Private investors rally to rising market

Phrases like 'fill your boots while stocks last' are once again buzzing round the internet

Financial experts are fond of asserting that the stock market is the best place for our money. They say that over time our savings, windfalls and pensions will make more money invested in shares than stowed safely, but boringly, in a building society account.

Yet anyone who has followed their advice in recent years is likely to have suffered a setback, if not a catastrophe.

The swarm of new investors who bought into technology and internet companies in the approach to 2000 made staggering amounts of money - if they got out in time. Anyone hanging on after the party ended on New Year's Eve 1999 when the FTSE 100 peaked at 6,930, will have seen their investments crash. By 12 March this year, the FTSE 100 had plunged to an almost unthinkable low of 3,287, valuing shares in Britain's leading companies at less than half what they had been just three years earlier.

The market may have turned another corner. There are signs that private investors are heading back into shares with a vengeance. The FTSE is up more than a quarter to more than 4,200. And many City pundits are predicting that the FTSE 100 will close the year with a further surge to 5,000.

For the first time since those heady days of 1999, the City is beginning to believe there may be an end in sight to the job losses, slashed bonuses and corporate downsizing that have deprived London's economy of millions of pounds. The bounce-back is also good news for millions of Britons who would not know a stockbroker from an insurance broker or a balance sheet from a nylon sheet. Their pensions, not to mention endowment mortgages or regular savings plans, are likely to be swelled by hundreds if not thousands of pounds from the rise in share values.

And investors with a direct stake in some of Britain's best known companies will have made a fortune outright by backing the right companies.

Carlton Communications, the owner of several of the biggest ITV franchises including Central and HTV, has almost trebled in value from a March low of 68p to 173p now. Rolls-Royce, the engine maker, has staged a similar comeback, from 64p to 169p. Another household name, the insurer Royal & Sun Alliance, is up a mighty 173 per cent.

Earlier this month Barclays Stockbrokers, Britain's largest broker for private investors, pointed to a rise in business. "Dealing volumes ... are up over 50 per cent from the market lows March," said Hans Georgeson, an executive.

Clients are markedly more confident now - 67 per cent of Barclays' customers believe their investments will grow and 60 per cent intend to pump more into the market in the next six months. A year ago, only 38 per cent expected the value of their holdings to grow and just 46 per cent intended to invest more money.

Other companies are also witnessing a rise in activity among private investors. Moneyextra, which provides online share trading services, reported a 27 per cent jump in share dealing for April and a 70 per cent jump in May. Yet it has taken a long time for investors to shrug off the stock market crash. Many took huge hits on the firms they backed when there seemed to be no end in sight to ever-rising stock market valuations. Some of the biggest names in corporate Britain were devastated by the collapse of the dot.com boom in 2000. Then the FTSE 100 tumbled to a low of 4,430 after the 11 September attacks in the US. Then there was further pain before the market slumped to its nadir this March.

The world's biggest mobile phone company, Vodafone, slumped from 399p at the end of 1999 to 80p last July. BT peaked at 1,053p on the eve of 2000, falling to almost a 10th of its value, 141p, this March. Lastminute.com, the internet start-up run by the entrepreneur Martha Lane Fox, dived from a flotation price of 380p to 18p. These companies have fought back. BT shares now sell for 184p, and Vodafone for 116p. Lastminute.com has staged a remarkable turnaround, up by more than 250 per cent to 276p.

So what is driving investors back into the stock market? Low interest rates seem to be the main reason. Shares are now so lowly priced that the amounts companies pay out to investors in the form of dividends (the yield) are highly attractive. Although the Bank of England base rate stands at a mere 3.5 per cent, the lowest since 1955, anyone with shares in the banking giant Lloyds TSB receives 7 per cent a year. The water group AWG yields an even more impressive 9 per cent. Analysts also point to a widespread belief among investors that the eight-year low the FTSE 100 hit in March will not be seen again.

Barclays believes that the end to the volatility seen in the market at the start of the year is giving private investors the confidence to return to equities. In the run-up to the war in Iraq, FTSE 100 stocks regularly lost a 10th of their value in a day. "Private investors don't like volatile stock markets. They don't like the idea of buying a share which could be down 10 per cent by the following day," explained a spokeswoman.

Stocks in the less highly valued companies in the FTSE 250 index have also been of interest to private punters who have been drawn by a high number of mergers and acquisitions. In particular, private financiers have been buying up big retailers like Selfridges, Safeway and Hamleys.

And whenever there is a buyout, the buyer tends to offer a far higher price than the market, providing a payday for investors.

The real money from the stock market's comeback has been made by private punters dabbling in small companies. The City's big guns rarely touch these so-called penny stocks because their shares are traded infrequently and can be difficult to sell in a hurry.

Here investing a bet rather than a decision based on analysis. These investors hope they will pick a winner that will soar. Soar in this part of the market means double, quadruple or even more, something that is unlikely to be achieved by an investor with buying into a blue chip or FTSE 250 share. And of course there are numerous examples from the past to whet punter's appetites.

Polly Peck is a classic penny share story recited by brokers and tipsters. Its stock went from 9p to £36 during the 1980s. £1,000 invested at 9p would have been worth £400,000 at the peak. A more recent example is stockbroker turned technology incubator Durlacher, which saw its shares soar from 17p to a high of 447p during the last stock market boom.

Polly Peck later went bust while Durlacher has lost 99 per cent of its value since the peak and is now back to being a simple stock broker.

Yet private investors are unperturbed by the latest clutch of warnings. One only has to look to bulletin boards of financial web sites to see a return of the bullishness of the technology boom. Phrases like "This one is going to the moon", "this stock is a 10 bagger" or "fill your boots while stocks last" are once again buzzing round the internet.