Stock market: functioning and investments

The stock market refers to public markets that exist for issuing, buying, and selling stocks that trade on a stock exchange or over-the-counter. Stocks, also known as equities, represent fractional ownership in a company, and the stock market is a place where investors can make investments by buying and selling ownership of such investible

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Quoted shares on the stock exchange

Once a company gets its shares quoted on the stock exchange there is a continuously updated and generally known market price, which is usually far higher than the level at which the original investors put their money into the fledgling business. In addition, there is a ‘liquid’ market, meaning there are large numbers of

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Returns

Shareholders benefit twice over when a business is doing well: they get dividends as their part of the company’s profits, and the value of the shares goes up so that when they sell they get capital appreciation as well. The return on shares over the long term has been substantially better than inflation or

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Stock exchange

The language of investment sometimes seems designed to confuse the novice. For instance, shares are traded on the stock exchange, not the share exchange. Nobody really knows why it came to be called the ‘stock exchange’. One theory has it that it was on the site of a meat and fish market in the

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Bonds

Shareholders are owners of a company by virtue of putting up the cash to run it, but a good business balances the sources of finance with the way it is used, and some of it can come from borrowing. A part of the borrowing may be a bank loan or overdraft, but to pay

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Preference shares

Preference shares can be considered a sort of hybrid. They give holders similar rights over a company’s affairs as ordinary shares (equities), but commonly holders do not have a vote at meetings; like bonds they get specified payments at predetermined dates. The name spells out their privileged status, since holders are entitled to a

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Convertibles

Some preference shares and some corporate bonds are convertible. This means that during their specified lives a regular dividend income is paid to holders, but there is also a fixed date when they can be transformed into ordinary shares – conversion is always at the owner’s choice and cannot be forced by the issuer.

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Gilts

The term is an abbreviation of ‘gilt-edged securities’. The suggestion is that of class, distinction and dependability. The implication is that these bonds issued by the British government are safe and reliable. There is some justification for that: the government started borrowing from the City of London in the 16th century, and it has

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Pooled investments

The main benefit of devices such as unit or investment trusts is the reduction of risk: you get a spread of investments over a number of companies, which cuts the danger of any one of the companies performing badly or going under. Another advantage is administration by a market profes­sional who may have a

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Other derivatives

When people talk of derivatives they are usually not referring to the range of collective investments but mean highly-geared gambles requiring extensive knowledge, continuous attention and deep pockets. Even the professionals got it so spectacularly wrong that the derivatives mire rocked the foundations of the global economy in the 1990s and swal­lowed some of

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Foreign shares

Asubstantial number of foreign companies are quoted on the London Stock Exchange, especially from Europe (eg Volkswagen, Bank of Ireland, Bayer and Ericsson). In addition there are US companies (eg General Electric and Abbott Laboratories), Chinese (Air China), Japanese (Honda, Kawasaki and Mitsubishi), Taiwanese (Acer), South African (SAB Miller), Chilean (Antofagasta) and Russian (Gazprom).

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How to pick a share

Anything to do with money is a matter of difficult choices. The sav­ings and investment part also demands a line of careful decisions. First comes the grading of safety and access to spare cash. There is the current account for everyday expenses, followed by the amounts accumulating for predictable larger spending such as holidays,

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Strategy for picking a share

1. Risk There is no such thing as a risk-free investment. Come to that there is no risk-free life. In investment there is economic cycle risk, company risk, exchange rate risk, income risk, inflation risk, market risk, sector or industry risk, and so on. In this context that usually means capital risk, ie the

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Forecasting the economy before picking a share

Deciding on a share or even a market sector – such as retailers, property developers, engineering manufacturers or financial companies – involves a second level of investigation. It means looking at the economy as a whole and then the way it affects the constituent parts. Forecasting the economy can be a mug’s game. Governments

Picking shares on the stock exchange

Once you have set the ground rules, you need investments to fit them. Warning: almost everyone who has ever had anything to do with the stock market has a theory of how to pick a share. They are similar to addicted gamblers and their sure-fire systems for winning at roulette or horse racing. The

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Fundamental analysis

Chapter 5 discussed the reasons for researching a business, its back­ground and circumstances, and how this can benefit an investor. In addi­tion to the general overall feel and cursory trawl through the available figures, there are techniques and calculations used by market professionals that can help pinpoint precisely why a company is better or

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Technical analysis

The normal contrast to fundamental analysis is ‘chartism’, which is also called ‘technical analysis’. This is concerned exclusively with the move­ments of share prices in the recent past to forecast how they will move in future. The really dedicated chartist does not even inquire whether the price chart is for houses, airline tickets, gold

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What does it take to deal in shares

Most advisers reckon £2,000 is the smallest sensible amount for a single investment, though many recommend £3,000. It is possible to deal in smaller amounts at one time but it puts up an extra barrier to making a return: stockbrokers set a minimum price on transactions and the dealing costs can overwhelm the profit

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Investment clubs

An alternative to managed, pooled vehicles looked after by a profes­sional is an investment club. This is a group of private investors who pool their cash and jointly decide how it should be invested. This has the advantage of spreading holdings over a larger number of investments than any single member could manage, without

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Costs of trading shares on the stock exchange

As with so many other things, it is more expensive in Britain to trade in shares than in many other industrialized countries. International comparisons have shown cheaper dealing overseas and fewer complaints about speed and information. Some US brokers also allow small investors a chance to get in on the ground floor by participating

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