A voyage of discovery

STOCK MARKET INVESTMENT: here and on pages 20 to 21 we look at the ups and downs of using your hard-earned cash to buy shares
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The Independent Online
These DAys, Deptford Creek is an almost deserted backwater. But 400 years ago, it was one of the most important ports on the Thames. In 1553, when Sir Hugh Willoughby led his three small ships onto the river, he was not simply embarking on a voyage of discovery, he was laying the foundations of the modern business world.

Uniquely for the time, his expedition was financed by a group of businessmen who had banded together to form the Mysterie and Companie of Merchant Adventurers for the Discoverie of Regions, Dominions, Islands and Places Unknown.

The expedition was both a tragedy and a triumph. Within a year Willoughby and his crew were dead - caught in the Arctic ice as they sought the North-east Passage around Russia to China. But another captain, Richard Chancellor, survived, travelled to Moscow and negotiated Britain's first free-trade treaty with the Russian Tsar, Ivan the Terrible.

The Muscovy Company was the first business in Britain with a modern company structure that separated ownership from management. The merchants each subscribed pounds 25 for a share of the business but did not get involved in day-to-day operations, which were the responsibility of the governor and his deputies, or as we would call them, the board of directors.

Most companies today are engaged in less exciting activity than discovering unknown lands but the basic structure remains the same: ownership is in shares that can be traded freely and is separate from the management of the business.

About 9 million people in Britain own shares, either investing in them directly, or with indirect shareholdings through pension funds, personal equity plans or unit and investment trusts. The attraction is simple: over the long term, money invested in shares will be worth much more than if it were kept in a savings account, particularly at the present level of interest rates. Yet many investors continue to shun the stock market.

That is often because of the perception that investment in the stock market is risky, difficult and only for rich folk in the City. The truth is rather different.

When you buy shares you hope to make money in two ways: a regular income from the dividend and capital growth, by which the shares will ultimately sell for a higher price than you paid in the first place.

But it is important to know that dividends do not always increase from year to year. If a company's profits take a nosedive, the payout to shareholders may be cut or even passed altogether, although this is rare.

Movement in share prices is influenced by many factors (the world economy, interest rates, political developments at home and abroad) not just individual company performance. In recent months, for example, share prices on the London Stock Exchange have been hitting record highs but many commentators and professional investors think this trend is unlikely to continue and that a downturn is likely.

If you do not have a well-funded pension plan and some spare cash put away for unforeseen emergencies, do not even think about the stock market. But if you do have money to invest then you may want to consider investing in shares as a way to make it grow over the long term, say five or 10 years.