If you had bought shares in Rolls-Royce five years ago, you would now be up 1,354 per cent. If you had bought Ocado instead, you would have lost 89 per cent of your investment. That contrast captures everything that makes individual share investing both compelling and dangerous.
In summer 2021, Rolls-Royce was mired in the Covid pandemic downturn while Ocado was riding a boom in online grocery technology. Few investors would have predicted which company would come out ahead.
Do your homework before you buy
Picking shares successfully requires time, effort and a willingness to dig into the numbers. That means reading trading statements, annual reports and results, as well as understanding what a company says about its own prospects and what independent analysts think.
When assessing a company, look at its financial strength, management quality, growth prospects and ability to pay dividends. Consider whether it can capitalise when conditions favour it, and whether it can survive when they do not.
Dividends matter more than many investors realise. The long-running Barclays Equity Gilt Study found that 100 pounds invested in the UK stock market in 1945 would have grown to 11,570 pounds by the end of 2024 through rising share prices alone. With dividends reinvested to buy more shares, that same pot would be worth 326,231 pounds.
Spread your risk
Holding too few companies is the classic mistake among share investors. Research suggests that at least 20 companies spread across different sectors is desirable, though there is no single magic number.
Avoiding home bias is also considered an important part of diversification. British investors can now access overseas markets, such as US-listed stocks including Apple or Nvidia, far more easily and cheaply than in previous years.
One approach recommended by investment experts is a core-and-satellite strategy: holding the bulk of a portfolio in broadly spread global funds or index-tracking exchange traded funds, while allocating a smaller portion to picking individual company shares.
Watch what you pay to trade
The cost of buying and selling shares has fallen sharply in recent years, driven largely by competition from app-based investing platforms. Hargreaves Lansdown, once charging 11.95 pounds per trade, now charges 6.95 pounds. Rival Interactive Investor charges 3.99 pounds, AJ Bell charges 5 pounds, and Fidelity charges 7.50 pounds. All of these services also carry account fees.
By contrast, Trading 212 offers free share dealing with no account fee. Freetrade and IG also offer free dealing with fee-free account options.
Foreign exchange fees are a separate consideration for investors buying overseas shares. Hargreaves Lansdown and Freetrade charge 0.99 per cent, while Trading 212 charges 0.15 per cent, a significant difference for active traders.
