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Some people might see the current recession as the very worst time to invest in the stock market, but many of the worlds most successful investors insist that a market downturn is the very moment when people should be investing. How the Stock Market Works will tell investors what is being traded and how, who does what and to whom, and how to evaluate both the shares and proponents claims about them. The authors answer questions such as: What are shares and gilts? What are futures and options? Where and how can you buy shares? How do you pick a share to buy?
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iv If you speculate on the stock market, you do so at your own risk.
Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or either of the authors. First published in 2002 Reprinted in 2002, 2003 Second edition, 2004 Reprinted in 2005, 2006, 2007 (twice), 2009 Third edition 2010 Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road London N1 9JN United Kingdom www.koganpage.com
525 South 4th Street, #241 Philadelphia PA 19147 USA
© Michael Becket, 2002, 2004 © Michael Becket and Yvette Essen, 2010 The right of Michael Becket and Yvette Essen to be identified as the authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN 978 0 7494 5689 4 British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Becket, Michael (Michael Ivan H.) How the stock market works : a beginner's guide to investment / Michael Becket, Yvette Essen. -- 3rd ed. p. cm. Includes index. ISBN 978-0-7494-5689-4 1. Portfolio management. 2. Investment analysis. 3. Stock exchanges. I. Essen, Yvette. II. Title. HG4529.5.B43 2010 332.64'2--dc22 2009030898 Typeset by Saxon Graphics Ltd, Derby Printed and bound in Great Britain by Bell & Bain Ltd, Glasgow
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Contents How this book can help Acknowledgements
xiii xv
1.
What and why are shares? Quoted shares Returns Stock markets
1 2 4 4
2.
What are bonds and gilts? Bonds Preference shares Convertibles Gilts
6 6 10 11 11
3.
The complicated world of derivatives Pooled investments Other derivatives
15 15 21
4.
Foreign shares
32
5.
How to pick a share Strategy The economy Picking shares
34 38 44 45
6.
Tricks of the professionals Fundamental analysis Technical analysis
57 58 70
7.
Where to find advice and information Advice Information
72 72 79
x Contents ___________________________________________________ Indices Online Company accounts Using the accounts Other information from companies Other sources Complaints
87 88 89 100 100 102 105
8.
What does it take to