Over the past few years, from the almost collapse of the banking system to the present day, stock markets, banks and investing have rarely been out of the headlines and off the front pages.
Mention stocks and shares and its hard not to imagine aggressive trading floors filled with hordes of suited men shouting buy or sell into numerous phones, and then quitting from stress at 30. But the reality is of course, much different. In fact, even for the casual investor, setting aside some money for the stock market can be a simple and effective way of getting your extra cash to work a bit harder than if you left it in a high-street savings account, where extremely low interest rates currently mean that it will be doing next to nothing for you. The main proviso is that you are willing to do your research, and have a strong stomach for those moments when share prices seem to be spiraling in the wrong direction.
Before investing, the first step is to decide what you want to achieve. For a lot of people, they will be investing for their retirement. With an ageing population the state pension just simply isn’t enough for most people, and the average age of retirement is getting higher. Or are you looking to provide something for your children for when they grow up or to contribute towards university? The stock market can make all the difference.
So just how volatile can investing in shares be? The simple answer is, sometimes very. The more complicated answer is, you can manage your own approach to risk. Better returns are basically a reward for taking more risk. But you can reduce the level of risk by choosing your shares carefully. Companies such as Vodafone or some banks such as HSBC are massive global corporations which make up a large part of the FTSE 100 index (this is a list of the 100 biggest companies in the UK by market value) and as such are less likely to see volatile price moves whether up or down. Of course, this is not always the case. The Gulf of Mexico saw BP’s share price, previously stable, drop large amounts in a short amount of time, wiping £8bn of its value, and even BT has undershot the market by more than 70% since privatisation in 1989. On the other side of the equation, a recent start up which has only just listed on the London Stock Exchange may have extremely cheap shares, the price of which may rocket up, but can just as easily rocket back down again.
This is the biggest difference between saving and investing. When you save money, your capital is (relatively) secure. You are (usually) guaranteed to get back the sum you put in, plus interest. When you invest you have no such guarantee. Your capital is at risk. In return for this, you would hope to get more back than you put in, plus a little income on the side as well, perhaps. With the Bank of England setting interest rates at just 0.5%, savers aren’t getting much of break, and when you account for inflation (at time of writing 3.5%) savers are in fact losing money as the value of their holdings is eroded. This makes it even easier to find a stock market investment that is beating high-street bank rates.
This is backed up in statistics. Most investment analysts suggest five years is the minimum period you should consider investing for. Over this length of time, the stock market has historically beaten the returns from a cash account 80% of the time. Invest for even longer, twenty years say, and shares have been better 98% of the time.
According to research from the investment bank Credit Suisse First Boston, if you had spare cash back in 1900 and had decided to invest it in the shares on the FTSE 100 index, the returns (adjusted for inflation) would be 5.3%, compared to just 1% if you had left it in cash.
So if you’re interested, how and where do you get involved? Most investment accounts fit into three broadly defined categories.
The first is a discretionary service. This gives your investment account manager complete authority to buy and sell investments for you without obtaining your prior approval. Within this you should have already discussed with the broker the amount of risk you are comfortable with, and what company sectors you are mostly interested in. The advantage is that they can instantly act on any changes in the market, rather than spending time trying to contact you. Regular reports will be sent to you. The main disadvantage with this approach, in addition to the loss of control over your investment decisions, is that charges can often be high.
An advisory service will also take into account your risk and investment objectives, but in this case, instead of managing the portfolio without consulting you, your investment manager will suggest courses of action which you may or may not choose to take. This gives you extra control over your portfolio with the benefit of a professional’s advice, and charges are also lower than a discretionary service.
The final type is an execution-only service. These are generally the cheapest as they do not require advice or management, and allow you to pick your own stocks and shares. These services can be very effective; providing you are willing to do your own research into the companies and sectors you are interested in.
Of course, the cost of these services can eat heavily into any profits. The range of cost per trade can be from a few pounds per trade to 15 pounds or even more. Not forgetting each trade incurs stamp duty of 0.5%. This is where we believe SVS Securities is leading the field with our execution-only online trading accounts. All investors can trade for just £1 for the first 30 days from opening their account, and after that just £5.75, which is still industry leading. These days any investor can get access to research on the internet, and if you are willing to put the time in, and are happy managing risk and sticking with the stock market even when it starts to look scary, it’s a great way of planning your finances for the future.