First principles of investing

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13. Selecting your shares

Investing in shares may be very risky. Over the short term the volatility of markets may temporarily depress the share price of even the best of companies. The cost of frequent dealing may quickly outweigh minor gains in price.

The London Stock Exchange has over 2,000 listed companies and is the main securities market in the UK. It acts as a primary market for new issues and also as a secondary market.

In theory, large companies which are well diversified may be more stable than smaller companies, partly because of their sheer size and partly because they may be well diversified in the UK and overseas and, as such, may be less vulnerable to market cycles and economic factors.

Your starting point, therefore, may be to decide whether to stick to the more solid blue chips or to investigate some of the higher risk/reward opportunities among the smaller companies.

The FTSE indices are arithmetically weighted by market capitalisation so that the larger the company the greater the effect its share price movement will have on the index.

'Market capitalisation' is the stock market valuation of the company which is calculated by multiplying the number of shares in issue by their market price.

• The FTSE All-Share consists of about 800 companies with a total market capitalisation of about £1,732bn. The All-Share is regarded by the London Stock Exchange as the professional investor's yardstick for the level of the UK equity market as a whole, and generally represents about 98 per cent of UK stock market capitalisation. Companies are allocated to 39 different categories of shares according to industrial sector.
• The FTSE 100 index consists of the 100 largest UK companies by market capitalisation. Together they represent about 78 per cent of the total UK stock market capitalisation (not just the All-Share). Many of these companies are multinationals with substantial overseas exposure.
• The FTSE 250 index consists of the next 250 companies below the FTSE 100 and can include or exclude investment trusts. The companies are capitalised at between £350m and £3bn. Together, these companies usually represent about 14 per cent of the UK stock market capitalisation (including investment trusts).
• The FTSE SmallCap does not have a fixed number of constituent companies but instead it comprises all the remaining companies in the All-Share which are too small to qualify for the top 350. Together they usually account for about 4.4 per cent of the total UK stock market capitalisation.
• The FTSE All-Small index combines the SmallCap and Fledgling indices, although these also exist in their own right. The Fledgling covers just over 700 companies which are too small for All-Share.

1. Five steps to establish your investment goals 2. Your attitude to risk and reward 3. The major asset classes 4. Which type of manager? 5. Your investment assessment kit 6. Is past performance a guide to the future? 7. Easy access deposits for emergencies 8. Fixed income products 9. A rising income 10. The choice of collective equity funds 11. Pensions and ISAs 12. Tax efficient but may be very risky 13. Selecting your shares 14. Your stockbroker 15. Buying your shares 16. Ethical Investment 17. When to sell 18. How to keep your portfolio on track 19. Do you need an adviser? 20. Conclusion

• First Steps in Shares
• How to Read the Financial Pages