YM Stock Market


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YM Stock Market

  1. 1. Yorkshire Bank Information Guides Money Leisure Retirement Family Home Career Business An introduction to the stock market Today more people than ever Still, many people find the before have money invested market daunting, many don’t in the stock market. In many understand what the stock cases it is through a pension market is or how it works. fund, a unit trust, or some may This Guide is designed to have purchased their first help. shares through the privatisation of government A glossary of utilities. key stock History shows that becoming a market terms part owner in some of Britain’s biggest companies can be a AIM Inside good long-term investment. This is the Alternative this Guide We’re not only talking about Investment Market. It is run • A glossary of key wealthy investors, investors by the London Stock with just a few thousand Exchange and lists smaller, stock market terms pounds have a range of fledgling companies often • Golden rules options open to them. making their first step into the • Buying shares • Choosing your own shares • Managed funds • Investment clubs • Tax
  2. 2. Money Bear dividend means the holder A Bear market is one where buys in time to receive the share prices across the entire current year’s dividend. market are generally, and Discount consistently, falling. When the market price of a Blue chip newly issued share is lower This phrase is often used to than its issue price. describe large well- Dividend established companies with a A company may pay all or part consistent record for growth. public market. This market of its profits to its usually lists more speculative Bull shareholders. This payment is companies and you should A Bull market is one where a dividend and it is usually consider the risk carefully. share prices across the entire paid twice a year. Do not market are generally, and expect all of a company’s AGM consistently, rising. profits to be paid out in the This refers to an Annual form of dividends. Successful General Meeting. As a Capital growth companies often reinvest part shareholder you will be While you will hopefully earn of the profit to help grow in entitled to attend the AGM income in the form of the future. If the company is and vote to approve accounts dividends from your share struggling, it may decide to and appoint directors. These portfolio, you may also reinvest all of its profits; or meetings are normally held experience capital growth. This is when the value of your the company might not make within 21 days after shares increases from the a profit, in which case a publication of the annual price you paid. In this case, if dividend will not be paid. report. you choose, you can sell the Before investing, check the Annual report shares and reap any capital company’s dividend record. As a shareholder you are gain. However, the stock Dividend income may be entitled to receive the annual market does fluctuate and attractive, especially if you're report which is a director’s shares can and do fall in a retiree relying on investment report detailing the value. In which case, if you income. performance of the company sell you will have made a Dividend yield over the year and its current capital loss. The secret is Dividend yield is the dividend financial position. research and wise investing. as a percentage of the share We will talk more about that price. This ratio helps shortly. measure the dividend return Did you being received on the shares. CREST know… In the past shares were Equities As this Guide will exclusively traded in the form This is another word for explain, one of the of paper certificates. But now, shares. a computer system called keys to successful Ex-dividend CREST links banks, stock market stockbrokers and companies, Purchasing shares ex-dividend investment is to and handles the electronic means the holder does not think long-term. The registration of a share receive the current year’s purchase. If you buy and sell dividend. If you are selling reason is this: shares regularly you can shares ex-dividend you will historically shares become a member of CREST still receive the dividend. have outperformed which will allow you to hold Ex-dividend date all other standard shares without paper This is the date on or after investment classes certificates. which the seller and not the over time. Cum-dividend buyer will retain the right to Purchasing shares cum- receive a dividend. 2
  3. 3. An Introduction to the stock market shareholder votes without Did you know… needing to attend a meeting by appointing someone else Financial advisers say a proportion of your to vote on his or her behalf. investment should go into cash and fixed Proxies can also be used to interest as well as shares. If you rely on your transfer voting authority to another party. investments for income – as many retirees do – you need some security. Rights issue A company wanting to raise extra funds may offer existing Final dividend Gilts shareholders the right to buy This is the dividend paid by a A stock issued by the more shares in the company. company at the end of its government to raise money This is often done at a financial year. known as a Gilt-edged stock. discount to the price currently FOOTSIE Interims listed on the exchange. This is a colloquial term for A company's results for the Securities the FTSE 100 which is an first 6 months of the financial This is another term for index of the UK’s largest 100 year. shares or any other paper publicly listed companies. Interim dividend investment. This index allows you to A dividend declared mid-way measure market Settlement through a company’s financial performance over time. The transfer of shares and year, authorised solely by the money between seller and FTSE directors. buyer. Financial Times Stock IPO Exchange, the joint operation Share An Initial Public Offering or for compilation and Shares are traded on the IPO is when a company first maintenance of the indices London Stock Exchange. A offers shares to the public. It used as the key performance market place where public is often also referred to as a benchmarks for the UK Stock companies are listed and their flotation or float. In some Exchange. These include the shares open for trade. When cases you will be able to buy FTSE All Share index, you buy a share you purchase directly from the company FTSE100, FTSE Mid 250 & an ownership stake in a public without going through a FTSE Small Cap. company. This gives you the stockbroker. right to vote at annual general xtraMark Nominal value meetings and you may also A market within the London The value ascribed to a share Stock Exchange specifically when it is first authorised and designed for investment companies and products. issued by a company. Did you Nominee account know… FSA If you hold shares A good accountant The Financial Services electronically they are Authority is the body will advise you of normally placed in a nominee charged with the account managed by a the pros and cons of responsibility of regulating stock market stockbroker or financial the financial services institution on your behalf. investing. You may industry. Premium find you're better off Further issues If the market price of a new with a share An already listed company share is higher than its issue portfolio in the non- needing to raise funds may price. release more shares into the working spouse's market for the public to Proxy name. purchase. A form by which a 3
  4. 4. Money receive part of the company’s profits through Did you know… payments known as dividends. If the share price The first golden rule of investing is to never put rises, you may also see a all your eggs in one basket. capital gain. However, if the share price drops you may Volume may choose to pool your funds see capital loss. The total number of shares with others. We will discuss Share certificates traded (bought and sold) in a that option a little later. Shares were traditionally held given period of time. in paper form and some still 2. Take a long-term are. A share certificate is the Golden rules view proof that you indeed are the Research has shown that the owner of the shares. If you 1. Diversify amount of time you hold on to hold a share certificate and Based on past performance, your shares and stay ‘in’ the decide to sell your the stock market offers stock market is much more shareholding you will need to attractive growth over the important than the time when deliver the certificate to the long term, but in the short you actually enter the market. broker who sells the shares term it can be volatile. There Take a long-term view to ride on your behalf. are also examples of what out the peaks and troughs. were once successful Stamp duty Short-term falls in share prices companies which fall from A tax of 0.5 per cent that is are part and parcel of investing grace due to factors that may payable when buying shares. in the stock market. Knowing not have been apparent or how to read those falls is Stockbroker which you may not have important. A member of the London researched at the time of your investment. That is why Two levels of influence usually Stock Exchange who buys one of the keys to successful affect share price movement. and sells shares for clients. We will discuss choosing a stock market investing is First is the overall economic broker and fees later in this diversification. If you have climate. The level of interest Guide. £10,000 to invest, it’s not rates, currency fluctuations wise to buy just one stock – and general level of techMARK you're better off with a confidence all affect share A market within the London selection. If you don’t have prices. Stock Exchange relating to enough funds to successfully technology companies. Second are company-specific diversify your portfolio, you factors affecting each share – Trading market such as cash flow, This term refers to any management strength, market where a stockbroker Did you company history, competition can sell or buy shares and is the most common way of know… and debt level. When a share price falls, shareholders should investing in a company. The The second rule of go back and review the London Stock Exchange is a stock market company fundamentals. trading market. investing is time-in, Decide whether the price drop not timing. This is related to general or means the more company-specific factors. time you have in the The most important question market, the more for investors is whether a fall changes their overall view of likely you are to ride the company. Look at whether out any short term shares across the board have fluctuations. been affected to the same extent. 4
  5. 5. An Introduction to the stock market Discretionary service You give the stockbroker or financial institution the authority to buy and sell shares on your behalf within an agreed set or parameters. You should be kept informed about the performance of your investments with all administration left in the hands of the stockbroker. You can choose any of the above methods or a combination of all three. Choosing a stock broker or financial institution If you are considering buying shares directly, you should carefully consider the certain value. So how do you organisation you choose to Buying shares go about it? There are now trust with this responsibility. Buying shares is a three basic options open to You need to be comfortable specialised subject. you if you are buying shares with their level of expertise, Institutional buyers for know the experience of the directly. pension funds and collective people involved, understand investment schemes hire Execution only their level of research and professional investment This is the cheapest way to what steps they will take to managers and investment buy shares but the service understand your investment analysts to undertake this on means exactly what it says. A needs. their behalf. stockbroker or financial Make sure you understand all institution will act on your Before investing as an charges up-front including instructions to buy or sell but individual you should be fully what commissions, or any aware of the risks, the time they will not make any other fees for other services needed to carry out research, comment or offer any advice you will be asked to pay. the sum required and the about your decision. If you Remember, the best costs involved in maintaining are confident in making a alternative may not be the a diversified portfolio. decision without advice, then cheapest, and make sure you this is a straightforward way It's never been easier or are comparing the same to access the market. You can cheaper for investors to buy a services. You will obviously also trade online. stake in our leading pay less for an execution only companies. This is due to: Advisory service approach than you will for • Electronic registration The stockbroker or financial receiving advice. The way you replacing share certificates. institution will recommend hold the shares may also • Bank account direct debiting which shares to buy and sell impact the fee; for example, if of share payments. but the final decision remains you choose to hold a paper • Buying and tracking of shares yours. The advice you are certificate this will normally on the Internet. given should take into cost more than an electronic account your own investment share holding. When you buy shares you can ask for either a fixed number goals and risk profile. By risk The London Stock Exchange of shares within a certain profile, we mean the level of will provide a list of all price range or buy any risk you are comfortable with authorised stockbrokers number of shares up to a in making your investments. and their services. You can 5
  6. 6. Money contact the exchange on 020 7797 1000 or visit the Did you know… website at www.londonstockexchange.com One advantage of the best managed funds is you get to borrow the brains of professional Your protection Many stockbrokers will carry analysts. Plus, with billions of pounds to invest, insurance to cover against they can get greater diversification. negligence and you should enquire about this and what it covers. There is a Financial overnight. Investing in 'blue Are they capable? Are the Services Compensation chip' shares is often directors well regarded? Will Scheme (www.fscs.org.uk, or considered a good idea – they provide an objective voice call 020 7892 7300) which these are big, stable, proven in management? provides for people who have stocks. Their share prices 2. History lost money through an usually grow slowly but How old is the company? adviser’s or broker’s fraud or steadily, providing a buffer Does it have a history of negligence. It covers a against market shocks that consistent performance? Has maximum of £48,000 no strike from time to time. Blue it stayed in the same line of matter how much you had chip companies usually have business or diversified? If invested. This figure is broken a continuous record of paying diversified, is it successful in down into 100% cover for the dividends, and so offer both its new business? first £30,000 and 90% cover steady capital growth and a for the next £20,000. source of regular income. 3. Dividends However, even with blue Has the company regularly Another avenue open to a chips there are examples paid dividends in the past? If disgruntled client is to take where companies have fallen not, why not? legal action against the broker on hard times and investors or adviser. This can be costly 4. Debt have lost money. No matter and if the person or firm is Companies in debt aren't what the size or reputation of bankrupt, may not produce a necessarily bad investments. the company you should result. Like individuals, companies always do your research. generally borrow to increase Using the internet Don’t take a hot tip at face their opportunities for profit. As mentioned, you can now value. Try to get independent However, the level of debt trade shares on the internet. information to support the tip should not exceed the assets However you should take – the best place to start is the of the company. steps to ensure the service company itself. Ask for their you are using is properly 5. Competition most recent annual report. Look for companies that regulated. You can check the The law requires a lot of dominate the market or fill a authority of the stockbroker information about a company niche in a bigger market. or financial institution offering to be contained in these Large, established companies the service by calling the FSA reports. Broking firms also usually win out over smaller, on 0845 606 1234 or by write regular research reports new companies. visiting www.fsa.gov.uk. on many shares. Ask your broker for reports on Dividend decisions Choosing your companies of interest. Share investors often choose own shares What to look for whether to take dividends in cash or use them to buy more Picking your own shares can When checking out any shares through a dividend be daunting, but there are company, there are five reinvestment plan. Another steps you can take to make common sense signs to look choice is whether or not to it easier. for: take advantage of bonus First, try and minimise risks. 1. Management shares. Let’s briefly look at Don’t try to make a killing Look at the people in charge. these alternatives. 6
  7. 7. An Introduction to the stock market management and invest in markets you'd otherwise find Did you know… difficult to access. The You may bring the average cost of your investment professionals investments down by a strategy known as 'employed' by you conduct Pound cost averaging, you ignore market extensive ongoing research into the financial performance fluctuations and invest the same amount each of individual companies and period (say, monthly), regardless of unit price. specific shares, taking into You take advantage of market fluctuations by account economic and market receiving more units when the price is low and trends. They constantly fewer when the price is high. monitor the market and adjust the investment portfolio. Depending on the investment Taking dividends in cash the money to invest in other fund you choose, you may If you want income to live on, companies within the UK and also get a stake in overseas cash dividends may be your in many cases around the markets. If you're doing it best alternative. world. yourself, you're unlikely to • A Unit trust is a fund made Dividend have the funds to access up of investors who have their reinvestment plans international markets. contributions divided into Some companies offer There are many different types individual units. The managers dividend reinvestment plans. of the trust then invest in the of managed funds. Some Shareholders can buy shares, stock market, again this concentrate on fixed interest in some cases, at a discount investment is either within the investments, others move on the market price, without UK, globally or both. higher along the risk ladder having to pay brokerage or • An Open Ended Investment with greater emphasis on stamp duty. The tax Company (OEIC) is similar to share investment. consequences of dividend a unit trust however it is a Your choice of managed fund reinvestment plans are collective investment scheme should reflect: complex, so seek professional in the form of a company. • The level of risk you’re advice if you're considering Investors buy shares in an prepared to accept. participation. OEIC and your money is • The ‘time factor’. Bonus share schemes pooled together with other For example, if you have 15 or Sometimes companies offer investors interested in the 20 years to retirement, you shareholders the dividend same portfolio of equities can afford to be in a more amount in bonus shares. As and/or property. The term volatile fund with greater with dividend reinvestment ‘open ended’ means that the exposure to the share market. plans, the tax consequences size of the company can go If you're closer to retirement, are complex so seek up or down, depending on the then you should consider a professional advice if you're number of people buying more conservative investment. considering participation. shares. In this regard they are The bottom line is - speak to a similar to a unit trust, but one professional adviser. Managed funds key difference is that shares in an OEIC are at a single price Another big advantage of a One way to really simplify for buyers and sellers. managed investment is the stock market investing is to simplified paperwork. The tax These funds invest your use a managed investment details of direct shares can money in the shares of a large such as an investment trust, become quite complex. portfolio of companies and unit trust or OEIC. across different asset classes. If you want to determine the • An Investment trust is a In a managed fund you pool relative efficiency of a fund company listed on the stock your money with other manager you should examine exchange. You buy shares in individual investors. You its Total Expense Ratio (TER). this company and it then uses benefit from professional fund You should be able to access 7
  8. 8. Money this figure through the the UK today, some are more way you invest in shares. For brochures provided by the successful than others and example; pensions, many of individual fund managers or you must ensure your club has which invest in the stock their annual reports. rules which will be followed. market, have tax advantages. These should help determine We will not go into detail here Warning: Investing your how members can come and about the various pension money wisely is an go, how funds will be invested schemes available but suffice important step. This Guide is not a replacement for and decisions made about to say many people are independent and managing the investments. already investing in the stock professional financial advice. market through a personal or We could write an entire guide This Guide is designed to on the pros and cons of occupational pension help you understand the investment clubs. There are scheme. advice you are given. You organisations that offer this However, there are ways to should never invest before type of advice, one is ProShare save tax with direct stock speaking to a professional. which is sponsored by the market investment as well. London Stock Exchange. To You may put your shares into Investment find out how you can get your what is known as an ISA clubs club started you can contact ProShare on (Individual Savings Account) - financial institutions offer Investment clubs are www.proshare.org or call these accounts and you will becoming an increasingly 020 7220 1730. pay no income tax or capital popular way to get involved in stock market investment. gains tax on your dividends Tax or profits from share You may choose to start a investing. There are annual Each person’s tax situation is club with your family, friends limits to the amount you can different and you should seek or colleagues from work. professional advice to invest in an ISA. However, you should make determine the most tax sure everyone understands Again we stress that you seek effective way for you to the risks and parameters professional advice. invest. within which the club will Note: ISAs were designed to operate. By taking a The following information is replace another tax free way professional approach at the based on existing tax of holding shares, Personal start you may avoid legislation, which may change Equity Plans (PEP). You may headaches in the future. in the future. still hold a PEP but only if it There are thousands of Generally speaking, you can was established prior to investment clubs operating in save tax depending on the April 5 1999. This Guide is produced by Life Directions Pty Ltd ABN 17 085 676884 on behalf of Yorkshire Bank. Yorkshire Bank is a trading name of Clydesdale Bank PLC, which is authorised and regulated by the Financial Services Authority (FSA). Credit facilities other than regulated mortgages are not regulated by the Financial Services Authority. The preparation of this Guide did not take into account any individual objectives, financial situation or particular needs. Before making any decision you should consider whether the information in this Guide is appropriate in light of your particular needs and financial circumstances. If you want further information about any of the topics covered, and how they may apply in your circumstances you should seek professional advice. Life Directions Pty Ltd has taken all care in the compilation and presentation of the facts and information contained in this Guide and the information was current as at 1 May 2005. However it is written as a general guide and is not intended to provide any financial, legal or other professional advice. Nothing in this Guide should be treated as an authoritative statement on any particular topic or of its applicability in any specific case. Action should not be taken on the basis of this Guide alone and specific professional advice should always be sought before any action is taken. Life Directions Pty Ltd, Yorkshire Bank and the companies in the National Australia Bank Group accept no liability for any errors or omissions. All rights reserved. No part of this Guide may be reproduced without the prior permission of Life Directions Pty Ltd and Yorkshire Bank. Yorkshire Bank is a trading name of Clydesdale Bank PLC. Registered in Scotland No.SC001111. Registered Office: 30 St Vincent Place Glasgow G1 2HL. YBIG12 (05/05)