Investment Options: Share in a fine future

How do you start to build a share portfolio and how much will it cost?

ONE IN three people in the UK now owns shares. Once limited to the wealthy, share ownership is now widespread, thanks largely to waves of privatisations and building society conversions.

Hanging onto windfall shares is one thing, but how much money do you really have to have to start building your own equities portfolio?

Share prices took a dive in late summer, and this has done nothing to encourage small investors to trust their hard-earned cash to the stock market. But over the longer term, most experts agree shares offer the prospect of higher returns than bank or building society accounts.

William Davies, of stockbrokers Capel-Cure Sharp, estimates you should ideally have at least pounds 20,000 to pounds 30,000 to invest in individual shares before you start.

"You need to have about a dozen companies [in your portfolio] if you were investing in the UK," he says. Having one holding in each industrial sector would help spread your risk. "If one part of the market performs badly, you don't want to be exposed to that alone," he says.

People with pounds 5,000 or less to invest might be better off with a collective stock market investment, such as a unit trust, says Matthew Orr of stockbrokers Killik & Co. This is a fund of shares in, say, 100 different companies of which you buy a unit.

So with a relatively small amount of capital you can spread your risk broadly.

Because of the risk that share prices will fall, all your main financial needs should be taken care of before you consider owning individual shares, says Finola Healy of ProShare, an organisation which promotes share ownership. "Make sure you have everything else sorted out first. Putting money in the stock market should always be money you can afford to lose," she says. Would-be stock market investors should first make sure they have enough life insurance, see whether their pension needs topping up, and check that they have an easily accessible fund of cash for emergencies, ProShare says.

You need the services of a stockbroker to buy and sell shares, and they offer different levels of service: advisory, discretionary or execution- only. Most novice investors would be wise to opt for an advisory service, where the broker gives advice, but leaves the final decision up to you.

Under a discretionary service agreement, the broker has the authority to use his or her own judgement to buy and sell stocks for you when it seems appropriate.

Execution-only service is the cheapest way to trade shares, with the broker following instructions and giving no advice. There is fierce competition between execution-only brokers and new services will be available next year as more US firms enter the fray. Internet stockbroking services are on the increase.

In general, using a stockbroker costs around 1.75 per cent of the value of the trade you make. You also have to pay 0.5 per cent in stamp duty. Charges can be hard to compare - some have a fixed fee and others charge commission. Some are cheap if you only buy or sell twice or three times a year, while others are better value for investors who trade more frequently.

Brokers' Tips

MATTHEW ORR, of Killik & Co, recommends healthcare stock Nycomed Amersham, and fund manager Amvscap. The smaller company, Psion, looks particularly interesting because of its Symbian venture with mobile phone companies, creating a new operating system.

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WILLIAM DAVIES, of Capel-Cure Sharp, says that market worries about Lloyds TSB's bad debts have been overdone, and the bank is expected to continue with share buybacks. Vodafone is the market leader both here and abroad, says Mr Davies, and has operations in relatively immature mobile telephone markets. SmithKline Beecham has a good pipeline of products in development.

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STUART FISHER of Williams de Broe tips BAA, saying that growth in discount airlines will lead to more passenger traffic, and more money for airport retailing. BSkyB has good long-term prospects with its digital products, and Orange could be a good buy.