The problem is that the costs of dealing – the commission paid to stockbrokers
The riskiness of share ownership, and the distortions of the tax system, have contributed to a decline in the proportion of shares held by private individuals. Instead, investment institutions now dominate the equity markets. However, the privatization issues have encouraged many individuals back into the stock market and some have estimated that there are still as many as 9 million shareholders in the U K.
The main problem for individuals in equity investment is the risk. As the Crash amply illustrated, share prices can fall dramatically in a single day. Even if the market as a whole does not collapse, individual shares can fall very sharply and the smallest investors are usually the last to hear the news that sparks the drop. It may be bad news about an individual company that causes its share price to plunge or bad news about a sector of the economy that causes a group of share prices (e.g. computer companies) to fall.
The best way of dealing with the risk of individual price falls is to spread shareholdings over a wide range of companies. This is a matter for careful judgment; obviously, buying five separate oil stocks will not protect you against a fall in the price of oil.
The problem is that the costs of dealing – the commission paid to stockbrokers, the stamp duty, and the spread between the buy and sell prices – mean that shares have to rise by several per cent just for the investor to break even. Of course, the wider the portfolio, the greater the costs. Since one should really have a portfolio of 10 to 12 stocks, the investor ought to have at least 10,000 to 12,000 to spend. He or she should also be ready to invest long term. Also, individual sectors may be more risky than others. Investing in diamond mining may give you a chance to make your fortune but you are also far more likely to lose your stake than if you had bought shares in ICI.
Tips and rumours can be misleading. Many investors rashly seize on a newspaper report. A story about booming coffee prices in Brazil will have been known of others long before, and the share price of coffee producers will already reflect the new. The tips given by financial journalists are often useful but, not alas, always right.
If there is a hope of a quick killing for the small investor, it may only come through new issues. Everyone who bought shares in British Telecom did well at first. By no means all new issues are no successful but it may well be that the publicity which surrounds further privatization issues will ensure their success. The investor should read the financial press carefully before such issues. If enough publicity is favourable, then it is likely that plenty of other investors will be willing to buy. That will mean that the issue will be over-subscribed and those investors who do not get the shares they want will try to buy the shares on The Stock Exchange, bidding up the price in the process.
Experts have a further rule of thumb – take profits and cut losses. It is luck and not judgement that allows a shareholder to sell at the highest possible price. Better to be sure of a 50 per cent gain, than lose all the gain trying to get 60 per cent. On the loss side, if a share price starts plummeting experts do not hand on in the Micawberish hope that ‘something will turn up’.
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