How do stocks work? At what point do I actually make money from them?

Asked by Sally

1 Answer

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Answered by Richard Salter, IFA in Trowbridge, WILTSHIRE
Shares are, much as the name suggests, part ownership of a company. For safety most investors are advised to only buy shares in trading companies listed on recognised stock exchanges. These range from the top UK 100 companies to younger, typically much smaller, companies listed on AIM or indeed a foreign listed company. Depending on which stock you buy and its trading philosophy - i.e long term growth or shorter term regualr cash generation (which allows for regular dividend payments) you can expect to see at least a dividend return very quickly. If the share price rises overnight it is also entirely possible to make a gain very short time. However, for most, it is much, much better to let a specialist choose a range of stocks to hold for you and a group of similarly minded individuals, and then hold and manage these on your behalf. In this way you 'pool' your risk by having your capital spread across a number of underlying companies and there is also the advantage of the fund manager using his expertise and resources to identify the best stocks to buy and hold in your collective fund.

Such funds are avialbe in every style and market - i.e. 'UK equity growth' or, for those seeking an income, 'UK fixed Interest' for example. These are known as Unit trust funds or OEICs and most can enjoy the added advantage of being sheltered from most UK taxes by being held in an ISA.

Best advice is that investors should always plan to invest for at least five years as stock markets and shares are notorious for constantly rising and falling prices. However, historically there have been more rises than falls such that, over the medium to longer term ( 5 yrs or more) you increae the odds of coming out ahead.

You may be lucky and make money overnight. But this would be high risk. You might also loose equally quickly. This is where a good fund manager should help you avoid the worst excesses. (There are over 2,500 such funds to choose from).

Be warned that if you choose to go it alone collective wisdom is that you need at least ten separate lines of stock, in unrelated industries (do not buy both HSBC and Barclays for example) and that each stock holding should be at least £10,000 to achieve both a well diverisified collection of investments each with sufficient exposure to make any gains worthwhile! Ten per cent profit on £500 being barely worthwhile especsilly after trading costs (the bid offer spread etc) are taken into account | 12.03.10 @ 16:44
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Answered by

Richard Salter
Richard Salter, IFA in Trowbridge, WILTSHIRE

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