- Do not buy shares with money that you can not afford to lose, stock prices fall as well as rise
- Spread your risks (i.e. do not put all your eggs in one basket). Before investing in shares consider the relative merits of investment funds that allow diversification at lower investment levels.
- Be prepared to invest for the longer term. The charges incurred in switching between investments can make a big difference to investment returns.
- Do not choose a volatile (i.e. high-risk) stock for a short-term investment. While risky investments can deliver excellent returns, it is generally best to have the flexibility to choose the right time to sell.
NAV ('Net asset value') - In essence this is an accounting value of the company based upon the value of its individual assets less the amount that it owes. The NAV is unlikely to reflect the market value as the individual asset valuation is an accounting rather than market valuation. Dividing the NAV by the number of shares outstanding will give you a base value of each share. Shares very rarely trade at their NAV as future expectations are built into their prices and certain assets such as brand image and people skills are very difficult to quantify and may not be reflected in the company's accounts.
EPS ('Earnings per share') - This is the amount of profit made by the company per existing share. It does not include significant profits or losses not expected to recur. High EPS suggests higher value per share.
P/E Ratio ('Price/Earnings Ratio) - Based on the previous year's results, this ratio shows how many years of net profits (i.e. profits after tax) it would take to equal its current share price. A high P/E ratio either indicates that the market expects the company to grow or that the company has made low profits.
Other basic terms that you will come across are:
LSE - Not to be confused with the London School of Economics, LSE is often used colloquially to refer to the London Stock Exchange which is also referred to as the Exchange. However it is not a term used by the Exchange to describe itself. The Exchange is a marketplace for UK shares held by the public. In order to qualify to be "fully listed" on the Exchange, companies must satisfy many criteria in respet of how they run their business. Being listed on the Exchange is no guarantee of future performance.
AIM (The Alternative Investment Market) - This is also run by the Exchange and is for companies that do not, or do not wish to satisfy the qualification criteria for a full listing on the Exchange's main market. Companies listed on AIM tend to be newer and smaller companies and are typically higher risk with potentially higher rewards.
You may wish to compare your chosen shares against an appropriate benchmark. This is where Share Indices come in. The so-called FTSE All-Share Index tracks the movement in the share prices of all the shares listed on the Exchange over time. The FTSE 100 tracks the 100 buggest companies. There are other indices more specific to particular sectors of the market such as the FTSE Small Cap for small companies and the FTSE techMARK All Share Index for the technology sector. You can compare the performance of your chosen stock by looking at the percentage growth over a period and compare it to the percentage growth of the index relating to its sector.
Points to Watch: Beware of so-called 'margin trading' where you only put up part of the cost of the underlying investment. This may magnify your potential returns but will also magnify any losses.
The price at which you can buy (the 'offer price') will be higher than the price you can sell (the 'bid price'). This is known as the 'bid/offer spread'. The price normally quoted in newspapers is the 'mid-price' between the two.
Tip: The bid/offer spread is a good indication of risk. The wider the spread (as a percentage of the stock price) the more risky the share.
Tax Tips: You can put individual stocks into ISA accounts through Stockbrokers to shelter dividends and gains from tax. Losses made on stocks purchased within an ISA will not be available to offset against gains on stock purchased directly .
Few people use their capital gains tax allowances, if you are unlikely to use yours, it may be better to hold interest yielding assets in your Stocks and Share ISA (e.g. Gilts and Corporate Bonds) and capital growth products (such as most shares) outside of your ISA. Authorised unit trusts and approved investment trusts may be more tax efficient for higher-rate taxpayers.
General
Stockbrokers
Choosing Shares
