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Though much of an APCIMS member's work typically involves
dealing with UK company shares, many will advise and deal
for clients in, for example, international securities, British
Government stocks (gilts) and options and futures (derivatives).
Many also run their own unit trusts and investment trusts
and virtually all offer PEP and ISA services to help maximise
the tax efficiency of your investments.
They will also advise clients on other investments such as
National Savings & Investments products and also make
recommendations on building society or bank deposit accounts.
Increasingly, APCIMS members are offering full cash management
facilities, enabling clients to achieve the most effective
management of both their cash and investments. Some even offer
banking facilities with cheque books.
However the core activity remains the trade in securities
(stocks and shares) quoted on the London Stock Exchange. The
following key definitions might help:
Shares (also known as equities) - when you buy shares
in a company, you become a partial owner of it. Your principal
benefit as a shareholder is to receive a share of the profits
- usually in the form of a dividend. If the company does well
over the years and increases its profits regularly, you will
enjoy a rising dividend income and the prospect of attractive
capital gains.Apart from share prices rising as a result,
or in anticipation, of a take-over bid, the prospect of rising
profits and dividends is what drives share prices upwards.
Equally, the prospect of falling profits and dividends depresses
share prices. These prospects influence prices because companies
issue a fixed number of shares. If more investors want to
buy shares than sell them, or vice versa, the imbalance between
supply and demand moves the price, as with any asset, whether
it is a work of art or a ton of wheat.
Different investors buy different kinds of shares for different
reasons. For example, shares in companies which are thought
to have excellent prospects tend to have low dividend yields
because demand for the stock has already pushed the price
to a high level relative to the dividend payout. These companies
may hold on to most of their profits to finance future growth,
rather than use them to pay out dividends.
Investors who are not concerned with immediate income may
concentrate on these "growth stocks" and hope for
significant capital gains and substantial income in the long
term. Other investors prefer a higher initial income, with
the hope of also achieving some capital growth, by buying
shares in companies with more pedestrian prospects. The permutations
are endless.
Do remember though that shares are risk investments and their
value can go down as well as up, as can the income. If, therefore,
you are an investor, as opposed to a short term speculator,
you must regard investment in shares as a medium to long term
exercise and spread your investments between a number of companies
in order to minimise the risks. This spread of investments
is known as a portfolio. It is very important to judge the
level of risk you are prepared to take and your adviser will
assist you on this.
If you are a speculator - and there is nothing wrong in this
because speculators are the people who oil the wheels of the
market place - it is important to understand that the potential
for high returns is balanced by a higher degree of risk. If
you don't know whether you are an investor or a speculator,
the stock market is an expensive place to find out.
It is also worth bearing in mind that, as an investor, you
should not get too excited or depressed about short-term rises
and falls in your share prices. Share prices have risen substantially
over the years but, even in depressed times, income growth
can continue and this in turn leads to an increase in share
prices. For many investors it is income growth which really
matters (because they live off income, not capital) and the
ownership of a good portfolio of shares is the most practical
way of achieving it. This is why the pension funds and insurance
companies invest so much in shares.
Gilts (Government stocks) - these are sold to the
investing public by the Government to help fund the difference
between what it spends and what it collects in taxes. There
are two main types: conventional and index-linked gilts. Both
are quoted on the London Stock Exchange and an APCIMS member
can buy or sell both of them for you.
Conventional gilts pay a fixed rate of interest which
is maintained until the Government repurchases the stock on
a predetermined redemption date and at a predetermined price.
They offer a completely predictable return, fixed throughout
their life, provided you hold them until their redemption
date. The price of gilts can however rise or fall in the market
as the outlook for interest rates and inflation changes, providing
possible opportunities to sell at a profit before redemption.
Normally the interest yield is higher than that from shares,
so they often form a useful addition to an income-seeking
investor's portfolio. For many risk-averse people they are
also a useful alternative, wholly or partially, to bank or
building society deposits. The reason for this is that if
you rely on a deposit account for your income, you are at
the mercy of any fall in interest rates. With a gilt, however,
your interest is fixed throughout its life, no matter how
low general interest rates fall.
Index-linked gilts are considered particularly low
risk investments. If you buy them on issue and hold them until
their redemption date, the Government guarantees to repay
you at a price which will give you full protection against
inflation. The income is also indexed, six monthly in arrears,
but initially is very low - maybe two to three per cent. This
makes them particularly attractive to very risk-averse investors
who do not require much income.
Under current legislation, capital gains made on gilts, both
conventional and index-linked, are not generally subject to
tax. APCIMS members monitor this situation and can advise
whether or not they are appropriate for you.
Investment trusts and unit trusts are often described
as collective investments. Both invest and manage a pool of
investors' money in a wide range of stocks and shares on behalf
of their investors, with a view to achieving a better result
than if the underlying investors did it themselves. Where
they differ is that an investment trust is a quoted company
dealt on the Stock Exchange, whereas a unit trust is not normally
quoted but can be bought and sold through the trust manager
in accordance with a pricing formula laid down by the Financial
Services Authority.
Like individual company shares, investment trusts are influenced
by supply and demand in the market. Their shares can trade
either at a discount (if out of favour) or at a premium (if
demand is high) to the value of the underlying assets held
by the trust. Unit trusts tend to be priced at or around their
net asset value, though the supply and demand factor can also
influence their pricing.
Unit trusts are normally more expensive to acquire than investment
trusts because of the greater spread between buying and selling
prices. Both are offered by APCIMS members, typically to provide
a spread of risk for people who cannot economically have an
individual portfolio, or to provide investors with exposure
to specialised investment markets such as South America and
the Far East, which are complicated and expensive to enter
as an individual shareholder.
Opinions generally differ as to which type of trust is better.
The truth is that success or failure ultimately depends on
the skills of the particular investment manager. APCIMS members
use both types and a number of them manage their own investment
trusts and/or unit trusts. Most other financial advisers appear
to ignore investment trusts, perhaps because they can be more
complex and, unlike unit trusts, do not generally pay introductory
commissions.
Derivatives are investment vehicles derived from another
investment product to meet specific investment needs. They
include warrants, options and futures and aim to provide an
easier way of gaining exposure to a particular market for
a certain type of potential return. Options, perhaps the most
versatile of all derivatives, are used to alter the risks
and hence the potential returns of an underlying investment.
They may be used by both the speculator and the risk-averse
investor.
LIFFE (the main London derivatives exchange) currently offers
investors options on about 70 leading UK equities, as well
as instruments relating to the FTSE 100 and the FTSE 250 indices.
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