The items in your weekly shopping basket may have different price tags and the same applies to investments on the market. Unlike your groceries, the price of a fund unit or share ‘on the shelf’ might be different to the price you end up paying.
Confused? You needn’t be as the system is less complicated than you think, and its fairly simple once you understand how funds and stocks are priced. Watch our video below on how to build an investment portfolio to get started.
In our penultimate chapter of ‘Investing for beginners’, Dan Coatsworth breaks down how you might construct an investment portfolio.
Hello. My name is Dan Coatsworth. Welcome to the latest instalment in AJ Bell’s ‘Investing for beginners’ video series.
So far, we’ve talked about reasons to invest, the different types of accounts and investments available, and working out how much you can afford to put away in an ISA or pension each month.
That’s covered all the essentials for preparing to invest - now it’s time to roll up your sleeves and start building your portfolio.
Before you decide where to put your money, you need to establish two key things: what is your risk appetite and how long is it before you need to access the money?
One mistake is to chase high risk stuff simply because you think they will give you best returns. There is nothing worse than fretting about investments if they aren’t going to plan. You certainly don’t want your stocks, bonds or funds to cause you sleepless nights. Therefore, it is important to be realistic about how much risk to take.
It is also important to know when you’ll need access to the money in your investment account. If it is soon, such as in the next two to three years, you won’t have time to ride the ups and downs of the stock market, so excessive risk-taking could backfire. Remember that share and bond prices do not travel in a straight line and that investing is a long-term game.
Another key consideration for building a portfolio is diversification. You want to spread your risks and one way is to invest in a range of different industry sectors, geographies and asset classes.
Having a mix of shares in places like the US, UK and Asia would provide geographical diversification.
The stock market is full of every industry sector you can imagine, so rather than put all your money into one place such as technology, why not consider other industries as well? That way, if one sector goes out of favour, hopefully something else in your portfolio will be thriving.
You might want to mix up the type of assets in your portfolio so the components don’t all move together. For example, different factors will influence shares, bonds, property, infrastructure and gold, so they might provide a broad spread to ensure your portfolio is diverse.
If you run with that idea, your portfolio selection might start with a multi-asset fund as the core holding.
AJ Bell’s Dodl app offers a range of multi-asset funds which are also called ‘all-in-one’ funds. You can choose from ones supplied by third parties or AJ Bell has a range of its own funds which are managed by our experts.
Anyone who wants a bigger choice of products can find them on AJ Bell’s own platform which features a range of multi-asset funds, as well as investments which could be put together in a portfolio to provide diversification.
For example, one route is to invest in a global equity fund and a strategic bond fund as the core holdings. You could then potentially consider adding satellite holdings such as a UK smaller companies investment trust, an emerging markets tracker fund, a healthcare investment trust, a technology fund, a UK commercial property investment trust and a gold ETF. That’s just an example - everyone likes to shape their portfolios differently.
If you want some inspiration, the funds section on AJ Bell’s website includes our Favourite funds list. We also have an investment trust select list created by our experts, as well as a range of our own funds. These are just some suggestions and you’ll be able to find a much broader range of funds and trusts on our platform.
AJ Bell cannot tell you where to invest - that applies whether you are using our platform or investing via the Dodl app. If you’re unsure about what to do, it might be worth talking to a qualified independent financial adviser.
I hope you found this video useful and don’t miss the final part of this series where we will discuss how to maintain a portfolio. Thanks for watching.
How are funds priced?
If you search for a particular fund on our platform, you’ll see a price to buy a unit of that fund on the screen such as £7.50. That is the price at which the fund was last valued and may not be the price you are charged when placing a buy or sell order.
Funds are generally priced daily. They are priced at the same time every day, which is set by the fund manager, and the value of the fund will depend on the value of its underlying assets.
Each fund manager will have a cut-off point for when you can buy and sell the fund, and you need to place your order before that point if you wish to deal at that day’s price. You'll need to check the research page for each fund for the relevant cut-off point. If you instruct us to buy a fund after the cut-off point, you’ll normally buy at the following day’s price.
When you place an order for a fund, you specify the value of how much you want to buy or sell rather than selecting the number of fund units. The price you get will be shown on the contract note for the deal. You’ll normally receive your contract note the next business day.
How are shares priced?
Share prices fluctuate throughout the day, depending on many different factors, but here are a few of the most common reasons:
- Investor supply and demand
- Company news
- Economic factors
- Market sentiment
The share price will move higher if there are more buyers than sellers and fall if there are more sellers than buyers.
When you look up a stock on our website, the displayed price has a 15-minute delay. You can see live prices for any UK-listed share you hold in your account with us, although you may still pay a different price to buy or sell due to the fast-moving nature of the market.
When you place an order, you’re quoted a specific price and it’s normally fixed for 15 seconds. When this time runs out you need to request a new quote. While the deal is being placed, we are still checking for a better price for you and if we find one, then you’ll get the better price.
Sometimes your quote may become unavailable, for example when the market is volatile. In this situation, you would need to request a new quote, or if no online quote is available, you can call us on 0345 5432 600.
What are bid and offer prices?
Another key point to consider is that shares have a bid and offer price. The bid price is the maximum that the market is willing to pay for your shares when you sell them and the offer is the lowest price the market is willing to sell them to you. Once you’ve bought the shares, the type of price used to value them depends on where they are listed in the world and the time at which you see the information.
When you go shopping and see a t-shirt priced at £10 in one shop and £15 in another, you can quickly work out which one is a bargain, particularly if they are the same quality item. With shares, you cannot simply look at the share price and say one company is valued more or less than a comparative business. For example, shares in Company X might cost 35p whereas shares in Company Y cost £15. You might think Company X is this bargain in this example. The price doesn’t tell you anything about how the company is valued – instead, you need to look at various investment valuation metrics, such as comparing the price to how much earnings a company makes.
Also, companies typically have a different number of shares in issue, hence why you cannot use the share price in isolation as a measure of how cheap a company is.
How are ETFs priced?
Exchange-traded funds or ETFs also fall under the category of shares in terms of how they are priced. You buy and sell their shares on the stock market and their price can change throughout the day when markets are open for trading.
How are investment trusts priced?
Investment trusts are treated in the same way as individual company shares, rather than funds, when it comes to pricing. Their price can change throughout the day when markets are open for trading.
The price of an investment trust’s shares is based on what the market thinks they are worth, not the net asset value – also known as NAV – which is the value of all the underlying investments in the trust and is typically published by an investment trust once a day.
The market value of an investment trust’s shares is often different to the value of the trust’s underlying portfolio, hence why you can sometimes find trusts trading at a discount or premium to NAV.
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Important information: The value of your investments can go down as well as up and you may get back less than you originally invested. We don't offer advice, so it's important you understand the risks; if you're unsure, please consult a suitably qualified financial adviser.