Personal Finance: Fool around on the stock market
Sunday 10 January 1999
Most people focus on the downside. It is true that you can lose money by investing in the stock market and you often hear anecdotal stories of investors losing their shirts. But, over the very long term, the stock market goes up. Since 1918 it has returned on average 12.2 per cent per annum. That is not stuff of headlines. It is boringly consistent, and over the long term Fools should be very happy to accept boredom at 12.2 per cent per annum.
To put that in some perspective, pounds 10,000 invested at 12.2 per cent per annum compounds to pounds 100,000 in 20 years' time. A nice little retirement nest egg.
If you've got a pension, you are already invested in the market. See, it wasn't that difficult was it? Next step is to consider taking the plunge and plumping for a cheap index-tracking fund. Also consider wrapping that in a PEP (soon to become an ISA) and investing a monthly amount in that fund. Your first steps to being a market expert are easier than you think. And then you may even want to buy some shares using your own judgement. So, to kick off ...
Who said January is the month for abstinence? Last week the FT-SE leading index of 100 shares shot above the psychological 6,000 mark. Buying by institutions, fund managers and (I dare say) individuals helped push the market forward.
The market is being propelled forward on a couple of fronts. The Bank of England chopped another 0.25 per cent off base interest rates on Thursday, in theory making shares more attractive than other forms of investment. Positive corporate news also helped push the market ever higher.
Did you get a mobile phone for Christmas? If you did, you weren't alone, as the UK's four operators connected a stunning 2.5 million new subscribers in the three-month period before Christmas. Vodafone, the market leader, now has almost 5 million UK subscribers and more than 20 per cent of the population are now mobile.
Forecasts of 50 per cent penetration by 2002 are not uncommon, so the growth party for these companies doesn't appear to coming to an end any time soon. The stock market has recognised this, and pushed the shares of Vodafone and fellow operator Orange to record highs. BT and Securicor own Cellnet and Cable & Wireless owns half of One2One and the share prices of those three companies didn't miss out on the action. This is a true growth industry and one in which UK companies lead the world.
Find out more on the Motley Fool website: www.fool.co.uk
ask the fool
Q. What exactly is a dividend? - JO, Sussex
A. A dividend is like a salary paid to shareholders of a company. Twice a year the company takes a share of its profits and distributes them to its shareholders. Some companies like to pay larger dividends than others and some - mainly smaller, but some larger, too - don't pay any at all.
Microsoft, the mammoth American computer company, which is probably the most successful company of the last decade, does not pay any dividends at all. It thinks it can best reward shareholders by keeping hold of all the profits and investing them in the business to make it grow even further.
You can tell how much of a dividend a company pays by looking at its dividend yield. This is often listed in a newspaper's financial pages. It is the dividend, divided by the share price, expressed as a percentage. If it is 5 per cent and the share price is 100p, then you know that shareholders will be receiving 5p for every share they hold as a dividend that year.
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