Small investors have few stock market options

Readers have sent Family Money letters asking how they can invest directly in the stock market. One reader from Athlone says he has been involved in unit funds for many years but is now interested in investing directly in shares.

Another, Ms E from Dublin says she has £10,000 to invest but has no idea about how to choose or buy shares.

First of all, anyone who has owned unit funds has had the benefit of professional fund mangers looking after their money. Investing directly in the stock market means that a "punter" is on his own and will have to depend on luck and his instincts to make a profit.

Rule one, for all who want to invest directly in shares is be prepared to lose most if not all of your money if things go wrong. Our reader with £10,000 at her disposal must be aware that investing in stocks and shares carries a fair amount of risk.

There is no guarantee that the bull market, that has resulted in the Irish stock market doubling in value in a short space of time will continue. All it would take to knock the stuffing out of the stock markets is another earthquake in Japan, a sharp rise in US interest rates, Saddam Hussein launching another Scud missile - the factors that could send the stock market into a tailspin are myriad. If you can't afford to lose your money then stay clear of the market. If however, you can afford to lose funds say, £10,000, and still sleep at night, this is how you go about getting into the market. First, it must be said that £10,000 isn't considered a large sum in stock investing terms. Stockbrokers, especially the big ones who deal mainly with institutional investors like pension funds, are unlikely to pay a great deal of attention to our reader with her £10,000 punting money.

If we presume that our two readers are financially secure and are looking for a bit of excitement rather than depending on their investment in the stock market for essential income, then it is also probably fair to say that an income from six-monthly dividend cheques will also not be a high priority.

At any rate, the dividend income from shares is generally pretty low and investors with £10,000 in higher-yielding stocks like the banks could expect dividends each year of, at most, £400.

Nevertheless, AIB and Bank of Ireland stock have been among the best performers this year, and Bank of Ireland's share price has almost doubled since the beginning of 1997. What you will get from these stocks is capital growth.

Ms E might be well advised to split her investment into maybe five lots of £2,000 invested in stocks with varying degrees of risk. Two of those lots could be invested in the banks, a couple of others in stocks with a high degree of exposure to the booming Irish economy, and maybe one £2,000 portion put aside for one of the punting stocks like an oil or mineral exploration company.

An investor prepared to take on a bit more risk could, of course, put more money into the exploration companies, but the old investment adage "not for widows and orphans" applies to most of these companies which have few assets other than their exploration licences. For every exploration company like Arcon and Ivernia which have made major discoveries, there are the likes of Atlantic Resources, Eglinton and Bula Resources where an awful lot of money was punted and effectively went down a hole. Forewarned is forearmed.

Now that you have decided where you want to invest in the stock market and the amount of risk you are willing to accept, how do you go about investing? First, find a stockbroker who is happy to take on your sort of business and will spend some time discussing with you the sort of portfolio of shares that best suit your risk profile. Advice is a major factor to consider when choosing a stockbroker, as are the fees and commissions that a stockbroker will charge.

The big stockbrokers pitch their commission at a level which tends to deter (some say deliberately so) the small investor. Most of these bigger brokers will charge a minimum fee that makes engaging their firm unrealistic for the small investor.

Unless you have an awful lot of money to invest, the four biggest broking firms Davy, Goodbody, NCB and Riada are best forgotten about. Walk in their door and tell them you have £250,000 to play with and a red carpet will be rolled out. But go in with £10,000 and the reception might be somewhat cooler. The commission the big brokers would earn on your £10,000 portfolio about 1.5 per cent would barely pay their daily post bill.

The smaller stockbroking companies will probably provide a better service for the small investor, but sadly for our Athlone reader, these are all based in Dublin, apart from one in Cork and a branch in Limerick of one of the Dublin firms.

So you will need to establish a relationship with a stockbroker, who will be willing to take your instructions on buying and selling down a telephone line. Alternatively, investors outside Dublin can buy and sell their shares through their banks, as long as they bank with AIB, Bank of Ireland or Ulster Bank.

The problem here is that these big banks own big stockbroking companies Goodbody, Davy and NCB respectively and if you ask your bank manager to sell £5,000 worth of Company X, that sell order will have to wait until the big broker has assembled a big enough order to make it worth his while going to the market.

In other words, if you think that a share is going to rise quickly, then you should deal with a smaller brokerage firm who can process your instruction more quickly. Don't automatically expect your order to be acted on instantaneously, the broker selling on your behalf still has to find a buyer (and vice versa). Many companies have their shares held by a small number of big institutional shareholders, so it is not always easy to find a buyer or seller at the time that suits you.

Your relationship with the stockbroker is hugely important, as you will be telling him to buy or sell at not less or not more than a specific price. Alternatively, you will be telling him simply to get you "the best price" in the market without giving a specific price instruction. Remember, unless you give a specific price instruction, the broker will always go for "the best price", and you will have no comeback unless there is clear evidence that he acted incompetently.

So how do you pick your shares? There are various ways used to compare companies that are in the same line of business such as the banks, building materials companies, etc. The usual gauges for comparing companies is the price/earnings ratio and the dividend yield. Without going into excruciating detail, the rule of thumb is the higher the price/earnings ratio, the better-regarded the company is in the market. The higher the dividend yield, the more generous the company is with its profits. On Mondays, The Irish Times carries a detailed table which summarises the previous week in the market and provides figures such as share price, price change on the week, price/earnings ratio and dividend yield. From Tuesday to Saturday, it publishes share prices from the Dublin and London markets, as well as reports on market trading each day.

One of our readers also asked about investing small amounts in Government gilts. This is not really an area for the small investor, as the size of a gilt deal is rarely less than £500,000 and is the preserve of the major institutional investors. If you really want to invest in the Irish economy through gilts, you are probably better off investing a unit-linked fund with a high concentration in gilts.

The stock market can be a very exciting and very lucrative investment location if things go well. It can also be a dangerous place for the unwary or the unprepared. The most important thing to remember is that if you cannot afford to lose your money, stay clear and leave it to the professionals such as the fund managers who operate unit trusts funds or life assurance investment funds. Finally, if deep down you really want a secure investment with a steady income stream stay clear of the stock market and look seriously at the many guaranteed products on the market from higher yielding deposit accounts to Post Office Savings Certificates to life assurance investment bonds.