UK Investing

Disclaimer

This lens is intended to describe some of the methods available in the UK to private investors. It does not constitute or offer advice. You are strongly urged to seek the professional advice of an FSA registered financial advisor before embarking on your journey into investments.

Most important: only invest with money you can seriously afford to lose, as the value of any investment can go down as well as up.

pick your share on fundamentals & time it using level 2 data
Most private investors in the UK start their portfolios with the underlying company shares - either individual shares or collective investments (mutual funds). The various mutual fund options will be covered in the next section.

As the exposure - and therefore the risk - is higher when holding shares, it pays to do thorough research before buying. It also makes sense to spread your portfolio over several company sectors to try and diversify risk. For example, if you owned, say, ten companies and they were all banks and mortgage lenders, your whole portfolio would have recently taken a massive hit!

When you are interested in a particular company share, you can easily look up certain data on the internet for free. The data you get is current best bid and offer prices, the volume of shares traded so far during the day, and the last trade to go through (price and volume). You'll normally be shown the points and percentage change since yesterday's close.

This is all very useful information, and allows you to get a 'feel' for the company, especially when you also take a look at the chart - the most commonly seen charts show daily prices at the close of trading, although there are lots of ways to represent the level 1 data in a chart (eg bar charts, candlesticks, and point and figure charts).

If you have only a fairly small amount of cash to invest, you might be more inclined to investigate collective investments - or mutual funds. In the UK, there are three main types:

• Open-Ended Investment Companies (OEICs)
  
• Unit Trusts
  
• Investment Trusts
  

The main difference between them is in how they get priced. OEICs tend to have a single daily price, called the net asset value (NAV) whereas the other types are similar to company shares, and have a bid price and an offer price.

A newer type of collective investment is beginning to establish itself in the UK, having been popular in the US and elsewhere - the exchange-traded fund or ETF. ETFs are traded in the market in real time, in the same way as shares.

Contracts for difference - or CFDs - are used widely now by private investors in the UK. They are a derivative product, which allows the investor to short sell - or profit from a falling share price. They are also leveraged instruments, so that the investor can expose themselves to perhaps ten times their stake. CFDs can be used to make substantial gains, but never forget that any losses are similarly multiplied by the leverage, and that these losses can very easily be greater than the initial investment amount - in other words, you can lose everything and then some more!

CFDs are very similar to traded futures except that no physical exchange of the underlying commodity takes place - so don't worry about having to get rid of a warehouse full of pork bellies! You enter a contract with the CFD company, and agree that the difference between the buy price and the sell price will be paid out.

buy put warrants to go short & call warrants to go long
If CFDs are similar to futures (without considering the underlying) then covered warrants are like traded options. The warrants come in two flavors: call option where you want the share price to go up; and put option where you want the share price to go down. In the recent market volatility, for example (first half of 2008) the main UK index, the FTSE found difficulty getting far above 6000. A common practice was then to buy FTSE put warrants at about 6000 in the hope of profiting from a pullback. Of course, this is only one of many strategies, some very complicated. The one described offers a good hedge, allowing an investor to gain on the falling FTSE when their other shares might be losing value. In other words, covered warrants can be used to offset losses elsewhere in the portfolio.