Investing for beginners

[ABB125]

On Saturdays and Sundays? You picked the wrong course!

Only on certain weekdays, fortunately. I like my weekends free, so that I can catch up on work I haven't done during the week! (And very rarely, if I have time, go on a rail trip somewhere, on the cheapest possible tickets...)


Back to investments, I have a few general questions:

• How are things like share prices determined? I know it's something to do with "the market", but that's a somewhat nebulous entity. If, for example, everyone suddenly sells their shares in British Airways, the share price will drop massively (I think!), but who chooses the new prices(s)? In my head, I envisage an economics graduate working 150 hours a week sat in a darkened room, pressing a "reduce price now" button, but I doubt that's what happens in practise!
• "Tracker" funds, such as the FTSE 100 one mentioned by @ainsworth74, how do these actually work? Is the money simply spread across each company in the FTSE 100, so that any changes average out?

 

[Wynd]

Only on certain weekdays, fortunately. I like my weekends free, so that I can catch up on work I haven't done during the week! (And very rarely, if I have time, go on a rail trip somewhere, on the cheapest possible tickets...)


Back to investments, I have a few general questions:

• How are things like share prices determined? I know it's something to do with "the market", but that's a somewhat nebulous entity. If, for example, everyone suddenly sells their shares in British Airways, the share price will drop massively (I think!), but who chooses the new prices(s)? In my head, I envisage an economics graduate working 150 hours a week sat in a darkened room, pressing a "reduce price now" button, but I doubt that's what happens in practise!
• "Tracker" funds, such as the FTSE 100 one mentioned by @ainsworth74, how do these actually work? Is the money simply spread across each company in the FTSE 100, so that any changes average out?

Prices are determined on the various exchanges and are posted accordingly. Prices are an amalgamation of buyers and sellers actions. At any one time there are Market Makers, people who are always offering shares for sale and will always buy shares. Typically investment banks but also brokers and dealers. These "shares for sale" are known as bids and offers. A Bid is the price selected by a buyer to buy a stock, while the Offer is the price at which the seller is offering to sell the stock.

News, sentiment and company fundamentals drive the buying and selling activity of humans and robots and the net result of that activity is posted on the exchange as the price. The more bids are transacted the more the price rises, the more offers are transacted the more the price falls. Millions of these happen sometimes per second, but typically per minute. That's called volume. Volume can also drive price, if its very high, then others may execute a trade based on volume, this ties in to sentiment.

In short prices are the net result of bids and offers, but those bids and offer prices can be driven by lots of factors. If an institutional investor wants to dump their shares, then the market can be flooded with lots of offers, which may well drag the price lower due to more trades being executed at lower prices. The reverse is also true. When Warren Buffet comes to buy stock, if word gets out, then others may pile in behind him and so more Bids are executed = higher price posted on the exchange.

Its all done electronically and virtually instantaneously. Bid and offer prices are correlated to market prices and also move almost instantaneously. What you end up seeing are domino effects, these are the famous flash crashes, for which circuit breakers are now in place to stop free fall prices.

News tends to have the biggest effect on daily prices, earnings in particular. Look at Facebook (Meta) yesterday and Amazon. One missed their earnings forecast and one beat. One went down and one went up. Many people try and time these plays, to "time the market", but that is basically just gambling unless you have inside knowledge of the company cash flow.

In short, yes. You can see how much each fund holds in a company expressed as a % of the fund. Some funds are comprised 1% of Apple stock for example.
That is precisely the aim of a tracker fund. To track the sector or wider market it is invested in so that if any one stock has a bad day, you dont lose significant capital. The analogy of many eggs in many baskets is often used.

 

[david1212]

.....
You can wrap these in an ISA which is great.

Something along these lines. https://www.vanguardinvestor.co.uk/...ntcmpgn=equityusa_usequityindexfund_fund_link

I have a Vanguard account with funds spread across UK FTSE 100 tracking, USA and world wide.

... I'm just hoping for some better returns than the cash ISA which the money is currently sat in (a whopping 0.01%!)

That is bad, I have a cash ISA that matures the end of next month that is 0.6%.

Given where we have been to me loosing ~2% pa against inflation was acceptable for a couple of years against the risks of Stocks & Shares. Around 18 months ago I did not expect the FTSE to be back well above 7000 so soon and that was when the government target was for something close to ' old normal ' by Christmas 2020. Now inflation is over 5% and just with a 54% domestic energy price hike now and most likely another in October will almost certainly go higher.
I have not seen a 1 year cash ISA rate over 1% so need to consider the options as while the risk will be higher I really do not want to loose 5% or more value over the year. For this 'pot' I'm not bothered about a real gain just nett inflation tracking.


As stated already you can not loose the capital on Premium Bonds. However no gain is guaranteed although with £1000 invested a £25 win in 5 years would beat your 0.01% ISA. Once several years ago long term there was statistically a reasonable return with the possibility of a bigger win but not now.

 

[ABB125]

Prices are determined on the various exchanges and are posted accordingly. Prices are an amalgamation of buyers and sellers actions. At any one time there are Market Makers, people who are always offering shares for sale and will always buy shares. Typically investment banks but also brokers and dealers. These "shares for sale" are known as bids and offers. A Bid is the price selected by a buyer to buy a stock, while the Offer is the price at which the seller is offering to sell the stock.

News, sentiment and company fundamentals drive the buying and selling activity of humans and robots and the net result of that activity is posted on the exchange as the price. The more bids are transacted the more the price rises, the more offers are transacted the more the price falls. Millions of these happen sometimes per second, but typically per minute. That's called volume. Volume can also drive price, if its very high, then others may execute a trade based on volume, this ties in to sentiment.

In short prices are the net result of bids and offers, but those bids and offer prices can be driven by lots of factors. If an institutional investor wants to dump their shares, then the market can be flooded with lots of offers, which may well drag the price lower due to more trades being executed at lower prices. The reverse is also true. When Warren Buffet comes to buy stock, if word gets out, then others may pile in behind him and so more Bids are executed = higher price posted on the exchange.

Its all done electronically and virtually instantaneously. Bid and offer prices are correlated to market prices and also move almost instantaneously. What you end up seeing are domino effects, these are the famous flash crashes, for which circuit breakers are now in place to stop free fall prices.

News tends to have the biggest effect on daily prices, earnings in particular. Look at Facebook (Meta) yesterday and Amazon. One missed their earnings forecast and one beat. One went down and one went up. Many people try and time these plays, to "time the market", but that is basically just gambling unless you have inside knowledge of the company cash flow.

In short, yes. You can see how much each fund holds in a company expressed as a % of the fund. Some funds are comprised 1% of Apple stock for example.
That is precisely the aim of a tracker fund. To track the sector or wider market it is invested in so that if any one stock has a bad day, you dont lose significant capital. The analogy of many eggs in many baskets is often used.

Thanks - that's made the system a bit clearer in my head!

 

[Bald Rick]

How are things like share prices determined? I know it's something to do with "the market", but that's a somewhat nebulous entity. If, for example, everyone suddenly sells their shares in British Airways, the share price will drop massively (I think!), but who chooses the new prices(s)? In my head, I envisage an economics graduate working 150 hours a week sat in a darkened room, pressing a "reduce price now" button, but I doubt that's what happens in practise!

Very simply it’s determined by the price people are willing to buy/sell. Two things to bear in mind:

1) the market is driven by a difference of opinion on price
2) to quote the Duke brothers “no matter whether our clients make money, or lose money, we still get our commission” (if you haven’t seen Trading Places, do so, it is one of the best films of all time)

But, to pick up your point about an economics graduate in a darkened room … that does sort of happen, but on a big scale.

The big financial institutions all employ large teams of analysts that review all listed (and many non listed) companies to see how they are performing, the markets they are in (or might be in), and the general competitive and regulatory environment they operate in. Different financial institutions may look into certain market segments more than others. Companies regularly hold ‘investor days’ where they present their current position to these institutions. It is, usually, in the company’s interest to have the share price increase.

The institutions use this extensive analysis to decide on what they feel is a fair value for the company based on its forward plans. They will then decide whether to buy shares (if they feel the current price undervalues) or sell shares they already have (if they feel the current price over values). (As an aside, they can sell shares they don’t own - that’s called ’shorting‘.)

Institutions buy and sell big lumps of shares, and when they do they will effectively go out to traders who will know who is willing to sell, and at what price. The price you see in the paper is the average of shares bought / sold on the given day, and an institution who is looking to buy lots will be paying over that price.

 

[Starmill]

I personally use:

- Freetrade for a bit of fun, as others have described. Free to use and totally do it yourself, though doing it yourself incurs 0.5% stamp duty on most British stocks. Even then I'm mainly invested in two reasonably dull categories: insurance and professional services (e.g. Admiral, Legal & General, Direct Line) and energy trusts (e.g. Foresight Solar, Greencoat UK, NextEnergy Solar). I find these are good places to keep chunks of cash long term and get some decent yields without being involved in sectors I view with personal distaste such as tobacco, gambling, oil and gas, mining etc.

- Nutmeg for a professionally managed portfolio. Not cheap at all, a fairly hefty management fee of 0.75%, and overall fees at 1.15%, but some decent 'Socially Responsible' screening, also known as 'ESG' (for Environmental, Social, Governence) screening. This holds my Lifetime ISA so it's more money and it's all in the highest risk brackets because it's going to be there for many years until I'm 60.

I manage both through their app, if that's what you want it works well.

In addition to the above, I hold some direct investments in an Innovative Finance ISA. These mainly take the form of crowdfunded bonds, where a company goes to the general public to raise capital for their business / social enterprise / whatever and pay a fixed rate of interest. They're fairly high risk because you don't know who you're lending to unless you do a deep dive into the company on the platform. But personally that doesn't concern me too much, and I like that I'm able to connect directly to fund missions which I believe are good for the country without needing to rely solely on the big banks or the government. If this is something that's of interest I use Triodos Crowdfunding (https://www.triodoscrowdfunding.co.uk) and Abundance Investment (https://www.abundanceinvestment.com).

 

[Stathern Jc]

A lot of interesting information and advice in the posts in this thread.
Most options are a case of horses for courses, and that depends on how long a term of investment is needed, how easily you might need to encash all or part of your investment or add to it, and of course the level of risk you are comfortable with.

Probably the best advice I can offer is, don't put all your eggs in one basket, and keep an appropriate balance of safe and speculative.
And make your own judgement of what that balance is.

 

[CC 72100]

Yes it's fun but I've been very hit and miss with my picks! Got some Royal Mail shares which have tanked (-14.99%) but my First Group shares are doing quite well (+24.38%).

Oh I know that 'hit and miss' feeling. First Group is one of my stronger performers too, with most shares purchased around 79p and currently just over £1 in share price.

I've also gone for some of the green energy investment Trust (pays dividends) as latterly mentioned by @Starmill - Foresight solar, The Renewables Infrastructure Group and Greencoat UK.

Quite a bit is however just in the Vanguard FTSE All World ETF.

 

[ainsworth74]

"Tracker" funds, such as the FTSE 100 one mentioned by @ainsworth74, how do these actually work? Is the money simply spread across each company in the FTSE 100, so that any changes average out?

First thing to note is that it isn't tracking the FTSE 100 it's tracking a global spread of shares. Vanguard's trying to track the performance of the FTSE Global All Cap Index not the FTSE 100 Index. For instance looking at the details shows that 60% is actually invested in the US, 6.1% in Japan and only 3.9% in the UK. The fund invests in thousands of companies from Apple Inc (the largest) at 3.37% to thousands of companies I've never heard of like SalfaCorp SA (0.00001%) which appears to be a Chilean construction company. But yes the idea of a fund like that is to spread the risk out by getting a range of different companies in different economies and different sectors. Broadly.

 

[simonw]

At the risk of causing offence, I assure you none is meant, I am surprised at the number of folk in premium bonds and cash savers.

1% is, well, its not great to put it mildly. Given inflation is now posting 7% officially, (IMHO its more like 15% but we went over that in another thread) 1% means you are hurtling backwards in purchasing power by at least 6% per annum.


Now I appreciate the stock market is not for everyone, but, over time it does tend to keep pace with the wider economy and hedge against inflation owing to the fact many of the constituents of the stock market are able to translate inflation in to higher gross and net income and pass that on to the markets via equity prices and dividends.

If you want zero risk then sure, cash savers are an option, but you have nearly as little risk in sovereign debt, which at least yields some returns against inflation.

I find it peculiar that so many folk get upset about interest rates on cash accounts (family members in particular) when they have just missed out on a 12 year boom in equities that has made the 1920s look sedate.

They never stop to compare how much they have actually lost adjusting for inflation on the cash account method over those 12 years but are quick to point out the stock market goes down as well as up.

Isn't that just a cognitive blind spot for those who are unhealthily risk averse?

true up to a point. Hardly anyone is going to get rich putting their money in premium bonds but where you put your money depends on a number of factors:

How much you can afford to invest.

How much you can afford to lose. This covers a number of things, from how good your health is, to how secure your job is, to who is dependant on you etc

How long you can afford to the up you money for.

Why you happen to have the money spare and what your short/long-term plans are

Your age and responsibilities

Your understanding of investments/markets and how much time you want to put into investing.

The answers to these and other questions will start to inform where you should put your money.

For the avoidance of doubt, this is not financial advice.

 

[eoff]

I did not know about Freetrade, I used to trade shares although with limited funds, US shares via a free account with Ameritrade, but they forced me to move to a UK account, they were taken over and then introduced charges to keep the account. I was in it for the long term, only infrequently making trades, some shares did spectacularly well and some badly but I came out ahead. I can't commit to a long term strategy any more and that is the only way that worked for me.
The uptick in inflation means I have to reevaluate my savings now.

 

[david1212]

That depends on the rate. If you are fixed at, say, 1%, then rather than overpaying it is better to invest the money - you can get around 3% in cash accounts if you look hard enough, and 4-5% in the stock market on solid, safe blue chip companies (BP, Severn Trent, etc).

Through A J Bell, Vanguard etc it is easy and low cost to invest in FTSE 100 tracking funds and funds these providers have set up from a portfolio of companies. How though as an individual and inside an ISA can you invest in specific companies e.g. as quoted BP, Severn Trent say £1000 - £2500 with the similar costs to a FTSE 100 tracker fund?

 

[Mag_seven]

(I am aware that any advice given in this thread does not constitute professional financial advice.)

I'm considering entering into the dark world of investment, as interest rates are so low at the moment. However, I have no idea where to start. Do any forum users have experience of investment, things to avoid etc?
Should I, for example, start with a Stocks and Shares ISA? Are investment funds a good idea? High street bank vs City bank? Etc etc

Initially I'd be looking at investing around £1000; once comfortable with whatever system I choose, more money could be invested.

Thanks

Thread reopened.

 

[johncrossley]

Through A J Bell, Vanguard etc it is easy and low cost to invest in FTSE 100 tracking funds and funds these providers have set up from a portfolio of companies. How though as an individual and inside an ISA can you invest in specific companies e.g. as quoted BP, Severn Trent say £1000 - £2500 with the similar costs to a FTSE 100 tracker fund?

Buying UK listed companies is bound to cost more than a tracker. The main reason is the 0.5% stamp duty, which isn't payable on trackers. However, if it is available on a foreign exchange, for example New York, that avoids the stamp duty, but then you have to factor in currency fluctuations as well as foreign exchange fees, although I feel this isn't that important as big companies will be earning money in a variety of currencies anyway.

 

[Wynd]

As advice for beginners goes, tracker funds are about the best advice a beginner could hope to receive.

My own advice would be to buy S&P500 trackers, primarily because US returns are higher over the long term than UK, on average.

If you want to go stock picking, then there are a number of good books out there, same with options trading and commodity trading.

Ben Grahams's The Intelligent Investor has stood the test of time. Berkshire Hathaway owes its success to this book.

Review of "The Intelligent Investor" by Benjamin Graham: Value Investing Insights

Discover the core principles of Benjamin Graham's "The Intelligent Investor." This review explores value investing strategies and their ongoing influence on finance.

www.investopedia.com

 

[SuspectUsual]

Buying UK listed companies is bound to cost more than a tracker. The main reason is the 0.5% stamp duty, which isn't payable on trackers. However, if it is available on a foreign exchange, for example New York, that avoids the stamp duty, but then you have to factor in currency fluctuations as well as foreign exchange fees, although I feel this isn't that important as big companies will be earning money in a variety of currencies anyway.

True, but a tracker fund will have an annual management fee for as long as you hold it. Typically (from memory) they’re around 0.06% so after 8 years or so it’s cost neutral

 

[Wynd]

True, but a tracker fund will have an annual management fee for as long as you hold it. Typically (from memory) they’re around 0.06% so after 8 years or so it’s cost neutral

My own view on this kind of attention to detail, that is, focusing on the friction, or fees, of buying financial assets, is its penny wise and pound foolish.

I write off every transaction fee as a pint didn't buy. I dont bother thinking about it, because fundamentally, the fees to access these products are now so low, that its hardly worth thinking about.

Long term, provided you stay the course, and don't buy deeply suspect assets, stick with the blue chips etc, probability is you make some money.

The real litmus test is, could you as an individual have invested the friction/fees better? If the answer is no, is there much point in thinking about them?

 

[SuspectUsual]

My own view on this kind of attention to detail, that is, focusing on the friction, or fees, of buying financial assets, is its penny wise and pound foolish.

I write off every transaction fee as a pint didn't buy. I dont bother thinking about it, because fundamentally, the fees to access these products are now so low, that its hardly worth thinking about.

Long term, provided you stay the course, and don't buy deeply suspect assets, stick with the blue chips etc, probability is you make some money.

The real litmus test is, could you as an individual have invested the friction/fees better? If the answer is no, is there much point in thinking about them?

Indeed. And the not-bought-pint analogy is a good one. I was merely pointing out that access to tracker funds doesn’t come for free

 

[david1212]

Without quoting extracts of several posts thanks for the comments.

I expect fees both ongoing and one off transaction fees, I just check they are typical rather than excessive. Simplistic as well as hypothec in the current unstable situation but a fund with a track record of 12% growth but 4% ongoing charges would give a lower nett gain than another with 10% growth but 1% charges.

Given investments need to be medium if not long term 0.5% stamp duty is 0.1% over 5 years so insignificant. Avoiding it by purchasing in a foreign currency given the fees and fluctuation is not a path I would take.

For individual blue chip companies I simply wondered if there was a way to invest relatively small amounts inside an ISA without as a proportion high fixed purchase and sale costs and ongoing costs.

 

[Bald Rick]

Without quoting extracts of several posts thanks for the comments.

I expect fees both ongoing and one off transaction fees, I just check they are typical rather than excessive. Simplistic as well as hypothec in the current unstable situation but a fund with a track record of 12% growth but 4% ongoing charges would give a lower nett gain than another with 10% growth but 1% charges.

Given investments need to be medium if not long term 0.5% stamp duty is 0.1% over 5 years so insignificant. Avoiding it by purchasing in a foreign currency given the fees and fluctuation is not a path I would take.

For individual blue chip companies I simply wondered if there was a way to invest relatively small amounts inside an ISA without as a proportion high fixed purchase and sale costs and ongoing costs.

There is another option - spread betting. Entirely tax free, although (obviously) you don’t own the shares and receive no dividends.

This is not advice, for the avoidance of doubt!

 

[DarloRich]

Send me £100 and i will invest it in a number of different options, the first being an exciting opportunity in the 3:15 at Towcester...............................

( the value of your investments can go up and well as down. Mainly down. DR investment services give zero fuchs about you or your future and will enjoy gambling your money on things we wouldn't touch with our own. Regulated by non one. Trebles all round.)

 

[RJ]

true up to a point. Hardly anyone is going to get rich putting their money in premium bonds but where you put your money depends on a number of factors:

Maybe not, but if you fill it up you usually get at least one prize every month, sometimes more. Better than the scandalously poor return banks offer on savings.

 

[Bald Rick]

Better than the scandalously poor return banks offer on savings.

thats not true. The return rate of Premium Bonds is 2.2%, but that includes the 24 in 110 billion chance of winning the £1m each year. Realistically, (and statistically) for an average investor of £1000, the median return is 0% per year.

Meanwhile I’m getting 2.75% in the bank, and 4% is possible on a fixed rate ISA.

 

[johncrossley]

There is another option - spread betting. Entirely tax free, although (obviously) you don’t own the shares and receive no dividends.

This is not advice, for the avoidance of doubt!

They make adjustments to allow for dividends. However, you have to pay interest charges for holding positions overnight so not cost effective if you plan to keep a share for several years.

== Doublepost prevention - post automatically merged: 6 Oct 2022 ==

Send me £100 and i will invest it in a number of different options, the first being an exciting opportunity in the 3:15 at Towcester...............................

( the value of your investments can go up and well as down. Mainly down. DR investment services give zero fuchs about you or your future and will enjoy gambling your money on things we wouldn't touch with our own. Regulated by non one. Trebles all round.)

Matched betting (which isn't gambling) is a way of getting free cash for minimum effort, tax free. People also exploit casino offers. For example, get 10 free spins by playing £10 on a particular online slot. Technically not risk free, but by taking several hundred lower risk offers where the 'edge' is in your favour, you are practically guaranteed to be in profit.

 

[Wynd]

Meanwhile I’m getting 2.75% in the bank, and 4% is possible on a fixed rate ISA.

Is this your only investment, or just the cash aspect?

 

[Acey]

My insurance company ( Aviva ) is offering 4.35% for a fixed term ( 2 years investment ) it's a recent offer, so I'm wondering if they know for certain that the interest rates are going to rocket in the future and they will be able to use your money more profitably for themselves ( obviously )

 

[Bald Rick]

Is this your only investment, or just the cash aspect?

Just the cash, although to be fair I’m currently sitting in most of my investment portfolio (Excluding the pension).

 

[Busaholic]

Don't 'invest' in bitcoin. £1,000 will likely plummet to nothing in the twinkle of an eye.

Re Premium Bonds. My wife and I purchased £10 worth on marriage in 1969 (a tenner was a week's wages for some then). We had £5 in each of our names. We never won a penny, until three days after my wife's death earlier this year and a £25 prize landed in our letterbox, made out to her. She'd have appreciated the irony and, after close scrutiny of the cheque, I established that as it was dated prior to her death I could pay it into her still extant bank current account, confirmed at my appointment with her Bank Manager a couple of days later. Anyone saying this strictly speaking shouldn't happen without acres of extra bureaucracy, I'll just repeat I used the word 'could' which was what happened: if it had been a significant prize I would probably have had to go through all the hoops. Just goes to show, in life, you never can tell!

 

[Stathern Jc]

Condolences Busaholic.
Think that could probably have been a case of having the cheque in your hand that could be paid in before her account was frozen and you started having to deal with another team at the bank.
What you need to do as an executor would be a subject in itself, but a good start I found was to write letters introducing myself with a photocopy of the Death Certificate for info, replies then came with relevant forms and requests for sight of the original Death Cert if needed (having more than one copy is useful too).
However, I digress from the theme of investing for the future.

 

[Sm5]

1. Whatever you do, dont go all in.
2. Make sure its you thats in control of it (you dont need someone else to lose money for you)
3. You control a timetable your comfortable with
4. Always be sure of the worst case, and can you afford to lose whatever that worst case looks like…ask yourself, what would your life look like without it ?