A BEGINNER'S GUIDE TO; INVESTING IN SHARES: A few words in your ear

Market jargon can sound baffling. Magnus Grimond offers novices some help with translations
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WITH luck, our beginner's guide to shares has helped initiate a few novice investors. Many, however, may still feel a bit left behind or in need of a little refresher on the distinctly offputting patois of the money men. This week, therefore, we offer a brief guide to junking the jargon and unravelling the acronyms.

Still the most important tool for the share picker remains the price- earnings ratio. At its simplest, the p/e ratio is the after-tax profits of a company available to its shareholders, divided by the total number of shares issued. The figure is usually expressed as so many pence per share. It provides a handy ready-reckoner to test a company's share price against its peers and the market.

Next in importance in the investor's toolbox is the yield. This represents the sort of percentage income you can expect from a particular share if you invest at the current price. In principle the calculation involves taking the total dividends for the year, dividing it by the share price and multiplying by 100.

As usual, tax muddies the picture. Dividends generally come with a tax credit, which covers any requirement to pay basic and/or standard-rate tax. Currently, the City adds the credit back to arrive at a gross yield figure. But the tax credit is becoming less and less valuable. The Government is gradually phasing out the ability of non-taxpayers to reclaim it, and from April next year the current 20 per cent tax credit will halve to 10 per cent. It looks increasingly likely that net yields - that is, with tax deducted - will become the norm with investors.

But boring old measures like p/e ratios and yields are being cast aside as the stock market drives onwards and upwards to ever-more vertiginous heights. Economic value added (EVA) is the latest buzzword in the boardroom. Its basis is deceptively straightforward: simply take the value put on a company by the stock market, add in its debt, and deduct from it the cash investors have put into the company over the years. If the result is positive, the company has added shareholder value, if negative, it has destroyed it.

EVA refines this approach to determine whether the company's return on capital exceeds its so-called cost of capital. Devotees, particularly from the US, claim it leads to superior share price returns. That may or may not be, but in the meantime it is generating fat fees for advisers and even fatter share options for company directors.

The business of dealing in shares throws up a language of its own. The bid-offer spread is the difference between the price at which you can sell your shares and the price at which you can buy them. It may refer to the prices quoted by a unit trust for its units or for shares traded by a market maker, who makes a turn by keeping the spread, or on the new Stock Exchange Electronic Trading System. The touch is the best buy and sell price on offer, so it will be the highest bid price and the lowest offer price of a share. In between, the mid-price splits the difference and is normally the one quoted in the newspaper share pages.

Having boned up on the prices, you might ask your stockbroker to deal at best: that is, get the best price he can at that moment. Alternatively, you might set a limit order so that he only deals within certain price limits.

As a private investor, you may want the growth of your investments to beat an index. As well as the FT-SE 100 (the Footsie), you may think your stockbroker is not much good unless he can beat the FT-SE All Share Index. Despite its name, it only covers 868 of the 1,902 UK companies quoted on the Stock Exchange. However, 97 per cent of companies by value are in the All Share, of which 77 per cent are in the Footsie. Alternatively, you might want to measure performance against a sector index or one based on the size of the companies included, like the self-explanatory FT-SE Fledgling.

Professional fund managers watch these things slavishly. They may decide to be overweight. Not necessarily an eating disorder, this refers to a bullish investor's decision to have relatively more of a company, sector or country in his portfolio than its contribution to an index would dictate. He might equally well be neutral or underweight.

This is just a tiny sample of the investment jargon an amateur punter must get his or her mind around. It is a constantly changing mosaic, with the Internet and chartism adding whole new vocabularies to the equation. The only consolation is that, unlike rocket science or biotechnology, the language of shares is generally relatively straightforward once you grasp the principles.

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