Shares and other investment types
Though much of an APCIMS member's work typically involves dealing with UK company shares, many will advise and deal for clients in, for example, international securities, British Government stocks (gilts) and options and futures (derivatives).
Many also run their own unit trusts and investment trusts and virtually all offer PEP and ISA services to help maximise the tax efficiency of your investments.
They will also advise clients on other investments such as National Savings & Investments products and also make recommendations on building society or bank deposit accounts. Increasingly, APCIMS members are offering full cash management facilities, enabling clients to achieve the most effective management of both their cash and investments. Some even offer banking facilities with cheque books.
However the core activity remains the trade in securities (stocks and shares) quoted on the London Stock Exchange. The following key definitions might help:
Shares (also known as equities) - when you buy shares in a company, you become a partial owner of it. Your principal benefit as a shareholder is to receive a share of the profits - usually in the form of a dividend. If the company does well over the years and increases its profits regularly, you will enjoy a rising dividend income and the prospect of attractive capital gains. Apart from share prices rising as a result, or in anticipation, of a take-over bid, the prospect of rising profits and dividends is what drives share prices upwards.
Equally, the prospect of falling profits and dividends depresses share prices. These prospects influence prices because companies issue a fixed number of shares. If more investors want to buy shares than sell them, or vice versa, the imbalance between supply and demand moves the price, as with any asset, whether it is a work of art or a ton of wheat.
Different investors buy different kinds of shares for different reasons. For example, shares in companies which are thought to have excellent prospects tend to have low dividend yields because demand for the stock has already pushed the price to a high level relative to the dividend payout. These companies may hold on to most of their profits to finance future growth, rather than use them to pay out dividends.
Investors who are not concerned with immediate income may concentrate on these "growth stocks" and hope for significant capital gains and substantial income in the long term. Other investors prefer a higher initial income, with the hope of also achieving some capital growth, by buying shares in companies with more pedestrian prospects. The permutations are endless.
Do remember though that shares are risk investments and their value can go down as well as up, as can the income. If, therefore, you are an investor, as opposed to a short term speculator, you must regard investment in shares as a medium to long term exercise and spread your investments between a number of companies in order to minimise the risks. This spread of investments is known as a portfolio. It is very important to judge the level of risk you are prepared to take and your adviser will assist you on this.
If you are a speculator - and there is nothing wrong in this because speculators are the people who oil the wheels of the market place - it is important to understand that the potential for high returns is balanced by a higher degree of risk. If you don't know whether you are an investor or a speculator, the stock market is an expensive place to find out.
It is also worth bearing in mind that, as an investor, you should not get too excited or depressed about short-term rises and falls in your share prices. Share prices have risen substantially over the years but, even in depressed times, income growth can continue and this in turn leads to an increase in share prices. For many investors it is income growth which really matters (because they live off income, not capital) and the ownership of a good portfolio of shares is the most practical way of achieving it. This is why the pension funds and insurance companies invest so much in shares.
Gilts (Government stocks) - these are sold to the investing public by the Government to help fund the difference between what it spends and what it collects in taxes. There are two main types: conventional and index-linked gilts. Both are quoted on the London Stock Exchange and an APCIMS member can buy or sell both of them for you.
Conventional gilts pay a fixed rate of interest which is maintained until the Government repurchases the stock on a predetermined redemption date and at a predetermined price. They offer a completely predictable return, fixed throughout their life, provided you hold them until their redemption date. The price of gilts can however rise or fall in the market as the outlook for interest rates and inflation changes, providing possible opportunities to sell at a profit before redemption.
Normally the interest yield is higher than that from shares, so they often form a useful addition to an income-seeking investor's portfolio. For many risk-averse people they are also a useful alternative, wholly or partially, to bank or building society deposits. The reason for this is that if you rely on a deposit account for your income, you are at the mercy of any fall in interest rates. With a gilt, however, your interest is fixed throughout its life, no matter how low general interest rates fall.
Index-linked gilts are considered particularly low risk investments. If you buy them on issue and hold them until their redemption date, the Government guarantees to repay you at a price which will give you full protection against inflation. The income is also indexed, six monthly in arrears, but initially is very low - maybe two to three per cent. This makes them particularly attractive to very risk-averse investors who do not require much income.
Under current legislation, capital gains made on gilts, both conventional and index-linked, are not generally subject to tax. APCIMS members monitor this situation and can advise whether or not they are appropriate for you.
Investment trusts and unit trusts are often described as collective investments. Both invest and manage a pool of investors' money in a wide range of stocks and shares on behalf of their investors, with a view to achieving a better result than if the underlying investors did it themselves. Where they differ is that an investment trust is a quoted company dealt on the Stock Exchange, whereas a unit trust is not normally quoted but can be bought and sold through the trust manager in accordance with a pricing formula laid down by the Financial Services Authority.
Like individual company shares, investment trusts are influenced by supply and demand in the market. Their shares can trade either at a discount (if out of favour) or at a premium (if demand is high) to the value of the underlying assets held by the trust. Unit trusts tend to be priced at or around their net asset value, though the supply and demand factor can also influence their pricing.
Unit trusts are normally more expensive to acquire than investment trusts because of the greater spread between buying and selling prices. Both are offered by APCIMS members, typically to provide a spread of risk for people who cannot economically have an individual portfolio, or to provide investors with exposure to specialised investment markets such as South America and the Far East, which are complicated and expensive to enter as an individual shareholder.
Opinions generally differ as to which type of trust is better. The truth is that success or failure ultimately depends on the skills of the particular investment manager. APCIMS members use both types and a number of them manage their own investment trusts and/or unit trusts. Most other financial advisers appear to ignore investment trusts, perhaps because they can be more complex and, unlike unit trusts, do not generally pay introductory commissions.
Derivatives are investment vehicles derived from another investment product to meet specific investment needs. They include warrants, options and futures and aim to provide an easier way of gaining exposure to a particular market for a certain type of potential return. Options, perhaps the most versatile of all derivatives, are used to alter the risks and hence the potential returns of an underlying investment. They may be used by both the speculator and the risk-averse investor.
LIFFE (the main London derivatives exchange) currently offers investors options on about 70 leading UK equities, as well as instruments relating to the FTSE 100 and the FTSE 250 indices.
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