Investing For Dummies Cheat Sheet (UK Edition) - dummies
Cheat Sheet

Investing For Dummies Cheat Sheet (UK Edition)

From Investing for Dummies - UK, 4th UK Edition

By Tony Levene

Cheat sheets contain bite sized text that lets you know some key points when investing. Want to impress your friends with your investing knowhow or simply want to grasp one or two key facts? Look at the cheat sheet and find out the difference between bonds and shares. Take on board some sound tips for the cautious investor. Discover exactly what fund managers can do for you. Know what to look at when selecting a stockbroker. This cheat sheet will give you all the basics and is a fun way to get useful information fast!

Knowing Your Investment Bonds from Your Shares

You will often hear investors mentioning both shares and bonds in the same breath. They can come from the same company, but there are plenty of differences. These differences include the following:

  • Shares are permanent, or until the company is taken over or goes bust. Bonds usually have a fixed life, shown on the paperwork you get.

  • Shares pay dividends, which can vary. Bonds pay interest, which should be fixed.

  • Shares give holders a say in the company proportional to their holding. Bondholders, in most circumstances, have no ownership or annual meeting voting rights.

  • Share prices can be very volatile. Bond prices vary less from day to day.

  • Share prices depend on profits. Bondholders have to worry about credit risk – the chance of the company going bust and failing to repay – because they won’t share in any profit increase.

Taking On Board Some Sound Tips for the Cautious Investor

Not everyone wants to jump in at the deep end. If you’re a cautious investor and you think the time is right, you may want to try one or some of the following:

  • A bond fund. Your money goes into fixed-interest securities tied either to governments or companies.

  • A mixed fund. This type of fund focuses on a mix of lower-risk shares, bonds, cash and property.

  • A targeted absolute return fund. The idea here is to achieve a steady return from a variety of assets, whatever financial market conditions might be. The ‘target’ is the percentage the fund’s managers attempt to produce above the interest you could get in a typical bank account.

  • A tracker fund. This type of fund follows a stock market index such as the FTSE 100 – or the Footsie – up and down. This option is good if you want to invest in shares but have no idea which ones to buy or which fund manager to back. But don’t forget: an index can be all over the place!

Being Aware of What Investment Fund Managers Can Do for You

Not everybody has the time or inclination to actively manage their investments. Fund management companies perform a number of useful tasks if you’re a hands-off investor:

  • They carry out all the purchases and sales, dealing with stockbrokers and taking advantage of economies of scale.

  • They deal with all the paperwork associated with dividends.

  • They take care of taxation within the portfolio.

  • They offer access to a diversified portfolio for a small sum of money.

  • In some cases, they make asset allocation choices, such as moving from shares to bonds.

  • They provide you with the comfort factor of being able to blame someone else if your investments head nowhere.

Knowing What to Look at When Selecting an Investment Stockbroker or Adviser

Most investors in the UK don’t need a stockbroker, except occasionally, when you can find a no-frills firm to buy or sell shares for you online. But if you’re more serious, then shop around to find a stockbroker (or adviser – the terms are often interchangeable) who’s right for you.

Areas for your personal research might include:

  • Costs. This shouldn’t be your first consideration, but it’s essential all the same. Excessive costs can wipe out gains from a clever investment strategy. Very excessive costs can turn good decisions into instant losses.

  • Level of service. Consider the experience of your contact or account executive, as well as whether email alerts and regular newsletters or other forms of stock recommendation will be sent out. Find out whether the broker offers a portfolio based on unit trusts, investment trusts or exchange-traded funds.

  • Protection from churning. Unscrupulous brokers try to earn more from your investments by overly frequent buying and selling. You should agree to a limit on their trading activity.

  • Size of portfolio. Make sure that you’re well within the broker’s parameters. If the broker wants a minimum £25,000, then having £25,001 isn’t much use because you could easily fall below the line if markets turn against you. Ask what happens if your fortune shrinks through bad decisions or because you choose to spend some of your money.