Some people mistake investing to be the same as earning interest on a basic savings account with a Bank or Building Society – although in reality it is very different.
The basics of investing
Let us say you purchase shares in the ABC Group. The shares are priced at £1 per share and you decide to purchase 100 shares which will cost you £100 – plus fees. You are now the proud owner of 100 ABC Group shares – congratulations!
All is well with ABC Group and business is going from strength to strength. People are now more confident with ABC Group and profits are up. As a result, the share price increases to £1.50. This means your shares are now worth £150 – an increase of 50%. This no doubt will make you very happy indeed.
Now let’s look at things from another angle.
ABC Group have issued a profit warning. People are no longer confident and stop buying more shares or worst still, begin to sell their shares. As a result, the share price drops to 50p per share. You still own 100 shares, but the share price is now 50p, meaning the value is £50 – a drop of 50%. But before you start to have sleepless nights, a drop of this value can be an opportunity. For example, if you invested a further £100 when the share price is now 50p, you will buy another 200 shares bringing your total to 300 shares at a cost of £200. Should the share price then recover to £1.50, the value of your shares are now worth £450 – a return of 225% based on your initial investment of £200.
Investing – Reducing Risk
Investing with DirectInvest here at GilesSmith (powered by True Potential), you purchase ‘units’ within the underlying ‘funds’ which make up the portfolio. The ‘units’ distinguish what money is yours with all the other investors which invest in the same fund. The key difference is that funds will have thousands of different shares similar to ABC Group – therefore spreading the risk. As the fund grows in value, the individual unit price will go up. Similarly if the value of the fund goes down, the individual unit price will also go down.
This is why here at GilesSmith we feel it’s best to invest little and often. This way, if the share price and fund value goes down, then further monies you invest will buy you more units for your money – think of it as a Summer or Winter sale. Ultimately if the share price or unit price goes down, you get more value for your money should you buy during this sale period.
Of course with any investment there are no guarantees. For example, if ABC Group went bust, there is a high chance you would lose your invested capital. However with a ‘fund’, should the same scenario happen and there are lots more shares held in the fund, a fund is better placed to absorb losses – better still, it’s the Fund Managers job to ensure that they don’t invest in companies that are likely to go bust in the first place. This is ultimately what you pay them for.
To find out more about DirectInvest click here