Preface
Who this book is for
This book has been written for those who are new to stock market investment or who want to broaden and deepen their knowledge of how the stock market works.
Anyone wishing to make their own investment decisions, rather than hand their assets over to a fund manager or see them stagnate in bank and building society accounts, will benefit from this carefully crafted step-by-step guide.
Even people with little spare cash but who want to be informed of the financial world we live in can gain a greater understanding of how the City of London and other business centres operate.
The book is also an invaluable tool for anyone who professionally needs to know about the stock market, from potential wheeler-dealers to advisers such as auditors and PR, to back office staff and students on business or media courses.
Structure of the book
The book is organised to take readers logically through the various stages of understanding stock market investment, with each new concept explained in simple terms as it arises.
It begins by outlining what shares are, why they exist and why people buy them, followed by a look at the London Stock Exchange and what it is there for.
We discuss how to make sensible decisions on which companies to invest in, sifting the mine of information that is published through the stock exchange, and learn how to pick out the key points in company results, including warning signs.
With the basics explained, it is time to look at how to buy and sell shares, where to get advice and how to remain well informed.
Finally, we look at takeovers and mergers, arguably the most exciting aspect of the stock market. While investing is in the main all about patiently building your portfolio, takeovers offer the most scope for a quick, substantial gain for investors who, like those who have read this book, understand what is going on.
Most of us are too busy earning a living to make any money. As long as the day job produces enough income to get by on, why worry?
However, since the global financial crisis in 2007–8, the odds have become increasingly stacked against the honest toiler. Despite higher levels of employment, pay rises have generally struggled to keep up with rising prices. During 2017, average pay rose by just over 2% while inflation, fuelled by a fall in the value of the pound after the Brexit vote, hit 3%, squeezing real wages by nearly 1%. Such cash as ordinary people could manage to save has attracted pitiful rates of interest, typically as low as 0.1%, in bank savings accounts.
Getting on the housing ladder has become an unattainable dream for millennials (those born in the run-up to the year 2000), especially in London. Average UK house prices rose 2.6% in 2017, according to the UK’s largest building society, Nationwide, and although that was lower than the 4.5% recorded in 2016 it was still ahead of wage rises.
The price of an average house is now six times average annual pay, double the ratio in the mid-1990s. Home ownership, the main means of wealth creation for postwar generations, has declined from 70% of the population to 62% in the past 15 years and is still falling; for those under 35, only 37% have managed to get a foot on the housing ladder.
The share of national income taken in pay has fallen over the past 50 years from around 55% to just above 50%. In other words, for every pound you earn, you get 50p and your employer gets 50p. Over the years, it is the owners of capital who have made the greatest gains, leaving ordinary mortals in their wake.
In theory, wealth is supposed to trickle down from the rich so that we all share the nation’s prosperity. Experience has shown that this simply doesn’t happen.
One solution could be to give workers a stake in the company they work for. However, there has been little enthusiasm for creating worker shareholders over the years. Only 2 million of the UK’s 32 million workers are members of a share scheme. (The John Lewis Partnership, the retail chain owned collectively by its workforce, is perhaps the most famous UK firm with such a scheme – but it was implemented in the 1920s.)
But employee ownership is far from the only solution to the problem of workers sharing less and less in the nation’s wealth.
There is an answer – and it is available to all. It can be implemented right now. You may have even already begun to do it.
Buy shares yourself – and not just in the company you work for but in a range of businesses. The revolution in the way major stock exchanges operate since the dawn of the computer age means it is easy and cheap for ordinary people to do so. And the rewards can be considerable.
Using updated examples, I explain:
· what the stock market is and how it works
· why share prices go up and down
· why some companies look cheap while others appear to be expensive
· how to make money and avoid heavy losses
· the traps that snare the unwary.
By reading this book, you will find that the finance pages of your daily newspaper become a mine of information instead of a daunting mist of incomprehensible murkiness.
You can, if you wish, turn straight to Part Four and take a direct leap into the exciting and lucrative world of stock market investing. Or you can use the index to treat this book as a reference work.
However, I would urge all new investors and those with little experience to be patient. Learn to walk before you can run. Start at the beginning and be led logically, step by step, through an easy-to-follow guide to those gold-paved streets. All the baffling issues are dealt with clearly and simply.
I cannot pick your shares for you, but I can tell you what to look for and how to look for it. Above all, I will endeavour to provide a level playing field in a world still dominated by professional players as you seek your share of the nation’s wealth.
Rodney Hobson
June 2018