Introduction

‘Risk comes from not knowing what you are doing.’
Warren Buffett

Stock markets around the world are involved with staggering amounts of money – around US$70tn – and so they attract the attentions of a great many clever and ambitious people, many of them ruthless. Combine this with the vagaries of geopolitics and the often rapidly changing fortunes of companies – resulting in severe volatility in share prices – and the stock market becomes a frightening place for a great many people. It is important to realize that markets, as expressed through indices such as the S&P 500 (USA) and the FTSE 100 (UK), can be highly volatile, moving up and down dramatically in very short periods of time. The fluctuations in individual share prices can be even more startling. Individual share price movements of 30% or more in one day are not unusual. However, a good understanding of how the markets behave and how to manage your investment risk should enable you to succeed as an investor. An ability to cope emotionally with serious volatility is useful, but this is much easier to handle if you understand what is going on.

This book is written for people like the author – the ordinary man or woman in the street – who want to make their money work for them. He (and of course, she) is often referred to in the industry as the ‘retail investor.’ This is intended to be a very practical guide to successful investing. It goes into some technical depth in a few places, but this should not detract from the overall value of the book.

Most books on investment in the stock markets focus on buying and selling individual shares. This book deals fairly extensively with investing in shares through funds as well as through individual shares. This is a form of investing that will better suit many retail investors, and can be more rewarding provided you understand the drivers of the powerful financial services industry, which habitually takes advantage of the small consumer. The fund management industry is unable to distinguish in a satisfactory manner between volatility and risk and encourages the unwary retail investor to sink his money every month into large, dull funds. There are companies that offer a wealth management service that will involve investing across a range of asset classes, but the subject of this book is investing in shares – also known as equities.

There are numerous books on how stock markets work and how to make money from trading and investing in company shares. They are written from a range of perspectives and the interested investor will get something valuable out of all of them. A perspective of this book is that the unwary retail investor is at a serious disadvantage to the professionals, but if he understands the terrain of the stock …