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This article was written by Bibi Bunmi Apampa an Empowerment Coach  at

What is the stock Market

 A place where shares can be bought and sold The stock market acts just like any other market where products are bought and sold. It is a market where Investors can freely buy and sell millions of shares issued by thousands of companies. As all stock markets are regulated, individuals cannot do any of the buying or selling themselves, they have to go through a stock broker

Why do companies list on the Stock Exchange?

The traditional answer is that private companies list on the Stock Exchange to raise capital and to provide a market in their shares. The owners give up part of their ownership in the company, and in return receive money to develop the business. But within that general explanation there are lots of subtleties:

 • A large family-controlled company may go public because its shares are split between hundreds of family members and there is internal pressure to provide a market which will allow them to cash in on their holdings.

 • A company whose shares are already quoted may decide to spin off a division and list it separately because the market is confused by having the two divisions together (e.g. Dixons' decision to float Freeserve).

• A new technology company may list on OFEX because that particular market is suited to speculative ventures with no track record, and finance is not available anywhere else.

 • A state-owned company may be privatised by the government because it has a political agenda to widen share ownership.

• An entrepreneur with a City following may list on the Alternative Investment Market (AIM) with a view to using the new company's highly rated 'paper' (i.e. shares) as a currency for acquiring other companies.

• An internet company may list because the mere act of listing provides it with valuable free publicity (e.g. internet companies found this useful in 1999 and early 2000).

The common thread of all these is that listing does provide a company with a separate public identity, and its shares will have some kind of recognisable 'value' because their price will be quoted on the market.

Selecting your shares

Investing in shares may be very risky. Over the short term the volatility of markets may temporarily depress the share price of even the best of companies. The cost of frequent dealing may quickly outweigh minor gains in price.

The London Stock Exchange has over 2,000 listed companies and is the main securities market in the UK. It acts as a primary market for new issues and also as a secondary market. In theory, large companies which are well diversified may be more stable than smaller companies, partly because of their sheer size and partly because they may be well diversified in the UK and overseas and, as such, may be less vulnerable to market cycles and economic factors. Your starting point, therefore, may be to decide whether to stick to the more solid blue chips or to investigate some of the higher risk/reward opportunities among the smaller companies.

The FTSE indices are arithmetically weighted by market capitalisation so that the larger the company the greater the effect its share price movement will have on the index. 'Market capitalisation' is the stock market valuation of the company which is calculated by multiplying the number of shares in issue by their market price.

The FTSE International Indices:

• The FTSE All-Share consists of about 800 companies with a total market capitalisation of about £1,732bn. The All-Share is regarded by the London Stock Exchange as the professional investor's yardstick for the level of the UK equity market as a whole, and generally represents about 98 per cent of UK stock market capitalisation. Companies are allocated to 39 different categories of shares according to industrial sector.

 • The FTSE 100 index consists of the 100 largest UK companies by market capitalisation. Together they represent about 78 per cent of the total UK stock market capitalisation (not just the All-Share). Many of these companies are multinationals with substantial overseas exposure.

• The FTSE 250 index consists of the next 250 companies below the FTSE 100 and can include or exclude investment trusts. The companies are capitalised at between £350m and £3bn. Together, these companies usually represent about 14 per cent of the UK stock market capitalisation (including investment trusts).

 • The FTSE SmallCap does not have a fixed number of constituent companies but instead it comprises all the remaining companies in the All-Share which are too small to qualify for the top 350. Together they usually account for about 4.4 per cent of the total UK stock market capitalisation.

 • The FTSE All-Small index combines the SmallCap and Fledgling indices, although these also exist in their own right. The Fledgling covers just over 700 companies which are too small for All-Share


 1. Ordinary Shares

Most investors are interested in the 'Ordinary' shares of a company. These are the ones that people talk about when they refer to a company's share price. Ownership of an ordinary share gives you: o a share in the company's dividend which is declared once or twice a year o a stake in the company's assets o a right to receive notice of, and attend, the company's Annual General Meeting o the right to vote on issues affecting the company (e.g. appointment of directors and auditors, rights issues, employee share schemes, takeover bids) o the right to receive the Report and Accounts of the company (if your ownership is registered in a nominee account you may be able to obtain these through the nominee company) o shareholders' perks Sometimes companies issuing new shares will issue them as 'partly paid' rather than 'fully paid'. This is a device to make them more attractive to investors. All it means is that investors pay for the shares in two instalments.

2. Preference shares

Preference shares differ from ordinary shares in having a fixed dividend. The company has to pay dividends on preference shares before ordinary shares, and if the company goes into insolvency, preference shareholders are ahead of ordinary shareholders in the queue. In exchange for the greater security, preference shares usually have reduced, or no, voting rights, and provide lower yields, at least over the long term. Convertible preference shares give the holders the additional right to convert the preference shares into ordinary shares.


The FTSE indices

The most important indices for the London markets are:

• FTSE 100 (the 'Footsie')

This is made up of the 100 largest quoted UK companies by market capitalisation. Usually they are companies over £2 billion in value. The FTSE 100 index is calculated every minute so that changes in the prices of the constituent companies are reflected 'instantly'. When you hear on the news that FTSE climbed 100 points it refers to this index. The composition of the FTSE 100 is revised quarterly, with new companies coming in to replace old ones as their market capitalisations change. Membership of the index has real commercial significance, because if a company slips into the FTSE 250 many tracker funds will be unable to invest in it, depressing the share price. Some argue that the system for selecting the FTSE 100 needs to be overhauled so that fashionable shares do not overwhelm the market at the expense of solid, profitable businesses.

• FT Actuaries All-Share

 This covers a much wider range of quoted companies, about 900 in all, accounting for 98% of the market. It is used as an important benchmark of investment fund performance. The index is calculated at the end of each day. • FTSE 250 The 250 largest companies after the FTSE 100. The index is calculated every minute.

 FTSE Small Cap 550 smaller companies. The index is calculated every minute



 The role of brokers

For most share dealing you will need to use a broker that is a member of the London Stock Exchange and regulated by the Financial Services Authority. You can pick from three types of service:

1. Discretionary

 o The broker has general discretion as to how he manages your portfolio. o You can narrow the discretion by giving the broker guidelines. For instance, you can ask him to pick shares that provide high income rather than capital growth, or to investing only in 'ethical' companies.

o For his services you pay a commission on dealing (usually around 1.65%) and possibly a quarterly or annual management charge based on the value of your portfolio. If you are paying a management charge, your dealing commission should be lower (around 1%).

o Beware of the discretionary broker who churns your portfolio. Churning means frequent dealing which creates commissions for the broker but may not be in your interests.

 2. Advisory

o The broker will contact you to suggest changes in the composition of your portfolio, but he does not have the authority to trade on a completely discretionary basis.

o Charging structures will vary from broker to broker. Some charge more for an advisory service than for a discretionary service, because there is more work in having to contact you before every deal. o Under FSA rules you will have to fill out a form describing your financial situation and your objectives, so that the broker can provide a suitable service.

3. Execution only

o The broker's primary function is to execute the buy/sell instructions which you give him. He does not give advice either proactively or at your request.

o Varying degrees of administrative help will be provided - e.g. summaries of your year's trading for your tax return, factual education

 o Execution-only brokers make their money from dealing commissions, and the market is very competitive. Typically, the percentage charged on a purchase or sale depends on the value of the transaction, with the percentage dropping as the value rises. There will usually be a minimum charge.



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Opening an account with a broker

 When you've chosen your broker, ask for an application form, or fill one in online. In most cases, the broker will ask for a banker's reference, and you will often have to deposit money with the broker before you trade. Clients increasingly keep money in their broker's client account, rather than posting in a cheque every time they buy shares.

However, some brokers do not accept cheque payments. You may be offered the option of transferring existing shareholdings for which you have a certificate into the broker's nominee account. The broker will issue you with a client account number and/or password which you will usually have to quote or key in when giving buy/sell orders on the phone or online.

Placing buy/sell orders

Suppose you want to buy 1,000 shares in a middle-sized company called Midco: 1. You get in touch with the broker and give your name, account number and security details. You ask what the current market price is for Midco.

2. The broker looks at the strip price on his screen and says 'Bid 105p - Offer 110p'. This means the market maker for Midco will buy your shares at 105p and sell your shares at 110p. The difference is known as the 'spread' and is the market maker's profit.

3. If you don't want to pay 110p, just tell your broker that and you don’t continue

 4. If you are happy to pay 110p you have two choices. Either place the order 'at best' which means the broker will attempt to fill the order at 110p but may end up filling it slightly higher, or, for certainty, place a 'limit' order at 110p which means you will pay no more than that amount.

5. The broker then has to effect 'timely execution'. He will ring one of the market makers and execute the order as quickly as possible.

 6. If the broker concludes the deal with the market maker, each enters the details into the Stock Exchange Automated Quotation (SEAQ) system on their computer.

7. At that point you own the shares. You can sell them again, even though you haven't received the contract note from your broker.


Contract notes

After a broker has executed your deal, his system will automatically generate and post a contract note.

This will show:

• name of the company

 • date of the trade

• number of shares traded

 • whether you have bought or sold

 • price

• commission charged

 • stamp duty (0.5% on purchases only & 1% on Irish stocks)

• Panel of Takeovers and Mergers Levy (a flat charge on large trades only)

 • name of the account in which shares are held

 You should check your contract notes carefully, to make sure you got the price you thought you were getting, and file them so that you can cross-check against your broker statement.

 Contract notes are also important when it comes to doing your end of year tax return, because they relate to the calculation of CGT. Depending on which broker you use, you may get quarterly and annual statements mirroring the individual transactions that have taken place on your account during the period in question

 This article was written by Bibi Bunmi Apampa a Business Coach  at


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