Types of Shares and How they are Traded

FTSE 100 shares and some of the more liquid FTSE 250 shares are traded on SETS; a stock exchange trading system which works by matching orders electronically. There is also another system; SETSmm which applies to the lesser mid-caps, some liquid Aim stocks, plus the remainder of the Main Market Small Cap index. SETSqx applies for the more illiquid shares which are quoted on the main markets and the rest of Aim; it integrates an electronic stacking of orders plus the standalone bids and offers of individual market makers. Trades are cleared via Euroclear UK, which are the owners of CRESTco. Settlement for UK shares is T+3 i.e. settlement takes place three business days after the deal has taken place with the broker. As well as having to pay broker charges amounting to £12 to £15 per stock trade, stock investors are also charged a 0.50% Stamp Duty on stock purchases with the levy being automatically added to the price unless you make use of spread betting in which case no direct broker fees or stamp duty apply.

When you bet on individual company shares you need to know a little about the types of shares which investors categorise different companies into. By this we do not mean ordinary or preference shares etc. But groupings which characterise the potential performance of a share.

Clever Strategy : When considering a company share first categorise what type it is. Then consider how it is likely to perform before finally making a decision to bet on it. Here are the main types of shares.

• High Yielding Shares

High yielding shares are those shares which offer a high rate of return or dividend. For those buying shares, they are less risky than growth stocks (see below) because they are not expected to grow so quickly and so any setbacks will have less of an impact on share prices. This advantage is, however, turned into a disadvantage for those betting on individual share prices because any fluctuation in the price is usually minor and tendency to buck the trend modest.

• Growth Stocks

With growth stocks investors are looking for an upward movement in the share price rather than a high dividend yield. Growth companies are usually those in expanding market sectors. In addition, they will benefit from good management, have higher than average profits, and be at a stage where they want to plough profits back to expand the company further. You can therefore expect that the dividend yield will be lower and the price/earnings ratio will be higher.

Growth stocks are ideal for financial betting because they hold the potential to rise in prise dramatically or – alternatively – crash in price spectacularly if the anticipated growth fails to materialise. So, it is possible to make a great deal of money if you predict all this accurately, or if the financial bookmaker makes a mistake. However, to do this successfully you will need to study the company carefully and follow its progress in detail.

• Recovery Stocks

These are the shares of companies which have been going through a difficult path. They may be firms which have been successful in the past, but which have seen a drop in profits because the general market is poor, or they may be shares which have not met investor’s expectations, or which are failing.

If you bet on these shares when they have hit the bottom of the cycle, or at the end of the recession, you could bet on them making a large and unexpected gain when they start to move up again.

• Blue Chip Stocks

The term blue chip comes from the stakes in poker. It refers to shares which are often issued by big companies and household names. These companies are usually valued at a minimum of £5 billion. They often form the basis of pension fund and insurance company portfolios. They are often, but not necessarily, in the FTSE 100 list.

The size of some of these companies means that they can influence share prices across entire industries, making them a popular sector play for many spread traders. For instance a position on Barclays is the equivalent of a bet on the financial sector. The chief advantage is that it is easy to track the performance and prospects of blue chip shares because a lot is written about them in the press. The disadvantage is that changes in the share prices are gradual. The secret of making a great deal of money by betting on blue chip shares is to spot or anticipate something coming up which could unexpectedly rise or lower the share price, as in the case of the Burtons example, which we have already looked at.

Note that large caps tend to outperform small caps during times of economic uncertainly or broad market turmoil because of several reasons not least because blue chips are more likely to be better capitalised financially and thus more likely to survive any prolonged market downturn. In addition, large caps tend to be better diversified in terms of both product and geographical spread and are more likely to pay dividends so at least offer shareholders something for their patience, even in difficult times.

• Smaller Company Shares

Small company shares can be a fertile ground for financial betting. The term small company is something of a misnomer. Small company shares are in companies worth between £20 million and £150 million, which can still be quite a large concern. Small company shares are often listed on the Alternative Investment Market or AIM.

The chief point to note about small company shares is that they traditionally outperform blue chip shares. They were incredibly successful in the 1980’s and early 1990’s and this pattern may resume. Not all spread betting companies, however, will accept bets on smaller company shares.

• Penny Shares

Penny shares are literally shares in companies which are worth only a few pennies. They are shares in companies which have hit the very bottom of their cycle, whose profits have fallen to rock bottom or have simply stagnated. The gamble is that they will find their feet and rise again. There have been some spectacular turn-rounds over the years, the most notable of which was Polly Peck in the 1980’s. Spotting such a share would enable a shrewd trader to make a small fortune. You may find, however, that not many financial spread betting providers offer bets on penny shares.

• New Issues

A new issue is exactly what it says, ie. a share in a company which is about to be, or has just been issued, on the stock market. There are not so many new, popular issues now as there were during the 1980’s heyday with the many privatisations but still a good many, many of which are too minor to be heard about in the press. Some financial spread betting companies take bets on these shares, either before, during or just after they have been launched.

The difficulty with new issues is that they are notoriously difficult to predict. Many new issues are under priced at launch and skyrocket on the first day of trading, while a few are overpriced. Others rise dramatically before crashing.

To successfully bet on these you need close knowledge of the company and its prospects. If you do, it is possible to do very well with new issues.

Grey Markets : Betting on a the value of a share before public trading begins is known as trading on the grey market. Not all financial bookmakers will accept grey market bets.

Structural Factors

When betting on individual company shares you should always be aware not just of its general prospects but on structural changes which are likely to affect the value of the shares. Advance knowledge of these can allow you to predict the market. If, for example, you are a shareholder or employer of the company concerned and find out about the situation before the market you could really make a killing!

Scrip Or Bonus Issues : If a share price rises sharply the company may issue free shares to existing shareholders. So, for example, if a shareholder holds 500 shares in a company worth 200p each their holding would be worth £1,000. If the company made a one-for-one scrip issue they would now hold 1,000 shares but they would be worth 100p, The effect of this is that although everything continues as before the share price falls.

Rights Issue : With a rights issue existing shareholders are invited to invest new money in a company in return for more shares. Again, the price is likely to fall.

Mergers, Demergers And Takeovers : All these structural changes are likely to affect the share price. It will usually rise. However the direction and extent of the change in value will depend on the individual situation and the restructuring that is being proposed.