Investing in the stock market


Francesca Amato has arrived in Cardiff to do a postgraduate marketing course at the University of Wales. Her father, a businessman in Milan, has given her £40,000 to cover her fees and expenses while she is studying in Britain. Francesca, however, has other, more ambitious, ideas about what to do with the money.


Yukio Inamura  
Richard Price  
Hans Gast  
Andreas Tsoulas  
Francesca Amato is doing a marketing diploma at the University of Wales. She is Italian.


Vocabulary Bonds, shares and other securities; investment management; financial journalism.
Skills Giving advice and warnings; explaining concepts and calculations.
Structures Giving advice.
Documents A portfolio; a bank leaflet on investment; a newspaper stock market column; listed share prices.

Getting investment advice

21.1 Listen and read

Francesca Amato is a postgraduate student at the University of Wales. A few days after her arrival in Cardiff, she visits Richard Price, her new bank manager. Listen to what they say. Does Richard think that her ideas are sensible?

RICHARD I see. You've got forty thousand pounds to invest. And the aim is a high income?
FRANCESCA And capital growth. I was thinking of buying and selling on the currency market - that's how my father made his money - but...
RICHARD Whoa! That is highly speculative see the meaning and very dangerous. Anyway, times have changed - forty thousand is peanuts see the meaning in the foreign exchange market nowadays. Even on the stock market, it's frankly not a lot of money, but I think we can make it work for you.
FRANCESCA Every day I read the city pages in the newspaper. see the meaning I think at the moment the market is bullish. see the meaning
RICHARD Well, it's true that the one hundred share index has been rising this week, but that doesn't necessarily mean that the big investors think it will go on rising. Anyway, I would strongly advise you not to go playing the market. see the meaning Leave that to the big financial institutions - the building societies, insurance companies, pension funds - they've got fund managers who are experts. What you want is a portfolio of investments see the meaning which will give you a good return on your investment.
FRANCESCA Mm, yes! Junk bonds - mezzanine finance... see the meaning
RICHARD No, no, no! The whole point of investment is to spread the risk. Look, I'll show you what I recommended the other day to a client in a somewhat similar position to yourself.

21.2 Listening practice: an investment portfolio

Richard Price telephoned his client to give her the details of the portfolio he had arranged for her. Listen to what he says. As you listen, read the details of the portfolio in 21.3.

I've now got the details of the bank's proposals for your investment portfolio, and here they are.
The capital to be managed amounts to fifty-seven thousand pounds, and we propose to split it like this: forty-four per cent cash, seventeen and a half per cent gilts, fourteen and a half per cent bonds, six per cent UK shares and eighteen per cent international shares and bonds. Now, I'll tell you what we propose to buy for you in each of those groups, starting with the cash: twenty thousand pounds will be put in a deposit account, five thousand will remain in your current account as a liquidity reserve. Gilts: five thousand in Treasury two per cent index-linked bonds redeemable in the year 2006; five thousand in Treasury nine per cent, in 1998. Bonds: two thousand six hundred James Dancey, convertible preference; two thousand six hundred A and Z redeemable preference; three thousand Goodies convertible unit trust.
Next, the UK shares: twelve hundred pounds in Barwest Bank plc, twelve hundred in Foresight Insurance, twelve hundred in Annandale Glass. International shares and bonds: three thousand pounds in Pacific Assets Trust, two thousand in Trans-Siberian Railroad, and two thousand six hundred each in Europewide unit trust and European Space Development. Total, fifty-seven thousand pounds, excluding initial charges.

21.3 Document study

This is the portfolio Richard Price put together for his client. Read it carefully.

Proposed portfolio for Mrs Johnson

Holding see the meaning and security see the meaning

5000.00 current account (liquidity reserve) see the meaning  
20000.00 bank deposit account
Total cash (44%)
5000.00 Treasury 2% IL 2006 see the meaning  
5000.00 Treasury 9% 1998
Total gilts (17.5%)
2600.00 James Dancey convertible preference see the meaning  
2600.00 A&Z redeemable preference see the meaning  
3000.00 Goodies convertible unit trust see the meaning  
  Total bonds (14.5%) 8200.00
Barwest Bank plc
Foresight Insurance Co
Annandale Glass Ltd
Total UK shares (6%)
Pacific Assets Trust
Trans-Siberian Railroad
EuropeWide unit trust
European Space Development
Total international shares/bonds (18%)

Portfolio total cost (excl. initial charges) see the meaning 57000.00

21.4 Listen and read

Richard explains the portfolio to Francesca. Listen to what they say. Notice how he explains many of the terms he uses. What is Richard trying to protect Francesca, and her money, from?

FRANCESCA But this is no good to me! Almost half of her money is still in cash! And seventeen per cent in gilts - those are government loan certificates, aren't they? I don't want to lend money to the government!
RICHARD Gilts are government bonds, yes, but remember they're called gilts because they're gilt-edged - the safest, most secure investment you can have, and very easy to sell at any time. You can't go putting everything into equities see the meaning - suppose there's another crash! see the meaning The principle of any portfolio is to spread your risk, so whatever happens in the future you can be fairly certain your capital will be protected.
FRANCESCA Mm. But these cash deposits are going to be eroded by inflation. see the meaning
RICHARD Yes, but you can't afford to be caught without cash in an emergency, can you? You must keep some liquidity. If all your assets are tied up, you're exposed to risk. That is what sound investment is all about - limiting your exposure to risk, covering your position. see the meaning Your father used to be an international exchange dealer, you said; he knows all about hedging a deal so he keeps himself covered. see the meaning
FRANCESCA You haven't answered my question about inflation.
RICHARD Right. The loss of value of the cash due to inflation is compensated for by interest payments, and by the gain in value of the other investments - which should rise faster than the RPI see the meaning, in addition, of course, to paying dividends. Now, I do have to warn all clients that share prices can go down as well as up. But I think you appreciate that ...

21.5 Reading for key words

Find the words or phrases in 21.1 that tell you the following:

1 Extremely risky; you might win a lot, you would probably lose.
2 Very little money.
3 Organisations which act as savings banks, and lend people money to buy houses.
4 A collection of investments of different types.
5 Invest in several companies so as to reduce the possibility of losing money.

Reading about the stock market

21.6 Writing practice: dictation

Listen again to Richard Price reading the details of the investment portfolio in 21.2. As you listen, write what he says. When you have finished, compare what you have written with the printed version in 21.2.

21.7 Document study

These are two of the documents about investments that Francesca reads. One is a leaflet which the bank gives to potential clients, the other is from the stock market column in a daily newspaper. Read through them carefully, and then do the exercise which follows.

Imperial Chemical Industries came to the rescue of a beleaguered stock market. see the meaning
see the meaning The FT-SE share index had, for the first time since October, dipped below 2,600 points and shares on the first day of the account were in desperate need of a little encouragement.
ICI obliged. Its first-quarter results, expected by some to be no more than £340m, came out at £414, and the FT-SE quickly clambered back above 2,600. ICI rose 20p to 1,080p.
Bass, firm last week, was another to turn in a strong performance. see the meaning County Nat-West Wood-Mac estimate that Britain's biggest brewer has increased its market share to 24%. The group's progress last week stemmed from suggestions it was about to sell its Crest Hotels chain. Accor, the French group mentioned as a buyer, has denied any involvement, but appears to have left the door open for a related company to clinch the deal.

  • Why not let Barwest look after your invested capital for you under its Investment Management Service?
  • You can give Barwest investment experts discretionary powers to manage your securities on lines you yourself lay down.
  • We will buy or sell to defend or improve your position at our discretion, though we can, if you wish, refer all proposed investment decisions to you for approval.
  • Your dividends will be addressed to wherever you direct.
  • The fee is 90p per £100 per annum (plus Value Added Tax if applicable) calculated on the market valuation of the investments at the time the fee is due. A minimum fee of £360 is payable.

21.8 Reading for key words

Find the words or phrases in 21.7 that tell you the following:

1 The ability to make decisions as they think best.
2 Buy or sell stocks and shares so that you are likely to make a profit.
3 If you are registered for VAT.
4 ICI did what the people who bought their shares hoped they would do.
5 Allowed the possibility to remain.
6 To make sure of the deal.

21.9 Find the right word

Read the text below about securities. Write a word from the box to fill each of the gaps.

bond convertible gilts index inflation lend portfolio
preference price prices redeemable securities unit value
Most investors seek, above all, security. They even call their investments a ''. By building up a b of investments, you can be pretty confident that, in the long run, the c of your shares will stay a little ahead of d . Many small investors pay their money to a e trust, which can invest more securely and profitably than the individuals could if they acted separately.
Every stock exchange has its f , to show how share g are moving from day to day; in London, the Financial Times-Stock Exchange 100-share index (known as the FT-SE 100 for short, or the Footsie) calculates the average h of shares of 100 major companies. This index started at 1000 on 1 January 1984.
Instead of buying shares in a business, you may prefer simply to i money to it. You receive in return a certificate, called a j . The safest 'business' to lend money to is the government. UK government bonds are called k '' (because they are printed on gilt-edged paper). If you lend to a company, you may receive bonds or l shares. m preference shares give the holder the right to convert them into ordinary shares at a later date; n preference shares give the company the right to buy them back or redeem them.

21.10 Speaking practice: the bank's investment services

Listen to this conversation. Then listen again, and speak the part of the man.

WOMAN What exactly will the bank do for me, if I use their management service?
MAN First, they'll deal on your behalf. Remember, you can only buy and sell shares through a stockbroker. see the meaning
WOMAN So you act as my stockbroker. Do I have to tell you what to do every time?
MAN You can do, if you want, but usually customers ask us to buy and sell at our discretion.
WOMAN OK, as long as you refer the decision to me for my approval.
MAN We also keep you posted on company news: new issues, takeover bids, that kind of thing. see the meaning
WOMAN Why do I need to know about takeover bids?
MAN Because the bidder may be making an offer for your shares. You've got to decide whether to accept.
WOMAN And the money that comes in - does that have to go to my account?
MAN No, we can forward dividends and other income anywhere you want - in accordance with your instructions. see the meaning

21.11 Writing practice: figures

Richard Price has to advise a customer who wants to invest £20,000. Look back at the dialogues and documents in this lesson. What advice would you give the customer? What fee will the bank charge him per year under its Investment Management Service? Explain to the customer how to calculate the smallest investment he must make to justify the bank's minimum fee.


21.12 Listen and read

Francesca is at a party for local business people. Listen to what they say. Notice how the different people give advice, and make and decline offers.

YUKIO So, you have come to Cardiff to study? What subject?
FRANCESCA I'm doing a marketing diploma and I hope also a doctor's degree in business administration, but at the moment I'm studying the stock market.
HANS Really? Is that just for fun, or have you some money to invest?
FRANCESCA I'm very serious about it. I have to have an income so that I can continue to live in England.
HANS Really! Excuse me a moment - Andreas - I would like you to meet a friend of mine. Francesca, can I introduce you to my business partner, Andreas Tsoulas. Andreas, this is Francesca - she is doing a marketing diploma at the university.
ANDREAS Hello, Francesca, I'm pleased to meet you.
FRANCESCA How do you do.
HANS And she is looking for an investment with a good return. She has a large sum of money to invest.
ANDREAS Ah! Really! Well, we have a great opportunity - you could get in on the ground floor. see the meaning
YUKIO You want her to put money into your road transport company? Huh! Don't you listen to them! They tried it on me last week. They know I'm only a production engineer so they think I don't understand money!
FRANCESCA Don't worry! I can look after myself. But I can see now why my bank manager warned me not to play the market!

Considering the options

21.13 Listen and read

Francesca meets Richard Price again to talk about her investments. Listen to what they say. Does Richard think that the p/e ratio is a useful way to value a company?

1991 Stock Price Change Yield P/E
High Low
1199 1024 *ICI 1080 +20 6.8 8.1
RICHARD You see, Miss Amato, it's a question really of knowing what to look for. With blue-chip companies like ICI your money is safe see the meaning, but the market price of the shares is obviously high. You know, of course, that share prices are published every day in the newspaper. This is what it says about ICI in today's listing. Where are we? Yes, here. Now, 'high and low' means the highest and lowest prices of this stock during the current year. The stock, of course, is ICI - stocks and shares are practically the same thing - and the star means that ICI is rated an alpha stock see the meaning - as I said, a blue-chip company. Yesterday's closing price was 1080p see the meaning, for a share with a par value of one pound. see the meaning That's 20p higher than the day before, so the change column says plus twenty. 'Yield' means the percentage of return on your investment - assuming you've had your shares for at least a year, you'll get a six point eight per cent return on what you paid for them. And the price-to-earnings ratio - ah, now this is supposed to be the key to the whole thing. You take the price of the shares as quoted on the Stock Exchange and multiply by the number of shares issued; that gives you the market valuation of the company. Then you divide that valuation by the company's earnings - that means its latest profit figure, after tax. In fact, of course, there are so many factors that influence market valuation and how big companies account for their profits that, in my opinion, p/e ratios are pretty meaningless.
FRANCESCA Yes, it's not as easy as it looks, is it? Do you know, I met two young men at a party who wanted me to put all my money into their international road transport consortium?
RICHARD Oh, did they now?
FRANCESCA But I would rather the bank looked after my financial affairs. I know you're very discreet.
RICHARD Yes. Discretion is the name of the game for bankers. see the meaning

21.14 Reading for key words

Find the words or phrases in 21.13 that tell you the following:

1 You must know precisely what information you require.
2 The amount you have to pay if you want to buy one share.
3 The amount you would have to pay if you wanted to buy all the shares.
4 A large international business organisation.
5 Doing something without other people knowing about it.
6 An essential quality in this job.

21.15 Listen and read

Francesca has another meeting with Richard Price to talk about her investments. Listen to what they say. How will Francesca be able to give her father the money back when she returns home?

RICHARD With your income from this portfolio, and the money you earn working part-time for that road transport company, I should think you'll have enough to live on quite comfortably. Probably won't have to dig into the capital at all.
FRANCESCA That's my intention. In three years' time I'll go back to Milan and say to my father: 'Here's your eighty million lire, I don't need it after all.'
RICHARD Hm, and what's his reaction going to be to that?
FRANCESCA He'll say: 'That's what I hoped you would do. You can keep the money, here's another eighty million - now start your own business!'

21.16 Structure practice: giving advice

Richard Price gives Francesca advice on her investments in a number of ways. Perhaps the most obvious is when he uses the verb 'advise':

I would strongly advise you not to go playing the market.

The pattern here is:

to advise (someone) to do (something).

You can also use the noun 'advice':

Let me give you some advice. Let me give you a piece of advice.

But there are many other ways of giving advice to people.

I suggest that you do ...
If I were you, I'd do ...
Why don't you do ...
Why not do ...
How about doing ...
What about doing ...

You meet a friend who has some money to invest. Give him some advice. Use each of the phrases listed above. Make sure that you use the right form of the verb with each.

I would advise you to go and talk to your bank manager.
Let me give you some advice - go and talk to your bank manager.


21.17 Find the right word

Read the text below on securities. Write a word from the box to fill each of the gaps.

alpha approval blue-chip bonus discretion equity interest
issue market par securities stockbroker takeover up

Your bank can act as your a ; it will deal in b on your behalf, at its own c or in accordance with your instructions, referring decisions to you for d if you wish. It will also advise you if, for instance, one of the companies you hold shares in is the subject of a e bid. The only way a company can take over another is to buy a controlling f in it - that is, at least 51% of its g . This can happen to even the most successful companies, rated as h ' companies' or i ' stocks' on the Stock Exchange. A takeover is not necessarily a disaster; rumours of one usually send the share price j sharply, sometimes far above its k value.
A company that wants to increase its capital must normally l more shares. It may take the opportunity to reward and encourage its existing shareholders by giving them shares as a m , or by offering them the right to buy the new shares before they are offered on the open n .