A Beginners guide to Investing i shares - So why bother?

In the first of a new series on the stock market, Magnus Grimond explains its long-term appeal
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The Independent Online
Love it or hate it, the stock market has suddenly loomed large for huge numbers of people who have received windfall shares from former building societies.

Around 16 million or 17 million people, many for the first time, are reckoned to have been catapulted into share ownership by the flotations of the Halifax, Woolwich, Norwich Union and other former mutual businesses. Many have decided they want nothing to do with the market and have already voted with their feet by cashing in their shares.

But if you are part of the majority that has not, we hope over the coming weeks to convince you in a series of articles explaining stock market investment that this foray can be an exciting and entertaining additional source of income. And for veterans of the 1980s privatisations like British Telecom, British Gas and the electricity companies, along with other more seasoned investors, we modestly hope to impart a little knowledge that will add to the profits and enjoyment of your shares.

This year's bonanza has given a huge boost to the cause of the little investor, who has been a steadily declining force in the stock market despite Margaret Thatcher's efforts to involve "Sid" in her privatisation programme. Although the number of small shareholders more than tripled to around 9.5 million between 1979 and 1996, the average value of shares held remains tiny. Sid and his mates now control a little over one fifth of all shares quoted on the Stock Exchange, whereas 40 years ago it was more like two-thirds.

Such disenchantment is understandable, given the impenetrable jargon, the huge changes and the bad publicity that all too often seems to surround the stock market. Few people have felt any enthusiasm to explore beyond the odd privatisation share and, with the London market scaling unheard- of peaks ahead of the 10th anniversary of the 1987 crash next month, many will be feeling an uncomfortable sense of deja vu. Is it all going to end in tears again?

Certainly, if it does crash, it will not happen in a vacuum. Without getting too pompous, the stock market penetrates almost everything we do. From apples to xylophones, from condoms to bibles, almost anything anyone has ever done or made to attempt to turn a profit has ended up being represented by a share traded on the stock market. Many people who regard themselves as having little exposure to the stock market may not realise shares make up the bulk of investments that back endowment mortgage policies and pension plans.

Quite simply, shares are the best way to prevent long-term savings being ravaged by inflation. This becomes horrifyingly clear in figures produced by BZW, the investment bank that is now being sold off by Barclays. An investor who had put pounds 100 into a building society at the end of 1945 would now be sitting on pounds 1,063, says BZW. By comparison, pounds 100 invested in a spread of shares ("equities") would now be worth pounds 25,017, assuming all the dividends received were used to buy more shares.

But inflation is the real bugbear for long-term savers. It is easy to forget that inflation has twice topped 20 per cent in the last 25 years and in the last 50 it has averaged more than 6 per cent a year. Factor that into BZW's investment calculations and the buying power of the building society pot falls to just pounds 50 - in other words, keep your cash in the bank and watch it halve in real terms over a working lifetime or so. In the mean- time, the shares are still worth pounds 1,187, or more than 11 times the original stake. That far outstrips even "gilts" - the bonds issued by the government to pay for schools, roads, hospitals and the like - which, despite the rock-solid guarantee of the state, would have been worth just pounds 99 in terms of spending power by now. It does not take a genius to see which route the smarter investor should take.

Yet the stock market remains one of the best-kept secrets from the investing public. While many seem prepared to spend hours seeking out that extra half a percentage point of interest offered by Middlington Homeshires building society or putting their money in the right Tessa or life insurance policy, few seem prepared to get involved in the daunting business of buying a few shares.

For many it is the risk. Shares undoubtedly go down as well as up and some, even household names, disappear altogether - witness Rolls-Royce in the 1970s and Maxwell Communications in the 1990s. Make no mistake, investing in individual shares requires strong nerves and an ability to learn from errors, but the hope is that these articles will pinpoint a few of the common- sense ways to avoid the worst pitfalls.

Others are put off shares by a simple comparison of the value of dividends, just over 3 per cent on average, against the higher building society interest rates that are available.

But that of course is only half the story. The income is derived from dividends paid by the company that issues the shares, but, unlike building society interest, dividends from a decent investment should grow progressively over time. Their value compared with the amount of money you originally put into the shares can become huge. Take Glaxo Wellcome, the drugs company. If you had invested in its shares in the early 1980s and held on, your income in dividends every year is now running at roughly a third more than your entire initial investment.

Not a bad return, even if it has taken half a generation of patience.

If you can overcome such phobias then we hope over the coming weeks to cut a path through the jungle of jargon and mystique that surrounds share investing and even give some insight into why it can be fun. And remember, in retrospect, Black Monday, 19 October 1987, represented a buying opportunity: the stock market ended the year higher than it began. For the long-term saver, there is no other place to be but in the stock market.