Personal Finance | Interview Answers | Winning CVs | Beat the Recession

Stock Market Investment Guide

Most financial commentators will tell you that the stock market has been a consistently good choice for most people looking to invest.

The value of property may have boomed in recent times but since the end of the World War 2, the annual return from domestic property has averaged 8.5 per cent, compared to an average growth of 12.5 per cent a year in the stock market.

The stock market also has the advantage over property that you can invest relatively small sums much more easily in shares than you can in bricks and mortar.

If you are considering investing in the markets, you need to be clear about some of the risks involved. Within the stock market itself, there are three levels of risk:

MARKET LEVEL

The risk that the entire investment market suffers a reverse. If this lasts a significant period of time, it's called a bear market. Of course, the longer a bear market persists, the more difficult it's likely to be for anybody to recover their investment. Conversely, this can be a good time to buy as prices will be down from previous heights.

SECTOR LEVEL

Here the risk is that a particular sector of the market suffers more than the wider market. Sometimes sectors can be down even though the overall market is on the up. The terrorist attacks in September 2001 forced down the price of airline and travel-related shares. If you tend to invest in one or two sectors only, and these take a tumble, you could end up losing money even though the overall market might be buoyant.

COMPANY LEVEL

If you buy shares or bonds in a specific company, your investment could suffer if the company hits a problem - maybe caused by bad management or increased competition, excessive debt, adverse press coverage and so on. Enron's collapse virtually wiped out its share value. Marconi in the UK also suffered a spectacular fall from grace.

So you've decided you want to invest in the markets? The key question you now need to address concerns the level of risk you are prepared to take on.

Another factor to bear in mind is the size and history of the company you might be considering investing in. As a general guideline, the bigger and better established a company is, the lower the risk involved. Small, often new companies involve a relatively high level of risk, since they have no track record to speak of and might be dealing in unproven ideas and technologies.

What you should always bear in mind is that, unlike a building society savings account, there is no guarantee of a return on your investment. In fact, if things go very badly, you can lose everything . On the other hand, if your selected stocks take off, you could get a return that far outstrips a conventional savings account.


Custom Search