Personal finance: Don't gamble unless you have money to lose

UNDERSTANDING THE STOCK MARKET
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Indy Lifestyle Online
Go to half a dozen reputable stockbrokers for advice on investing in shares and the chances are you will be given six different answers. This is after you have provided all the relevant information such as your age, income, assets and liabilities, family commitments, future plans and your attitude towards risk. The fact of the matter is there is no "right" way. But there are ways which should be avoided.

There is no shortage of people with views on what shares to buy to make a fortune. In the belief that garments made from sackcloth are going to be the fashion for the millennium, they could wax lyrical about a small quoted company which is in an ideal position to corner the market. Of course, you are to tell no one else and both of you will make a fortune.

However, if you are serious about making money from the stock market and you do not have money to lose, do not adopt a gambling instinct. Of course, you may pick a share which is a winner, but on the other hand, you may lose your shirt.

On a serious note regarding tips from friends who work for a company, there are very strict rules regarding acting on privileged information (ie unpublished facts) which, when revealed, will influence a share's price. Insider dealing, as it is called, is a criminal offence.

While you may also do well by sticking a pin in the shares listed on the business pages, you could just as easily pick a Polly Peck, Lowndes Queensway or some other company which is destined to be worthless in the future. I once heard of an investor who bought low-priced shares in companies with unusual-sounding names. Neither of these ways is recommended.

Before you begin to decide what you are to buy, you must give some serious thought to your own position. Assuming that you have adequate pension arrangements and a suitable cash reserve, what money can you afford to invest in the stock market? What are you looking for? Do you want to build a capital sum for the future, or are you really looking for income?

If you are within a few years of retirement, and are relying on a share portfolio to pay off debts or buy an annuity, time is not on your side to recover from any losses. Your priority is likely to be preservation of capital while seeking ways to generate additional income. It is likely that lower-risk shares, together with gilts, unit trusts and cash deposits, will be your route to achieve your goals.

On the other hand, if you are younger and financially secure, you can afford to be a little more aggressive in your approach. Including shares of some smaller companies in your portfolio may therefore appeal, as they have the potential for spectacular growth. However, a higher proportion sink without trace. If the thought of suffering a loss will cause you sleepless nights, this route is certainly not for you. Instead you should be thinking of a few shares which are "growth stocks", which means they will hopefully steadily increase in value over time, as well as some more pedestrian investments to act as a cushion.

However, whether your aim is income, spectacular growth or more reliable appreciation in the value of your shares, there is one golden rule - spread your risk. Do not set yourself up as a hostage to fortune by just relying on the performance of one or two shares. Opinions differ as to the ideal number of companies in which a private investor should hold shares. Some say 10, others as many as 20. ProShare's chief executive, Gill Nott, says: "As a very general rule, you should aim to have the shares of at least six different companies in your portfolio at any one time."

Spreading the risk by holding shares in, say, six banks or six retailers is not the answer, however. Ms Nott's advice is clear. "It is wise to buy shares in a number of different companies in different sectors of the market, so that if one share or sector performs badly, this will be balanced by the performance of your other investments." In other words, consider selecting one share from six different sectors.

Given that the recommended minimum shareholding is pounds 2,000, so as to absorb the buying and selling costs, how does the newcomer to the stock market with limited funds start? One solution is to begin by investing in a unit trust before investing directly in shares. This will create an instant portfolio. While more funds are being accumulated, make some imaginary investments and follow their progress to test your skill in stock selection.

- John Andrew

"Choosing the Right Investment for You" is ProShare Investor Update No 2. Send an A4 stamped addressed envelope to ProShare, 13-14 Basinghall Street, London EC2V 5BQ.

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