There is a certain kind of investor who prefers to hold shares rather than funds, despite the extra jeopardy and what others see as drudge work.
Putting money in funds run by professional managers, who choose the stocks and monitor them for you, seems dull to them.
Some will be content to dabble in shares on the side, while still holding a perfectly sensible well-diversified fund portfolio, while others stick mainly or even wholly to stocks.
We explore what motivates them and what extra work is entailed if you’re interested in becoming more of an active hobbyist investor.
Fun factor: What motivates the kind of investor drawn to shares – and are you one of them?
Why are some investors more attracted to shares?
Excitement: The possibility you could buy a stock which is going to do incredibly well attracts some investors, according to Rowan Dartington investment director Tim Cockerill.
You might just find a firm that is going to be very successful, particularly if you are looking for opportunities among small and medium-sized companies, he says.
Cockerill adds that new technology, like that being developed in the battery and hydrogen sectors right now for example, inspires people to buy shares in firms that might make a breakthrough and therefore a lot of money.
Enthusiasm: Buying shares allows you to truly tailor your portfolio to the companies and themes you are most interested in, says Rob Morgan, investment analyst at Charles Stanley Direct.
This can be a far more engaging activity than buying funds, ETFs and investment trusts, even when they are a convenient shortcut and require far less research and monitoring than a shares portfolio, he says.
It can be exceptionally rewarding, both intellectually and financially, for people who have the necessary time, aptitude, enthusiasm and psychological make up, explains Morgan.
Cost: Investing in shares brings cost benefits, points out James Rowbury, investment research coordinator at Redmayne Bentley.
Tim Cockerill: New technology inspires people to buy shares in firms that might make a breakthrough and therefore a lot of money
‘Where funds carry an annual fee and, in some cases, a multitude of additional charges, shares are only subject to stamp duty taxation on entry and – potentially – capital gains on exit.
‘We feel investors should be mindful of this. If they feel their expertise and conviction is sufficient, applying a blend of direct shares into a portfolio is a sensible approach to boosting returns (net of costs).’
Social activity: ‘There is a burgeoning online community of empowered investors discussing their opinions and research with one another,’ says Morgan.
He adds that many investors hold a central portfolio of funds, plus some shares on the side for social involvement and fun.
Beginner’s luck: This is a potentially dangerous aspect of buying shares that draws in people new to investing, according to Morgan.
‘You can sometimes make money even if you barely understand what you are doing,’ he says.
‘Blind luck or simply buying into a fashionable “story” that attracts crowds of investors chasing upwards momentum can lead to short-term gains and overconfidence.’
Morgan warns fashions change and momentum can suddenly reverse, which leaves an uninformed investor with nowhere to turn.
‘Should losses be cut, or should they hang on? Without a grasp of the fundamental facts about a business and the anchor of proper research and knowledge, buying individual shares can go wrong. Especially if hope is abandoned at the worst possible moment.’
What extra work do you need to do as a share investor?
You certainly need to do some homework before buying shares, says Cockerill.
The most basic questions you need to ask yourself include whether a firm is profitable, how much debt it has got, what is its size and who else is invested in it, he explains.
How to invest in shares
From where to buy, to finding ideas and valuing companies, read a guide to successful stock-picking here.
How to check a company is financially sound before you invest in its shares: Find out the basics of reading a balance sheet here.
How can you tell if a share is good value? Find five sums to work out if a company’s stock is a winner or a dud here.
On the last point, if the big investment houses have put in money you might infer that is a positive, adds Cockerill.
He also advises probing who are the big holders of a stock and their relationship to the company, as the current management might have invested their own money and therefore have a direct stake in making it a success.
‘If you are looking at a small or medium-sized company in which the management doesn’t have a stake, you would ask the question why is that,’ he says.
Rowbury says investing in shares directly carries an additional risk, as it concentrates a portfolio into a fewer number of holdings, so investors must ensure they diversify.
‘If one of these shares fails to meet return expectations it has a much bigger impact on the portfolio performance than it would if it were part of a larger basket of shares in a fund.’
Morgan cautions: ‘Liking a company’s product or service might get you interested in it, but it is not a reason on its own to own a stock.
‘Successful individual share investing will likely involve much more. Research on earnings, the state of the balance sheet, competitive position, expansion plans and so on is necessary for a full analysis.
‘But be under no illusion it will be hard work if you want to do it properly – and not everyone wants to spend their spare time scouring company accounts, following industry developments and assessing key metrics.
‘That’s why funds tend to be good solution for most – it’s easier to monitor one shepherd than a flock of sheep!’
What to consider before buying a stock
James Rowbury of Redmayne Bentley offers the following checklist.
Liquidity: Are the shares easily tradeable? If not, you may struggle to sell later, or be hit with an undesirable price when trying to exit, he writes.
Understanding: Do you understand the business and the sector it operates in? This is a common pitfall for investors when they don’t take the time to research a company properly – the stock market is full of surprises.
Overpaying: Look at the company’s valuation and decide if you think it has enough growth to justify its price.
Strategy: Often investors look at the businesses past performance and buy a stock based on this alone. It is always good to understand where the company is going from here and whether it will continue in this way.
Management: Do you trust the management? Look at their track record in other positions, check if they stay very long at companies and most importantly, do they own any shares themselves.
Diversification: If you are still comfortable investing in a direct company, ensure you have a portfolio of ideas that will diversify your risk. Make sure they are not all in the same sector.
Thrills: Why do some investors prefer buying shares to funds – is it just more exciting?
What if you are attracted to share investing, but daunted by the work?
‘Not all funds are boring. There are some out there doing some interesting things,’ says Cockerill.
Cockerill suggests that investors limit their share holdings to no more than 5 per cent of their portfolio, as that is safe territory in case you make losses.
James Rowbury: A blended approach to shares and funds offers additional value
‘I have always thought if it’s not a big amount of your portfolio then I see no reason against having some fun.’
Rowbury says there are merits to investing in both shares and funds, but a blended approach offers additional value.
‘For us, a key benefit is applying our expertise in regions and sectors we are most adept in analysing.
‘Those companies that are listing in our domestic UK markets are well covered by research and better understood than some of their overseas counterparts and thus, we maintain some clear convictions in these businesses.
‘The fund market gives us the opportunity to outsource this expertise to management teams with a deeper understanding of the particular market they invest in.’
Rowbury offers Asia as an example, pointing out it is difficult to fully understand the market opportunity of businesses that operate in a cultural and economic landscape so widely different from our own.
‘Therefore, we will ensure the custodian of our client’s money is “on the ground” and able to identify the best prospective investment ideas,’ he says.
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