Ten Ways To Win With Shares
Investing isn't gambling, because you can stack the odds in your favour. Here's how to make more from shares.
Almost every investor -- from the lowliest private investor to the biggest City player -- has one goal in mind: to beat the market by making superior investment returns.Of course, taken as a whole, investors can't beat the market, because, in effect, they are the market. Indeed, research shows that around four-fifths (80%) of private and professional investors fail to beat the index which they track, largely thanks to 'breakage' -- the costs of buying in and out of shares.Hence, most investors are kidding themselves if they believe that they can outperform the market over long periods, and that this superior performance is down to skill, rather than plain old luck. Nevertheless, there are ways that individuals can beat the system with a little thought and effort. Here are ten for you to think about:BUY SHARES BELOW COST1.Buy shares at a discountIf you're given the opportunity to buy shares at below the market price, this can swing the balance of probability in your favour. For example, government privatisations in the Eighties were 'priced to go', which enabled both private and institutional investors to make handsome returns, even if they held the shares for only a short time before selling (known as 'stagging').A recent example of the power of the discount came from the flotation of life assurer Standard Life (LSE: SL.) on 10 July. As well as receiving windfall shares, Standard Life members could buy additional shares at a 5% discount on the market price -- at 218.5p, instead of the 230p which non-members had to stump up. Today, these can be sold for 272.5p, a gain of 25% in two months.2.Switch on to SharesaveIf you work in the public sector, are self-employed or a sole trader, then this tip is no use to you, as it only applies to employees of private or stock-market listed companies.More than five thousand companies operate approved employee share plans, and around 3½ million workers participate in share-based incentive plans. The most popular of these is Sharesave, also known as Save As You Earn (SAYE) or Savings-Related Share Option scheme, which has over 2½ million participants.Sharesave gives employees the right, but not the obligation, to buy shares at a future date, at a price determined just before this option is granted. The sponsoring company can discount this option price by up to a fifth (20%) off the market price at that time.Sharesave participants agree to save between £5 and £250 a month for three, five or seven years via payroll deduction. When their plan matures, they can use this cash, plus a tax-free bonus, to buy shares at the original discounted price. This tax-free bonus was increased this month, making Sharesave even more attractive.You can learn more about Sharesave here.3.Sip at Share Incentive Plans (SIPs)As well as Sharesave, companies can offer the following Share Incentive Plans to all employees:Free shares: each year, employees can be given free shares worth up to £3,000, free of income tax and National Insurance Contributions (NICs).Partnership shares: employees can buy shares, again free of income tax and NICs, valued up to the lower of £1,500 a year or a tenth (10%) of pre-tax annual salary.Matching shares: employers can add up to two free shares to each partnership share that employees buy.You can learn more about SIPs here.CUT YOUR COSTS4.Buy index trackersAn index tracker does what it says on the tin: it tracks a particular stock-market index, such as the blue-chip FTSE 100 index, which measures the value of the one hundred biggest companies listed on the London Stock Exchange.Trackers are passively managed investment funds, which means that you're not paying for the services of a fund manager who actively buys and sells shares on behalf of investors. This massively reduces the ongoing costs of trackers, which are largely managed by computers. Indeed, the cheapest index tracker charges a total expense ratio (TER) of 0.3% a year, which is less than a fifth of the annual cost of investing in an actively managed fund!Invest in index trackers via the Fool!5.Buy Exchange Traded Funds (ETFs)As well as investing in trackers, I also buy index-tracking Exchange Traded Funds, which behave like index-tracking funds, but can be bought and sold just as shares can, making ETFs a cheap and flexible way to invest in stock markets. Indeed, by buying ETFs inside my Selftrade ISA, I pay no buying commission (or stamp duty), which means that I can invest almost at zero cost!6.Invest inside an ISAWhy let the taxman take a slice of your dividends (the income from shares) and your capital gains (the profits made when your shares increase in value)? By sheltering your shares inside a tax-free wrapper known as an Individual Savings Account (ISA), you can keep the taxman's greedy mitts at bay!7.Use a low-cost online stockbrokerThe less you pay to buy and sell shares, the higher your returns will be, all other things being equal. Thus, it pays to deal via online stockbrokers, which charge far lower commissions and annual fees than high-street banks and other providers do.8.Use discount brokersJust as you can buy shares cheaply via an online stockbroker, so you can invest cheaply in various stock-market funds via a discount broker. Why pay an initial charge of, say, 5%, plus annual management fees of 1½%, when you can invest with no upfront charge, plus lower ongoing fees, simply by using a discount broker (such as Cavendish Online) or fund supermarket (for example, FundsNetwork)?PLAY THE LONG GAME9.Reinvest your dividendsAs I often remark, "The stock market saves its greatest rewards for the most patient investors". If you want to maximise your returns over long periods, you must avoid spending your dividends. Indeed, over long periods, more than half of your final investment return will come from reinvesting dividends, instead of spending them.For example, over 126 ten-year periods since 1885, the average return of the FTSE 100 index is 118%, excluding dividends. Reinvesting all dividends would have increased this to 223%, which almost doubles your return. So, hands off those dividends, because they're earmarked for tomorrow, not today!10.Ignore investment hype and fashionsIf you want to lose money big-time, follow investment fashions. For example, during the dotcom boom (or dotcom boob, as I call it!), frenzied investors were chasing up share prices in technology, media and telecoms firms, and TMT funds were being touted as the 'new new thing' by financial advisers who were hypnotised by stories of a 'new paradigm'.Alas, many of these firms went bust without making a profit, and the performance of these much-hyped funds was abysmal from 2000 onwards. So, be cautious -- and remember that, when it comes to investment funds, today's star can easily become tomorrow's dog!More: Use the Fool to find great index trackers, ISAs and savings accounts!Disclosure: Cliff owns iFTSE 100 shares, invests in index trackers, and has a beneficial interest in Standard Life.