I am afraid to say that my industry has built a bad reputation not only for poor communication and service with my customers, but also for a less impeccable record in terms of costs and fees.
Investment costs, while not always straightforward, should be clear and simple. Sadly, the investment market has built up a glossary of terminology that is not always understood even by its professional practitioners (I must admit that I have been guilty of creating some terminology in the past to see if Can the ‘experts’ be fooled – and they were).
There is also a well known firm that maintains a separate booklet on all its direct charges for the customers!
The difference between the sale and purchase price of a stock or fund is called a spread.
What is this?
However, there is one issue that I wanted to bring to your attention as you build your portfolio expertise, and that is ‘spreads’. Simply put, the spread is the difference between the sale and purchase price on any given stock or fund.
For most investors, they will only see one price quoted in the paper, but in reality there is often a considerable difference between the two prices.
Now, for very well-known companies that do a lot of business, the difference can be quite small and only a few pence.
However, the spread can be too wide for smaller companies, as the trading volumes are very low. The size of these spreads can be up to 5 percent, which means that your investment should be at least before you turn a profit.
Sometimes the spread can be higher than the share price.
Then note the liquidity
When we buy shares we always like to think that we can easily resell them. These are ‘liquid’ stocks, which means there are lots of them, so there is no problem buying or selling it.
However, if you move out to the FTSE 350 (the top 350 by market capitalization) the liquidity, or trading potential, in that stock decreases sharply. Some may be unavailable at the time because there may be no buyer or seller.
So what you just bought becomes a burden until a buyer comes.
The smaller the company, the less liquidity it will have, so diving into smaller companies in, say, AIMs (alternative investment markets) can become a one-way street unless you’re careful.
There are many ways this can be managed, for example, doing business in that small company once a year.
This means that trades can be concentrated to build liquidity for a brief period before it evaporates and your trading oasis disappears into the sand again.
Never buy a stock or stock before checking to see how tradable it is, and how widespread it is.
Your share price could technically double, but until you can sell it, that profit is just an illusion.
Justin Urquhart Stewart co-founded fund manager 7IM and is the president of the regional investment platform.