Funds & individual company shares investments: what to look out for when you don’t know what you’re doing

One of the huge benefits of the technology we’re surrounded with is that we no longer need to speak to a human being in order to invest our money. The second benefit is that we can all invest in the stock market fairly easily, from our phone and with a pretty small amount. This article focuses on the most important things to look out for when you are learning how to invest in the stock market, and what to incest in.

Disclaimer: this article does not constitute financial advice. In order to obtain financial advice, please seek out certified professionals in the field.

Funds vs individual company shares

Most investors focus on two specific types of investment available: a fund and company shares.

Funds are managed entities which hold a portfolio of specific individual shares, bonds and other securities and which are publicly traded. You might have heard of a ‘hedge fund’ or an ‘index fund’ or a ‘mutual fund’. While hedge funds are privately owned, index funds and mutual funds are publicly traded and you can invest into them.

In short, index funds will own shares in public companies distributed right across the local market – this means that they usually perform very closely to how the overall market performs. You can therefore assume that if you invest into an FTSE100 index fund, the value fluctuation will be very close or the same as FTSE100 index overall performance. Mutual funds on the other hand are publicly traded funds which do not tie themselves to market index performance and instead will trade in company shares, bonds and other securities which they think will do well. They are in that sense similar to hedge funds – the fund manager tries their best to make as much money as they can for their shareholders.

You might have also heard of ETFs and REITs. ETF is similar to a mutual fund, with the main difference being that ETF is traded throughout the day and a mutual fund is traded at the end of a day. To trade means to make a purchase of sale of funds. A REIT is a real estate investment fund – REITs invest your money in real estate (both commercial and residential) and no other assets.

The benefit of funds it that you can start investing with very little money (most platforms permit trades starting from £100). This benefit is not available for the more valuable individual company shares.

Individual company shares can be purchased at the price at which the company is valued (based on the forecast of supply and demand – it indicates how well the company is likely to be doing) at the time divided by the number of shares in circulation. For example, a single Apple share price at the time of writing of this article is $114.97. It will however continue to fluctuate based on how Apple Inc is performing as a business. If you have $114.97 and some small change for the trade fee, you could become Apple’s shareholder just like that.

The risk with individual shares is that you might not be aware of how the company is really doing, you will be reliant on how well it is led and if it suddenly goes bust, your capital could be wiped out.

Not all companies are publicly traded – as a stock market investor you will only be able to purchase shares in the companies which are publicly traded. If you are hoping to purchase shares in a privately owned company, you might need to take the private equity/venture capital route.

Share price and dividend payment

There are two specific money-generating metrics you will need to consider when purchasing shares, regardless of them being in a fund or of individual company.

The first one, is of course, the share price. Because share prices fluctuate a lot, this figure is usually the one which will give any new investors some grey hair. Imagine a scenario in which you have purchased that Apple share mentioned earlier, only for the news to erupt that Apple business is going to be impacted by a recession, a supply chain issue, financial scandal and/or a natural disaster. Usually news like this would cause the price of the shares to dip, dragging the value of your investment in that company down with it. This is usually when an inexperienced investor gets nervous and starts selling their holding, contributing to a further price decrease of the shares. An experienced investor instead of selling, will assess the situation of the company and the market overall and consider if this disaster scenario is likely to really impact the company’s operations and profitability. If it looks like the business is still solid, the experienced investor may decide to purchase the shares, now cheaper than before the news hit, with hope that they’ll recuperate their value just fine raising the value of the investment. What am I trying to say by this scenario? You should pay attention to the share prices when you sell and buy. In between, you should pay attention to the business news.

The second, but equally important aspect in investment decisions is the dividend. A dividend is a profit distribution payment to shareholders on annual basis (sometimes partially paid as often as quarterly). A dividend is therefore your share of profit that the company has made. You can either re-invest it, or keep it as your income. You will be able to see the typical dividend percentage values in the factsheet for the share or fund you are interested in purchasing. Most publicly traded companies pay dividends, and therefore most mutual and index funds also pay them. If a business pays dividend, usually it’s a sign of good health – however, you should also monitor company’s annual reports and profitability as much as you can.

Initial charges, ongoing charges, dealing charges and performance fees

Trading is not expensive, but it’s not free either. There are four specific fees and charges which you need to be aware off, aside from of course tax.

The first one is the initial charge – this fee is charged on your initial transaction where you purchase specific holding. The fees can be high, so pay attention to them and in particular for funds, look for alternatives if it feels too expensive. I am going to use Vanguard FTSE100 Index fund as example here – their initial charge is 0%. Another funds which I also hold, iShares Pacific x Japan Equity Index charges 5%, which is offset by the online brokerage I use. Neither of the two values are indicative of the funds’ performance.

The second important fee is the ongoing charge. This fee is, in simple terms, a management fee. Your platform will usually charge it per fund, and the fund will charge it’s own one. Be sure to always pay attention to these and look for funds with low charges. The annual charge, at least in the UK, seems no longer related to the quality of service and since the investment capital is always at risk, it’s also not exactly a blue chip indicator anymore. To use the same two examples as above, Vanguard FTSE100 Index fund charges 0.06% and iShares Pacific x Japan Equity Index charges 0.13%.

Next, the dealing charge. This one is charged by your broker directly and is your payment for placing the trade. In case of online platforms, some charge it and some don’t. As example, the two platforms which I use for my ISA and private pension respectively, do not charge dealing fees. HSBC charges up to £49.95, depending on what you’re shopping for. If you are opting to be a hands-on investor, seek out the most cost effective options to avoid high fees.

Finally, a performance fee. These are fees paid to your broker for generating profit. Unless you are specifically working with a platform offering managed portfolio or an actual broker advising you on trades, this fee should stand at ‘No’ or 0% for any self-managed accounts.

Where to start if you only have £100 to use

Before you start investing, take a word of advice. Until you know what you’re doing exactly, only invest the money which will not cause you hardship if you were to lose it. Why? Your capital is always at risk. Economy, and stock market with it, is a fickle beast with recessions, bankruptcies and force majeure happening all over the place and you might make money, or you might lose money.

And if you have £100 which will not have a material impact on your life, you might just as well out it to work. I would start with the following steps:

  • research platforms which offer stock & shares ISAs (if you’re outside of the UK, ISA is a tax efficient individual savings account, similar to IRA only without it needing to be used for retirement)
  • pick a reputable, inexpensive platform in line with your needs. Here is a nice article from Investopedia which might be of further help
  • research the funds you might be interested in. £100 will get you a single purchase and to keep you on the low risk side, focus on index funds and mutual funds. You should avoid individual shares until you have a really good understanding of the market you are investing in
  • check that the platform you like allows for trades in the fund you want to trade in. This is particularly relevant when investing internationally – for example a whole host of publicly traded companies registered in Poland IO might be interested in are not available for purchase through my British platform as the financial regulations they operate under are not compliant with the British regulatory requirements. If you are in a similar situation, it’s worth reaching out to the company in advance and asking them directly

Once you are satisfied with what the online brokerage platform offers, it’s time to register, make the deposit and place the trade. Once the contract completes and the shares are in your account, sit tight and carry on learning about the market.

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