Six Ways of Getting Market Exposure

The first starting point when looking for a stockbroker is to work out what type of account you need. What sorts of instruments do you plan to invest or trade in and what do you hope to achieve? Once, you have worked out what you are interested to trade or invest in, it is simply a case of shopping around to find the right package at the best available price.

Shares – This is the time-tested and traditional way of investing in the stock market. You call your broker (or more likely in the modern world just access an online brokerage account) and buy shares directly in the company you wish to invest in. The costs involve brokerage commissions and your exposure will be based directly on the performance of the individual stocks you hold, without professional advice backing you.

Exchange-Traded Funds (ETFs) – These work very much like any other stock and are listed on the exchange but they denote the performance of an index or commodity. ETFs are designed to mirror the performance of an index but are bought and sold just like a share which makes them useful as long-term core portfolio holdings and for more active traders. Exchange-Traded Funds are merely the exchange traded version of index tracking funds (although now of course weird and wonderful ETFs are being launched which veer far away from the original purpose/intent of index tracking). ETFs are priced continuously throughout the day when the markets are open so you can buy or sell them easily and know exactly how much it is going to cost you. For instance in Australia ETFs vary from the traditional State Street products that follow the S&P/ASX200 or 50, to iShares exchange traded products which mirror international indices and others tracking gold or silver. The fees for participating in ETFs are typically quite low. In the UK there are now some 10 different providers operating in the marketplace and are becoming increasingly popular.

Listed Investment Companies (LICs) or Investments Trusts – These behave much like exchange traded funds in that acquiring one unit buys you a whole portfolio, although listed investment companies are usually more like managed funds as opposed to passive index-trackers. Also, quite unlike exchange traded funds, their share price performance does not directly mirror the underlying holdings and may under or overperform. The main difference between Investments Trusts and unit trusts is that investment trusts are quoted limited companies listed on a stock exchange (as opposed to mutual funds) and are thus traded constantly during market hours, rather than at a set price determined once in a trading day. Here it is worth noting that that the shares of an investment trust can trade at a premium or discount to the NAV (net asset value) of the underlying investments (this is unlike a unit trust or Oeic fund). Investment trusts can also borrow which means they are able to utilise leverage.

Managed Funds – Again a traditional way of investing where you invest money with a professional fund manager in a unit trust arrangement. Your money is added to a common investors pool and the funds manager manages the funds to the best of his ability. You do get professional advice but at sizable fee. Two of the more popular types of managed funds in the UK are unit trusts and Oeics, both of which allow investors to pool their resources and have a so called ‘expert’ investment mananger manage the fund.

Individually/Separately Managed Accounts – These are something in between actively managed funds and a direct shareholding. A fund manager takes care of the stock selection process but as opposed to a managed fund you still own the underlying stocks, rather than just units in a trust. This can have tax advantages and allows for more customisation.

Contracts for Difference – or CFDs for short, a growing segment of the trading world. CFDs are margin traded and allow you to apply leverage meaning you get additional exposure for your money, which can be a good or bad thing depending on how good you are at predicting a market’s direction. Contracts for difference also allow for short positions which means that you can benefit from the fall of a share’s price. CFDs are more akin to speculation than investing.