A beginner's guide to investing in shares: Okay, I'm convinced - so where do I buy?
Purchasing your shares can give you a warm feeling inside, says Magnus Grimond
Sunday 16 November 1997
Freebies aside, arguably the simplest and most satisfying way of buying shares is to take part in a "new issue" where a company such as Railtrack lists its shares on the stock market for the first time. Simplest because all the information is laid out in relatively straightforward language in a "prospectus". As the name suggests, this is a selling document for the company concerned, so is hardly unbiased. But it is probably the most comprehensive repository of information on the company you will see and the financial parts have to be independently audited.
Satisfaction comes from the warm glow the investor feels at taking part in one of the primary functions of the stock market - to raise money for growing companies. The idea is that the company sells some new shares for cash, which it then uses to develop the business in the way outlined in the prospectus.
Alternatively, the existing shareholders may sell all or part of their shares to raise money for themselves. Not surprisingly, things do not always turn out as intended and it is as well to be careful if existing shareholders unload a suspiciously large chunk of shares.
Listing, or floating, for the first time need not involve raising cash. A few companies seek a listing, known as an introduction, simply to create an easier market for buying and selling their existing shares or because they are demerging - offloading - parts of the business. But "offers for sale" are more fun, allowing anyone, big or small, to buy shares through the post after filling out a simple form in the prospectus. There are no stockbroker's fees and often, particularly in the heady days of the 1980s, the shares start trading well above the price they were offered at (known as a "first day premium"). Understandably, this made new issues hugely popular among smaller investors. However, in its wisdom, the stock exchange changed the rules to make raising money cheaper for companies. Coming alongside the demise of the massive offers for sale of the privatisation programme, this has made offers a rarity.
Nowadays, small investors mostly have to be on the books of a friendly stockbroker to get a sniff of a new issue before it hits the market. And with the smaller companies that usually form the backbone of the new issues market currently out of favour, stock market launches of any description other than building societies have been few and far between this year.
But that does not mean the small punter is entirely squeezed out of the market for new shares. "Placings", either by companies new to the market or those already "quoted" on the stock exchange, allow customers of stockbrokers to pick up shares at the same price as the City big guns. Equally, someone who already owns shares in a company has the chance to pick up more when a "rights issue" is announced.
Rights issues can often provide a means of acquiring shares on the cheap. The new shares will be offered at a substantial discount to the existing price. And while the theory says that the two prices should converge somewhere in between to leave you no better or worse off afterwards, in fact, the price very rarely falls that far.
All this leads us to what is the core way of buying and selling shares, through a stockbroker. Unfortunately, despite huge upheavals over the past 10 years, brokers remain a depressingly expensive breed. Typical commissions paid for buying and selling shares, expressed as a percentage of the value of the transaction, are still around 1.5 per cent. That said, one of big benefits of more competition has been the arrival of "execution only" brokers who give little or no advice but offer an efficient and sometimes much cheaper service over the telephone and even the Internet. Sharelink is one of the biggest. It claims to have 600,000 customers, although with a commission of 1.5 per cent on deals of up to pounds 3,000 and a minimum of pounds 20, it is not the cheapest. The Share Centre, another execution- only dealer linked up to the Internet, offers a cheaper deal for small transactions.
However new shareholders may feel happier having some guidance, at least to begin with. Banks like Barclays and NatWest will offer both execution- only and advisory services, often surprisingly efficiently run. They also offer useful extras, including share and stock market opinions based on research only available otherwise to big institutions.
So it certainly pays to shop around, but remember the comfort factor is also important. There is a lot to be said for getting advice from someone you trust and feel is interested in even quite a small portfolio.
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