The Financial Times Guide To Investing: The Definitive Companion To Investment and The Financial Markets

433 Pages·2004·10.96 MB·English

by  Glen Arnold

FTGU_A01.QXD 19/3/04 2:32 pm Page i
THE FINANCIAL TIMES
GUIDE TO
I N V E S T I N G
FTGU_A01.QXD 19/3/04 2:32 pm Page ii
In an increasingly competitive world, we believe it’s quality of
thinking that will give you the edge – an idea that opens new
doors, a technique that solves a problem, or an insight that
simply makes sense of it all. The more you know, the smarter
and faster you can go.
That’s why we work with the best minds in business and finance
to bring cutting-edge thinking and best learning practice to a
global market.
Under a range of leading imprints, including Financial Times
Prentice Hall, we create world-class print publications and
electronic products bringing our readers knowledge, skills and
understanding which can be applied whether studying or at work.
To find out more about Pearson Education publications, or tell us
about the books you’d like to find, you can visit us at
www.pearsoned.co.uk
FTGU_A01.QXD 19/3/04 2:32 pm Page iii
THE FINANCIAL TIMES
GUIDE TO
INVESTING
THE DEFINITIVE COMPANION TO INVESTMENT AND
THE FINANCIAL MARKETS
GLEN ARNOLD
FTGU_A01.QXD 19/3/04 2:32 pm Page iv
PEARSON EDUCATION LIMITED
Edinburgh Gate
Harlow CM20 2JE
Tel: [phone]
Fax: [phone]
First published in Great Britain in 2004
© Pearson Education Limited 2004
The right of Glen Arnold to be identified as Author of this Work has been asserted
by him in accordance with the Copyright, Designs and Patents Act 1988.
ISBN 0 273 66309 7
British Library Cataloguing in Publication Data
ACIP catalogue record for this book can be obtained from the British Library
Library of Congress Cataloging-in-Publication Data
Arnold, Glen
The Financial Times guide to investing: a definitive introduction to investment and the
financial markets / Glen Arnold.
p. cm.
Includes bibliographical references and index.
ISBN 0–273–66309–7 (alk. paper)
1. Investments. I. Title:Guide to investing. II. Financial Times Limited. III. Title.
HG4515.A76 2004
332.6—dc22
2004043239
All rights reserved; no part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or other-
wise without either the prior written permission of the Publishers or a licence permitting restricted copying in
the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP.
This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or
cover other than that in which it is published, without the prior consent of the Publishers.
This publication is designed to provide accurate and authoritative information in regard to the subject matter
covered. It is sold with the understanding that neither the authors nor the publisher is engaged in rendering
legal, investing, or any other professional service. If legal advice or other expert assistance is required, the
service of a competent professional person should be sought.
The publisher and contributors make no representation, express or implied, with regard to the accuracy of the
informaiton contained in this book and cannot accept any responsibility or liability for any errors or omissions
that it may contain.
10 9 8 7 6 5 4 3 2 1
08 07 06 05 04
Typeset by 70
Printed and bound in the UK by Biddles Ltd, Guildford & King’s Lynn
The publishers’ policy is to use paper manufactured from sustainable forests.
FTGU_A01.QXD 19/3/04 2:32 pm Page v
To two inspiring teachers of what is really valuable,
Chris and Brenda Arnold, my parents
FTGU_A01.QXD 19/3/04 2:32 pm Page vi
About the author
Glen Arnold is an investor, author of many investment and corporate finance publications
and professor of finance (part-time) at the University of Salford. He heads a research team
focused on stock market mispricing. He is also engaged in consulting activities and a
lecturer on finance and investment. He can be reached at [email protected].
FTGU_A01.QXD 19/3/04 2:32 pm Page vii
Acknowledgements
This book draws on the talents, knowledge and contributions of a great many people.
I would especially like to thank the following.
Warren Buffett who kindly assisted the illustration of key points by allowing the use of
his elegant, insightful and witty prose.
Dr Mike Staunton and Professors Elroy Dimson and Paul Marsh of the London Business
School who granted permission to present some important data from Triumph of the Opti-
mists: 101 Years of Global Returns(Princeton University Press, 2002).
Tim Bond, Mark Capleton, Fred Cleary and Sreekala Kochugovindan at Barclays Capital
who granted permission to reproduce key stock market return figures.
Gill Hart at the Financial Times for her energetic support for the project.
The team at Pearson Education (FT Prentice Hall) who, at various stages, contributed to
the production of the book: Jonathan Agbenyega, Laurie Donaldson, Julie Knight, Richard
Leigh, Lisa Reading, Kate Salkilld, Richard Stagg, Amanda Thompson, Stephen York, Eliza-
beth Wilson, Geoff Chatterton, Annette Musker.
Sarah Mitchell, Liz Royle, and my wife Lesley, who bravely faced my handwriting to type
much of the manuscript.
Huw Morgan and Alison Kennedy of the University of Salford who devoted time to
reading chapters 11, 12 and 13, and suggested valuable improvements.
The publishers are grateful to the following companies for their permission to repro-
duce copyright material:
The Financial Times Ltd for extracts and financial data published in the Financial Times
The London Stock Exchange for Table 3.1, Exhibit 3.4, Exhibit 4.2 and Exhibit 4.4.
Exhibit 14.1 reprinted with permission of the Free press, a division of Simon and Schus-
ter Adult Publishing Group from COMPETITIVE STRATEGY: Techniques for Analyzing
Industries & Competitors by Michael E. Porter. Copyright © 1980, 1998 by the Free Press.
All rights reserved.
In some instances we have been unable to contact the owners of copyright material, and
we would appreciate any information that would enable us to do so.
vii
FTGU_A01.QXD 19/3/04 2:32 pm Page viii
FTGU_A01.QXD 19/3/04 2:32 pm Page ix
Contents
Foreword xvii
Introduction xix
(cid:2)
Part 1 Investment basics
1
1 What is investment? 3
Partnerships 4
Limited liability 5
Ordinary shares and exraordinary returns 6
Shareholder rights 6
A money-making machine 7
Dividends and retained earnings 8
What if I want to sell? 9
Primary and secondary markets 9
Bonds 10
Capital structure 11
Stocks and shares 11
Rights issues 12
Financial Institutions 12
Be proud to be a capitalist! 15
A note of warning: investment and speculation 16
2 The rewards of investment 19
Becoming a millionaire 20
Simple and compound interest 21
How well have investors fared in the past? 22
The importance of income 24
International comparison 24
Equities versus gilts 25
ix