Investing in Stocks & Shares: A Step-by-step Guide to Making Money on the Stock Market

257 Pages·2009·1.45 MB·English

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Dedication

For my father, Donald White, who (among many other kindnesses too
numerous to mention) bravely introduced me to trading in shares
through his own stockbroker and also taught me about investment
trusts.

Published by How To Content,
A division of How To Books Ltd,
Spring Hill House, Spring Hill Road,
Begbroke, Oxford OX5 1RX. United Kingdom.
Tel: [phone]. Fax: [phone].
Contents
List of illustrations viii
Preface ix
Introduction 1
1 Why buy shares? 3
The benefits 3
Why do shares rise in value? 9
Are shares right for you? 11
A history of shares 17
The difficulty of selecting shares 26
2 An explanation of shares 28
Basic information 28
Why come to market? 34
More about shares 35
Capital versus income 37
The stockmarket indices 40
Marketability of shares 42
Market subdivisions 47
Share sectors 47
Types of share 48
3 Factors affecting the price of a share 57
Share dilution 57
The perception of share values 62
The movement of markets 68
The importance of timing 71
Company bids and takeovers 72
v
vi Investing in Stocks & Shares
4 Avoiding undue risk 76
Avoiding local risk 76
Overseas investments 77
Pooled funds 79
The institutions 89
The zero sum game 89
5 Dealing in shares 92
Certificates or nominee account? 92
The broker 93
Taurus/Crest 98
A summary of charges 102
The mechanics of share dealing 104
When to buy and when to sell 113
The Coppock Indicator 114
6 Stockmarket strategies 116
Some stockmarket investment strategies 116
Modern portfolio theory/risk management 121
The Logical Investment Strategy 122
Summary of the Logical Investment Strategy 124
Construction of a wishlist 126
Construction of a hitlist 128
Valuation of shares 128
Performance assessment 129
7 Investing in traded options and futures 131
Introduction to options 131
Interpretation of charts 141
Futures 146
Other derivatives 146
8 Bonds/gilts/interest-bearing deposits 147
Introduction to bonds and gilts 147
Tax implications of purchases of bonds and gilts 157
Strategies for buying gilts 159
How to buy and sell gilts 161
How to buy and sell bonds 162
9 Six typical case studies 163
Conclusion 173
Contents vii
Appendices
1 Government privatisations 174
2 The Black-Scholes Model for traded options 176
3 Personal Equity Plans (PEPs) and Tax Exempt Special
Savings Accounts (TESSAs) 178
4 Individual Savings Accounts (ISAs) 179
5 The price of gold 184
6 Split capital investment trusts 186
7 Business and Enterprise Schemes 188
8 Permanent Income Bearing Shares (PIBS) 192
9 Bulletin Board/SEATS 195
10 Value investment 196
11 FRS-3: new accounting rules 198
12 AIM/PLUS 199
13 Emerging markets 201
14 Order-driven markets/SETS 202
15 The Internet 204
16 Capital Gains Tax (CGT) 206
17 Reinvestment of dividends 213
18 Derivatives 215
19 Alternative investments 219
20 Inland Revenue stamp offices 220
21 Self-invested pension plans (SIPPs) 221
Glossary 225
Further reading 241
Useful addresses 242
Index 244
List of Illustrations
1 The Barclays Capital indices from 1945 to the present 4
2 Equity and building society funds: growth with net income
reinvested 4
3 The BZW indices in real terms 8
4 Equity and building society funds with net income
reinvested (in real terms) 8
5 Proxy form for voting 29
6 Certificate of dividend payment 31
7 Typical statement of ISA transactions 41
8 Rights issue: letter of allotment of shares 58
9 Warrant certificate 60
10 Share dividend counterfoil 63
11 Letter of acceptance for new issue of shares 94
12 Stock transfer form 96
13 Contract note for purchase of shares 103
14 Share certificate 107
15 Contract note for sale of shares 109
16 The ‘X, Y, Z Form’ for renunciation of shares etc 111
17 Typical statement of a money market account 133
18 Contract note for purchase of traded options 139
19 FTSE index chart showing formation of resistance levels 143
20 Chart of share price showing strong trend line 144
21 Chart of gold showing declining trend 145
22 Example of a convertible certificate 148
23 Typical gilt certificate 158
viii
Preface
to the Seventh Edition
Investing in Stocks and Shares has proved to be one of the most
enduring of guides to investment in stockmarkets since it was first
published in 1992. This may be because it is maintained by a
professional long-term investor and not by a financial journalist or a
salesman peddling a ‘get-rich-quick’ book; or it may be due to the
book’s advocacy from the first edition of the importance of seeking
dividend growth from investments in shares, and not buckling to the
latest investment fashion.
The beliefs expressed in the first edition, that share prices would
rise more than alternative investments and that the ‘Logical
Investment Strategy’ would have a long term application, have
been fulfilled despite the general decline in stockmarkets across the
world during 2001–2003. Much of the decline was due to the
bursting of the ‘dot-com’ bubble and the belated realisation by
investors that mobile phone companies would struggle to grow once
everyone had a mobile phone. Readers of earlier editions should
have largely avoided both disasters. The prediction in the 6th edition
(2003), that stockmarkets would recover, was speedily borne out.
Between 2003 and 2006 the average share price rose by about 60 per
cent, far outstripping housing, cash and bonds. However, while
compiling Table 1 for this book, I was startled to discover that
houses had outperformed shares for the ten year period up to 2007.
That is the first time that this has occurred since the book’s first
edition in 1992.
Nevertheless, the decline in global inflation has lowered expecta-
tions of returns from all types of investment. Gilts and house prices
have enjoyed a good run in the last six years, but this cannot
continue unless inflation (and thence interest rates) falls even
further. Indeed, it is economically impossible for stockmarkets and
house prices to move in opposite directions for any length of time,
since both are ultimately driven by company profits via dividends or
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