Brexit uncertainty has left a cloud of doubt about buying shares in the country’s top performing businesses.
Britain once had a love affair with the FTSE and stocks and shares, but that seems to have ended in this era of political and economic upheaval.
It’s possible to win and lose fortunes on the London Stock Exchange by playing the market, but that’s for the few rather than most investors, who hold a few shares for the long-term mainly through pensions and ISAs.
But FTSE100 companies and beyond can still hold a key that unlocks a comfortable retirement for the many.
But before dabbling in shares, it’s important to understand the market and how the City of London works.
What is the FTSE?
The FTSE – better known as the Footsie – is short for the Financial Times Stock Exchange Index. There are several indices – the FTSE100, FTSE350, the FTSE All Share and some Alternative Investment Market indices (AIM).
It’s important to know what category of companies are represented on each if you intend to buy into their shareholding.
FTSE100 – This is the Footsie most quoted on the news and represents Britain’s top 100 private companies by market value. The market value is determined by the number of issued shares multiplied by the current share price.
For example, a company with 1 million shares valued at £1.50 each has a market capitalisation (also called the ‘market cap’) of £1.5 million.
When the Footsie loses value or has money ‘wiped off’, the total market cap of the top 100 companies falls by that amount, so if the FTSE started trading at £10 billion and had £3 billion wiped off in a bad day’s trading, the total market cap of each company is now £7 billion.
The Footsie started in 1984 with a base of 1,000 points and is now more than 7,000. In the beginning the total value of FTSE100 companies was £100 billion – now that level has reached £1.5 trillion.
FTSE350 – The top 350 companies by market value
FTSE All Share – An index tracking the share value of around 600 of the 2,000 or more companies traded on the London Stock Exchange
FTSE AIM 100 – The top 100 private companies by market cap ranging from start-ups to longer trading companies raising money to expand by issuing shares
How has Brexit disrupted the FTSE?
Investors need to make a decision about where to put their money and that decision has been made harder by Brexit.
Brexit has led to a falling Pound which has helped many FTSE companies because most derive a high proportion of their income from overseas.
Switching foreign earnings into Sterling has proved profitable for many who are making more money from sales purely on currency exchange while their overheads remain stable.
In percentage terms, FTSE 100 companies derive around 70% of their revenue from overseas, while this shrinks to around 50% for the next 250.
Because the FTSE250 companies are more prone to impact from the performance of the UK economy, how Brexit influences the stock markets makes a bigger difference to their revenues.
The rule of thumb is the FTSE100 thrives on a weak pound, while the FTSE250 does better on a strong pound.
Companies must meet some qualification rules for listing on the London Stock Exchange.
These include a rule that the company must have traded for at least three years, so investors can scrutinise annual accounts to see how the business has operated and they must have a market cap of at least £700,000.
Knowing what to invest in
Different types of companies are prevalent on the different indices.
FTSE100 companies tend to be mining stocks, oil majors, pharmaceuticals, tobacco companies and banks, while the FTSE 250 is the up and down escalator for companies who have dropped out of the FTSE100 or are on their way up.
Passive investors looking to park their money and make an average or slightly above average return can invest in FTSE Trackers, which do as they say – tracking the value of the FTSE 100 or 350.
Tracking the right index is vital, which is why investors need to know which companies and sectors their money is in.
Active investors move their money around according to a strategy or market movements, more in the hope of short term gains than passive investors.
The takeaway is for investors to understand the index or fund they are following.
How does confidence impact investments?
Often the FTSE rises and falls on sentiment – or how analysts and fund managers view the future of the economy based on current data.
They don’t have crystal balls and cannot foretell the future, so take what they say with a pinch of salt and learn to follow pundits who come close to the mark rather than slick talkers.
Analysts and fund managers cite past performance, computer data models and their own views as reasons to back specific companies.
Most professional investors will say buy while the market is falling, because the value of shares will increase in the long term. Holding your nerve is tough but a valuable talent.
But don’t try to outguess the market. You have a 50:50 chance of being right, but making the right call once is no guarantee you will do see for the next 10 times.
What are equities?
Equities are another name for shares in a company.
Shares come in two distinct categories – ordinary and preference.
When an investor buys an ordinary share, they become a part owner of the business. The share entitles them to a share in the profits – paid as a dividend – and, depending on the terms and conditions attached to the share and the number owned, a say in how the business is run.
The investment can pay in two ways – capital growth in the value of the share and the dividend.
However, neither are guaranteed. Share prices can rise and fall, while the directors can elect not to pay a dividend unless the shares are ‘preferred’ or ‘preference’ shares that come with a fixed dividend.
Not paying or cutting a dividend is usually read as a sign the business is facing financial issues and leads to a drop in the share price.
Investors have developed a simple formula that calculates the dividend pay-out ratio (DPR).
Just go to the annual accounts and divide the dividends paid by the company’s net income.
The result gives a percentage of net income paid to shareholders.
Preference or preferred shares are slightly different from ordinary shares.
They come before ordinary shares in the hierarchy of ownership, so generally command a dividend before ordinary shares, which is why they are called ‘preferred’, but they don’t come with voting rights.
Another important distinction is preference shares come close to the end of the queue for a pay out if the company goes to the wall, but are ahead of ordinary shares.
This means they are viewed as less risky than holding ordinary shares.
Companies often limit the perks to shareholders who own a certain number of shares.
For instance, Adnams, the pub and hotel group, give a 15% discount card for meals, accommodation and in-store purchases to anyone holding a single share, while cruise company Carnival offer on-board credits to shareholders with 100 or more shares.
Tax on shares
Shareholders pay taxes on the earnings from shares, except those paid on shares held in pensions and ISAs, which are free of income and capital gains tax.
Dividends paid on shares held by individuals come with a £2,000 annual personal tax-free allowance.
Above that amount, dividends are lumped in with other earnings and subject to income tax.
If shares held by an individual are sold, any increase in value is subject to capital gains tax. Again, any growth in shares held by pensions and ISAs are free of CGT.
And like income tax, CGT comes with an annual tax-free personal allowance.
The CGT rules on selling shares are complicated, but here’s a basic guide from HMRC
Back in the day, buying shares was slow and complicated and generally involved a stockbroker who worked as an independent or through a bank.
Now, buying shares is a lot easier. Technology has automated the process and led to fund supermarkets springing up online.
Fund supermarkets are online trading platforms that offer no advice, just an account to hold and trade shares as an individual or through a pension, ISA or equity fund.
Stockbrokers and fund supermarkets are authorised by the Financial Conduct authority and come with a layer of consumer protection.
Do look at a range of share buying options, as the charges for managing your money and buying and selling shares will vary between platforms.
Investing in funds
Investing in funds is like buying shares, but instead of taking a stake in a single company, the fund spreads the investment across several companies.
Funds can also give ordinary investors a route into other assets, like property or bonds.
The idea is funds spread risk.
Lump sum or drip feed investing?
How someone invests often comes down to personal circumstances, like attitude to risk and how much money is available to buy shares.
Investing a lump sum means shares are bought at the same price and are susceptible to potential market downturns.
If all the cash went into a FTSE100 tracker and the market dropped 15%, so would the investment. That could mean waiting a long time for the market to climb back into the black for you.
Regularly investing small sums reaps a benefit called ‘pound cost averaging’.
Setting the same amount of money aside each month means buying more shares for the same amount of money.
How does this work? Well, investing £10,000 in £1 shares buys 10,000 shares, but investing £500 a month means taking up 500 shares in the first month, but if the price falls to 90p in the second month, you can buy 55 shares and so on.
The idea is if the price of shares drop, you are exposed to less risk, but in the long term should make more capital growth.
Share ownership hack
It’s a good idea to have a structured approach to investing in shares.
The tax advantages of buying shares through pensions and ISAs far outweigh those of buying as individuals
However, if you have maxed out your pension and ISA tax breaks, you can hold another set of shares as an individual with tax-free dividend earnings of £2,000 a year.
Investment schemes supervised by HM Revenue & Customs also offer a tax-effective way to own shares, but with riskier businesses.
The Seed Enterprise Investment Scheme (SEIS) offers a 50% income tax refund on share investments of up to £100,000, plus capital gains benefits.
For larger investments, the Enterprise Investment Scheme (EIS) offers a 30% tax refund on stakes of up to £1 million.