose Winning Shares

Recognising Value When You See It

Accounting for Value

Part 3: Picking Winners

Chapter 11: Decoding Company Documents

Slices from the Big Cheese: The Annual Report

Getting a Second Opinion

Compiling Your Own Research Department

Chapter 12: Analysing Industries

Interrogating the Industries

Outlining Key Industries

Chapter 13: Being Prepared for a Changing World

Charging at Bullish Opportunities

Hugging Tight with a Bearish Outlook

Discussing Important Info for Bulls and Bears

Chapter 14: Getting Active and Alternative with Investment Funds

Understanding Investment Trusts

Exploring the Rise of Alternatives and Investment Trusts

Deciding Whether Investment Trusts and Index Trackers Are Right for You

Investigating the Rise of Crowdfunding

Part 4: Investment Strategies and Tactics

Chapter 15: Taking the Bull (or Bear) by the Horns

Bulling Up

Bearing Down

Straddling Bear and Bull: Uncertain Markets

Chapter 16: Choosing a Strategy That’s Just Right for You

Laying Out Your Plans

Allocating Your Assets – Diversification Is Key

Knowing When to Sell

Chapter 17: Using Your Broker and Trading Techniques

Checking Out Brokerage Orders

Buying on Margin

Going Short and Coming Out Ahead

Understanding Leveraged Shares

Chapter 18: Getting a Handle on DRIPs and PCA … ASAP

Dipping into DRIPs

The One-Two Punch: Pound Cost Averaging and DRIPs

Chapter 19: Looking at What the Insiders Do: Corporate Capers

Tracking Insider Trading

Looking at Insider Transactions

Observing Corporate Share Buybacks

Staging a Comeback with Share Scrips

Chapter 20: Considering Tax Benefits and Liabilities

Paying through the Nose

Sharing Your Gains with the Tax Inspector

Understanding There’s No Such Thing as a Free Share

Taking Advantage of Tax Advantages

Comparing ISAs and Pensions

Chapter 21: Creating a Smarter Portfolio with Lower-Cost Funds and ETFs

Understanding Why Costs Matter

Acting on the Advice of Academics

Considering Tracking an Index

More Competition Means Lower Fees for ETF Investors

Examining the Importance of Leveraged Trackers

Looking at Another Acronym: The Remorseless Rise of ESG

Keeping Your Eyes Open When Investing in ETFs

Chapter 22: Recognising the Relentless Rise of Technology

Looking Closer at How Digitisation Has Changed Everything

Focusing on the Remorseless Rise of e-Commerce

Considering China’s Influence

Delving Deeper into the World of AI, Big Data and Robotics

Understanding Investment Opportunities in the Cloud and Online Gaming

Going Green – How Renewables Are Creating New Investing Prospects

Looking at Digital Currencies and the Blockchain

Going Global — Fintech Is Here

Preparing for the Coming Biotech and Genomics Revolution

Growing and Raising Food in the Food Revolution: Food 2.0

Part 5: The Part of Tens

Chapter 23: Ten Warning Signs of a Share’s Decline

Earnings Slowdown

Sales Slowdown

Exuberant Analyst Reports That Defy Logic

Insider Selling

Dividend Cuts

Increased Negative Coverage

Industry Problems

Political Problems

Too High or Unsustainable Debt

Funny Accounting: No Laughing Here!

Chapter 24: Ten Signals of a Share Price Increase

Rise in Earnings

Increase in Assets Because Debts Are Stable or Decreasing

Positive Publicity for the Industry

Heavy Insider or Corporate Buying

Increased Attention from Analysts

Rumours of Takeover Bids

Consumer Desire for the Brand

Strong or Improving Bond Rating

Powerful Demographics

Low P/E Relative to Industry or Market

Chapter 25: Ten Ways to Protect Yourself from Fraud

Be Wary of Unsolicited Calls and Emails

Get to Know the FCA

Don’t Invest If You Don’t Understand

Question the Promise of Extraordinary Returns

Verify the Investment

Check Out the Broker

Beware of the Pump-and-Dump

Watch Out for Short-and-Abort

Remember That Talk Is Cheap (Until You Talk to an Expert)

Recovering (If You Do Get Scammed)

Chapter 26: Ten Challenges and Opportunities for Stock Market Investors

Debt, Debt and More Debt

A New Monetary Norm

Central Banks Mess Up

The Return of Inflation

Pension Crisis

Emerging Markets

China’s Rise

The Green Energy Transition

Dangers from Out of the Blue

The One Certainty

Part 6: Appendixes

Appendix A: Resources for Investors in Shares

Financial Planning Sources

The Language of Investing

Textual Investment Resources

Investing Websites

Investor Associations and Organisations

Stock Exchanges

Finding Brokers

Investment Sources

Sources for Analysis

Tax Benefits and Obligations

Fraud

Appendix B: Financial Ratios and Accounting Terms

Liquidity Ratios

Operating Ratios

Solvency Ratios

Common Size Ratios

Valuation Ratios

Other Useful Accounting Terms

Index

About the Authors

Advertisement Page

Connect with Dummies

End User License Agreement

List of Tables

Chapter 2

TABLE 2-1 John Smith. Investor: Personal Assets as of December 31, 2021

TABLE 2-2 Listing Personal Liabilities

TABLE 2-3 Working Out Your Personal Net Worth

TABLE 2-4 Listing Your Income

TABLE 2-5 Listing Your Expenses (Outgoings)

TABLE 2-6 Looking at Your Cash Flow

Chapter 3

TABLE 3-1 Types of Investors, Financial Goals and Shares

TABLE 3-2 Comparing the Yields of Various Investments

Chapter 5

TABLE 5-1: The Top Ten Shares of the FTSE 100 Index in April 2021

Chapter 6

TABLE 6-1 Deciphering Tables

TABLE 6-2 The Life of the Half-yearly Dividend

Chapter 8

TABLE 8-1 Grobaby PLC P&L Account

TABLE 8-2 Grobaby PLC Balance Sheet

Chapter 9

TABLE 9-1 Comparing Yields

Chapter 14

TABLE 14-1 Pros and Cons to Infrastructure Spectrum

TABLE 14-2 Pros and Cons to the Property Spectrum

Chapter 17

TABLE 17-1 Looking at Well-Known Betas

Chapter 18

TABLE 18-1 Pound Cost Averaging (AL)

Chapter 20

TABLE 20-1 Differentiating between ISAs and Pensions

Chapter 21

TABLE 21-1 Observing How Charges Mount Up Over the Years

TABLE 21-2 Top Ten on the FTSE 100 ETFs

TABLE 21-3 Predicting Returns over Three Days

TABLE 21-4 How Leveraged Shares Can Amplify Returns over Months

List of Illustrations

Chapter 13

FIGURE 13-1: The UK age pyramid for 2021.

FIGURE 13-2: UK interest rates over the very long term.

Guide

Cover

Title Page

Copyright

Table of Contents

Begin Reading

Index

About the Authors

Pages

i

ii

1

2

3

4

5

6

7

8

9

10

11

12

13

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

31

32

33

34

35

36

37

38

39

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

245

246

247

248

249

250

251

252

253

254

255

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

278

279

280

281

282

283

284

285

286

287

288

289

291

292

293

294

295

296

297

298

299

300

301

302

303

304

305

306

307

308

309

310

311

312

313

315

316

317

318

319

320

321

323

324

325

326

327

328

329

331

332

333

334

335

336

337

338

339

340

341

342

343

344

345

346

347

348

349

350

351

352

353

354

355

356

357

358

359

361

362

363

364

365

366

367

368

369

370

371

372

373

374

375

376

377

378

379

380

381

Introduction

Houses, gold, tulips, bitcoin … our idea of what constitutes a good investment has changed dramatically over time, but one precious, valuable idea still holds true: that shares over the long term have been a great investment and have without doubt made their intrepid ‘holders’ returns of between 5 and 7 per cent per annum over many decades. Obviously that optimistic assessment requires a huge caveat, perhaps even a flashing warning sign of epic proportions, loudly proclaiming that investing in shares can be a rollercoaster ride!

Anyone piling their hard-earned fortune into the stock market in 2007 or January 2020 would soon have realised that shares (also called equities or stocks) can be hugely volatile and that you can lose your money almost overnight. Remember the dark days of early winter 2008 (or February 2020) when the financial markets stood on the edge of catastrophe and shares were plunging by 5 per cent one day and 10 per cent the next. Scary stuff, but within 12 months, the markets had staged a remarkable recovery and some stocks had more than trebled in value. The moral of the story is simple: Investing in shares can sometimes be fun, often risky, but also frequently rewarding, especially if you’re patient, careful and diligent. This book can definitely help you avoid the mistakes others have made and can point you in the right direction.

Explore the pages of this book and find the topics that most interest you regarding the world of share investing. Understanding what not to do can be just as important as working out what to do. The single difference between success and failure, between gain and loss, boils down to one word: knowledge. Take this book as your first step in a lifelong learning adventure.

About This Book

No one knows anything in the paranoid world of investing. Every day experts traipse onto TV screens to discuss where ‘the markets’ might go tomorrow … or next week … or even next year. Trust us when we say that it’s all hocus pocus – no one knows anything for sure. In fact, you might have a better handle on what really matters in the global markets than the ludicrously overpaid hedge fund maestro sitting in his office in Mayfair. Stock markets are a volatile brew of common sense, wisdom based on decades of experience of ‘what works’ and an inkling of the ebb and flow of human emotion. Master these criss-crossing currents and you might just build a sensible investment portfolio. Hopefully this book helps you navigate these stormy, ever-changing waters.

This book is designed to give you a realistic approach to making money by investing in shares. It provides the essence of sound, practical share investing strategies and insights that have been market tested and proven from nearly a hundred years of stock market history.

Investing in Shares For Dummies, 3rd Edition, is also a book that is quite different from the ‘get rich with shares’ titles that cram the bookshelves. It doesn’t take a standard approach to the topic; it doesn’t assume that shares are a sure thing and the be-all and end-all of wealth building. At times in this book, we tell you not to invest in shares. This book can help you succeed not only in up markets but also in down markets. Bull markets and bear markets come and go, but the informed investor can keep making money no matter what. To give you an extra edge, we have tried to include information about the investing environment for shares.

In this third edition of this book, we focus on how investing has been changed dramatically by the advent of new technologies. In particular, we investigate the following:

How Internet-based share dealing has changed everything

Why robo advisers might be a cheap, easy-to-access way forward for many investors

Why technology is driving much of theme-based, big-trend investing and how you can get involved with these big changes

How the rise of passive investing through index tracking funds has helped democratise investing

How the changed global macroeconomic environment has impacted investing post pandemic

Foolish Assumptions

We reckon you’ve picked up this book for one or more of the following reasons:

You’re a beginner and want a crash course on share investing that’s an easy read.

You’re already a share investor, and you need a book that allows you to read only those chapters that cover specific share investing topics of interest to you.

You need to review your own situation with the information in the book to see if you missed anything when you invested in that hot share that your sister-in-law recommended.

You need a great gift! When Uncle Fred is upset over his poor share picks, you can give him this book so he can get back on his financial feet. Be sure to get a copy for his broker, too. (Odds are that the broker was the one who made those picks to begin with.)

Icons Used in This Book

We use icons, which are little pictures in the margins, to point out information. Here are the icons we use:

This icon flags a particular bit of advice that just may give you an edge over other investors.

When you see this icon, we’re reminding you about some information that you should always keep stashed in your memory, whether you’re new to investing or an old pro.

Pay special attention to this icon because the advice can prevent headaches, heartaches and financial aches.

The text attached to this icon may not be crucial to your success as an investor, but it may enable you to talk shop with investing gurus and better understand the financial pages of your favourite business publication or website.

Beyond This Book

In addition to the material in the print or e-book you’re reading right now, this product also comes with some access-anywhere goodies online. Check out the free Cheat Sheet at www.dummies.com. Just search for investing in shares UK.

If you do fancy delving a bit more deeply into these ideas, then you may also want to check out David’s personal investing blog at www.adventurousinvestor.com or maybe if passive, index tracking funds spark your interest, investigate www.etfstream.com.

Where to Go from Here

We don’t expect you to read it cover to cover, although we’ll be delighted if you read every word! Instead, this book is designed as a reference tool. Feel free to read the chapters in whatever order you choose. You can flip to the sections and chapters that interest you or those that include topics that you need to know more about.

Because every chapter is designed to be as self-contained as possible, it won’t do you any harm to cherry-pick what you really want to read. But if you’re like us, you still may want to check out every chapter because you never know when you might come across a new tip or resource that will make a profitable difference in your share portfolio. We want you to be successful so that we can brag about you in the next edition.

Part 1

The Essentials of Investing in Shares

IN THIS PART …

Get a better understanding of the basics of buying shares before you make your first investment.

Identify what you need to scrutinise your own situations and financial goals as much as you scrutinise shares.

Take stock of your current needs, goals and risk tolerance before you invest.

Discover how to determine what you need to know in order to choose the stocks that best suit you.

Chapter 1

Exploring the Basics

IN THIS CHAPTER

Knowing the essentials

Doing your own research

Recognising winners

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 people to invest in the likes of British Gas and British Telecom) changed everything. Suddenly everyone seemed to have amassed a small portfolio of privatised companies as well as shares in building societies such as Halifax who’d chosen to ‘demutualise’ and ‘list’ 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 years later adventurous types even took to investing in the companies of ‘tomorrow’ – think Amazon or Google – 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 – see Chapter 15 for more on these). Share prices tumbled worldwide and everyone declared that they were much the wiser.

Now, of course, everyone knows 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 – the Global Financial Crisis – came along and the rest is history. Perhaps this time everyone has learned their lesson … or perhaps not! Shares have bounced back in value, which rather suggests that the animal spirits of investing are alive and kicking. And 2020 experienced another exciting roller coaster ride as markets plunged and then soared, and those stocks such as Amazon and Google that were once a bit ‘spivvy’ suddenly turned into ‘must have’.

One might rather cynically conclude after these serial booms and busts that many investors really hadn’t known exactly what they were investing in. If they’d 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, which we discuss in this chapter.

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 ‘How is your wife?’ He responded ‘Compared to what?’ You need to apply the same attitude to stocks. When you’re asked ‘how are your shares?’, you may be able to say that they’re doing well – especially when compared to an acceptable ‘yardstick’ like an index (such as the FTSE 100 or the FTSE All Share). 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 stockbroker’s account or go to a website to click ‘buy shares’. 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 Starting

Gathering information is critical to your plans for investing in shares. You need to gather information on the shares you’re 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 what’s happening to the company whose shares you’re 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 you’re 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 ‘meat’ of picking shares. Successful share picking isn’t mysterious, but it does take some time, effort and analysis. This may sound like a lot of work but it’s worth it, because shares are an important part of most investors’ portfolios. Read the following section and be sure to ‘leap frog’ to the relevant chapters.

Recognising the value of shares

Imagine that you like eggs and you’re 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 companies’ shares. The supermarket is the stock market. What if two brands of eggs are similar, but one costs £1 while the other costs £1.50? 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 – though if you’re so minded, you might scrutinise the label for mention of free range.

The eggs at £1.50 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 eggs is old, of poor quality and priced at £1 and the other brand is fresher, of superior quality and also priced at £1, which would you buy? Of course, you’d take the good brand because they’re better eggs. Perhaps the lesser eggs are an acceptable purchase at 50 pence, but they’re definitely overpriced at £1. The same example works with shares. A badly run company isn’t a good choice if you can buy a better company in the marketplace at the same – or a better – price.

Comparing the value of eggs may seem overly simplistic, but doing so does cut to the heart of investing in shares. Eggs and egg prices can be as varied as companies and share prices. As an investor, you must make it your job to find the best value for your investment cash. (Otherwise you get egg on your face. We bet you saw that one coming.)

Understanding how market capitalisation affects share values

You can determine the value of a company (and thus the value of its shares) in many ways. The most basic way to measure this value is to look at a company’s market value, also known as market capitalisation (or market cap). Market capitalisation is simply the value you get when you multiply all the number of outstanding shares of a particular company by the price of a single share.

Calculating the market cap is easy. It’s the number of shares outstanding multiplied by the current share price. If the company has 1 million shares outstanding and its share price is £10, the market cap is £10 million.

Small cap, mid cap and large cap aren’t references to headgear; they’re references to how large the company is as measured by its market value. Here are the four basic categories of market capitalisation:

Fledglings:

These shares are sometimes known as

micro-caps

or

tiddlers.

They’re small and very risky.

Small caps:

These shares may fare better than the fledglings and still have plenty of growth potential. The key word is ‘potential’.

Mid caps:

For many investors, this category offers a good compromise between small caps and blue chips. They offer much of the safety of the big companies while retaining a part of the growth potential of small caps.

Blue chips:

These are the established heavy hitters and are ideal for the cautious investors who want the potential for steady appreciation with greater safety. These companies tend to be represented in something called the FTSE 100 Index of top, ‘blue chip’ companies. We explain more about indices in

Chapter 5

.

From a safety point of view, the company’s size and market value do matter. All things being equal, large cap companies are considered safer than small cap companies. However, small caps shares have greater potential for growth. Compare these companies to trees: Which tree is stronger – a sturdy oak tree or a newly planted sapling? In a great storm, the oak has a chance of survival, while the young tree has a rough time. But you also have to ask yourself which tree has more opportunity for growth. The oak may not have much growth left, but the sapling has plenty of growth to look forward to – assuming that climate change hasn’t resulted in all those saplings dying.

For investment beginners, comparing market cap to trees isn’t so far-fetched. You want your money to grow without becoming dead wood.

Although market capitalisation is important to consider, don’t invest (or not invest) based on market capitalisation only. It’s just one measure of value. As a serious investor, you need to look at numerous factors that can help you determine whether any given share is a good investment. Keep reading – this book is full of information to help you decide.

Sharpening your investment skills

Investors who analyse the company can better judge the value of the shares and profit from buying and selling them. Your greatest asset in investing is knowledge (and a little common sense). To succeed in the world of share investment, keep in mind the following key success factors:

Analyse yourself.

What do you want to accomplish through your investment in shares? What are your investment goals?

Chapter 2

can help you figure this out.

Know where to get information.

The decisions you make about your money and the shares to invest in require quality information. If you want help with information sources, turn to

Chapter 3

.

Understand why you want to invest in shares.

Are you seeking appreciation (capital gains) or income (dividends)? Look at

Chapters 8

and

9

for information on these topics.

Do your research.

Look at the company whose shares you’re considering, to see whether it’s a profitable company worthy of your investment cash.

Chapters 10

and

11

help you scrutinise the company.

Choosing a successful share also means that you choose a winning industry.

You frequently see share prices of mediocre companies in ‘hot’ industries rise higher and faster than solid companies in floundering industries. Therefore, choosing the industry is important. Find out more about analysing industries in

Chapter 12

.

Understand how the world affects your shares.

Shares succeed or fail in large part due to the environment in which they operate. Economics and politics make up that world, so you should know something about them.

Chapter 14

covers these topics, but also take a look at

Chapter 2

.

Understand and identify megatrends.

Doing so makes it easier for you to make money. This edition spends more time and provides more resources helping you see the opportunities in emerging sectors and even avoid the problem areas (see

Chapter 13

for details).

Use investing strategies like the experts do.

In other words, how you go about investing can be just as important as what you invest in.

Chapter 16

highlights techniques for investing to help you make more money from your shares.

Keep more of the money you earn.

After all your great work in picking the right shares and making big money, you should know about keeping more of the fruits of your investing. We cover the taxation of share investment in

Chapter 20

.

Sometimes, what people tell you to do with shares isn’t as revealing as what people are actually doing.

This is why we like to look at company insiders before we buy or sell that particular share. To find out more about insider buying and selling – not to be confused with ‘insider dealing’, which is illegal – read

Chapter 19

.

Actually, every chapter in the book offers you valuable guidance on an essential aspect of the fantastic world of shares. The knowledge you pick up and apply from these pages has been tested over nearly a century of share picking. The investment experience of the past – the good, the bad and some of the ugly – is here for your benefit. Use this information to make a lot of money (and make us proud!). And don’t forget to check out the Appendixes.

Boning Up on Strategies and Tactics

Successful investing isn’t just what you invest in, it’s also the way you invest. We are big on strategies such as trailing stop losses. You can find out more about these in Chapter 17.

Buying shares doesn’t always mean that you must visit a stockbroker or that it has to be hundreds of shares. You can buy shares for pennies and use programmes such as dividend reinvestment plans. Chapter 18 tells you more.

Getting Good Tips

In Chapter 21 we place our finger firmly on the pulse of the market and look at some major new innovations sweeping through the financial services sector such as and index tracking funds and exchange traded funds (ETFs). We look at why they can be useful and what you need to look out for! Used sensibly, these ‘low-cost’ funds – the managers charge a very small amount of money in fees – can make a huge difference to your long-term investment plans.

Protecting yourself from the risk of losing money (known as downside exposure) is what separates investors from gamblers, and Chapter 23 gives you ten warning signs of a share’s decline. We know when we see some of the signs that (at the very least) we need to put on a stop loss order (Chapter 17) so that we can sleep at night. Sometimes the return on your money is not as good as the return of your money.

If shares give off ‘negative signals’, then it follows that they give off ‘positive’ ones as well. Chapter 24 gives you ten of the best signs that are commonly seen before a share is ready to rise. What better time to jump in?

You should be aware about the risks of fraud. It’s tough enough to make money from shares in an honest market. Yet we must always be aware of those that would take our hard-earned money from us without our consent. That’s why we include Chapter 25 – because there’s always a chance of encountering problems when you’re dealing with humanity.

Chapter 26 is one of the best chapters in the book. You really need to understand if the environment for a particular share is good or bad. The best shares in the world sink in a tough market while the worst shares can go up in a jubilant and rising market. Ideally, you avoid those shares that are in the tough market and find good shares in a good market. This chapter points you in the direction of those markets.