The room for error is much, much smaller when you are investing directly, and unless you have a huge amount of time and resources, it is very difficult to find undiscovered value.
However, the cost advantages of investing in stocks and the potential for exponential growth make the odd punt here and there a very attractive prospect.
In the first of a two-part series, investment research manager at The Share Centre Sheridan Admans analyses some of the companies our readers are backing in their portfolios. We start with the most popular choices in the FTSE 100 and FTSE 250, which have a strong value focus running through them.
Randgold Resources
Gold equities have had a terrible time of late, and FTSE 100 company Randgold Resources – a popular choice with FE Trustnet readers – is no exception.
Admans thinks the company is a good option for investors who want direct exposure to the gold mining sector, but says in general they should err on the side of caution.
"The performance of the shares will to a certain extent be linked to the performance of the underlying price of gold, as we saw when it fell in April," he said.
Performance of stock vs indices over 1yr
Source: FE Analytics
"However, over the last year, Randgold’s share price has really been influenced by stock-specific issues and its exposure to Mali, which has been going through political turmoil."
"Although confidence in Mali and the stock has taken a tumble, the actual operations of Randgold have remained largely unaffected, setting record production and profit levels during 2012. However, it would be unwise to rule out the possibility of further turmoil."
"We consider this as a high-risk investment but recommend Randgold Resources as a 'buy' for investors considering an exposure to gold and a company that is expanding its resource base, operations and production," he added.
Randgold has a market cap of £4.5bn. According to FE data, 10 funds hold the stock in their top-10, the majority of which have a commodities focus. However, Fidelity UK Growth and the Close Growth Portfolio also have major stakes in it.
Barclays
Banks featured heavily in our readers’ stock-picks, none more so than Barclays. The majority of those who highlighted it did so for valuation reasons.
Admans says Barclays is his favoured high street bank, but still sees it as a high-risk stock. "The banking sector has shown signs of improvement, but trying to make a case for a bank being under or overvalued remains difficult," he said.
"Barclays remains our preferred high street bank but we would advise longer-term investors to drip-feed and build a holding over time, as the economic climate remains uncertain."
"Although we don’t believe there is an obvious catalyst to drive the share price higher, it could outperform if the market can get over its recent indigestion following the early-year success."
Like all UK retail banks, Barclays had a disastrous 2007 and 2008, losing close to 90 per cent of its share price value. However, the bank has recovered strongly since then, and is now breaking even over a five-year period.
Performance of stock over 5yrs
Source: FE Analytics
Our data shows that 89 funds hold Barclays in their top-10. The likes of Standard Life UK Equity Recovery, Jupiter UK Growth and Fidelity Moneybuilder Growth all have more than 5 per cent in the stock.
Afren
Oil and natural gas exploration company Afren was the most popular FTSE 250 company among our readers. It operates predominantly in Nigeria, but also has operations in Asia and the rest of Africa.
Admans sees it as one of the stronger options in the oil and gas sector, but thinks its high-risk profile suits a regular savings plan.
"Afren’s business is spread far and wide, currently with 31 separate operations in 12 different countries," he said.
"The company has a very good track record of exploration success, the latest being the Barda Rash resource in Kurdistan, which began production less than a year after acquisition."
Performance of stock vs index over 6 months
Source: FE Analytics
"The share price has been tracking sideways over the last six months on the back of a lack of drilling updates."
"However, we believe Afren is worth a closer look for those investors who like a higher level of risk and are prepared for some volatility. New investors might want to drip-feed into the stock."
Only one fund – Jupiter Global Energy – holds Afren in its top-10. The company has a market cap of £1.3bn.
RSA Insurance
FTSE 100 company RSA Insurance was hit by a dividend-cut recently, but the resulting hit to its share price has made it a popular value play with investors.
Admans thinks the dividend-cut was necessary.
"In light of the low bond-yield environment, RSA Insurance has taken the stance to rebase and cut its dividend," he explained.
"It believes this enables it to create a sustainable dividend and progressive dividend policy going forward and to support its plans to invest in opportunities for growth."
"This is in the best interests of shareholders in the longer term and after the initial shock, investors are starting to come around to RSA’s prudent way of thinking."
Performance of stock vs index over 1yr
Source: FE Analytics
However, while he is upbeat from an income perspective, Admans thinks the poor outlook for growth means there are better options elsewhere in the insurance sector.
"Growth in emerging economies is continuing to offset flat UK and European markets," he said.
"Despite RSA being in good shape to benefit from any upturn in global growth, we have a 'hold' recommendation on the stock, preferring others in the sector, including Prudential and Aviva."
"We currently see no drivers for growth externally or any evidence in results to see an earnings upgrade or price re-rating."
RSA Insurance has a market cap of £4.2bn and is currently yielding around 6 per cent. Threadneedle UK Equity Income is one of 14 funds that holds the company in its top-10.
Vodafone
While there is clearly a lot of demand for value stocks, investors still like predictable "dividend aristocrats" such as Vodafone, which was the most popular equity among our readers overall.
Admans says it is a solid choice and would fit well into an income portfolio. However, he says investors who want capital growth should perhaps look elsewhere.
"With a forecast yield of 5.4 per cent, Vodafone continues to be a top dividend-payer in the FTSE 100 and we recommend the company for income-seeking investors," he said.
"However, current challenges and investment in expansion of data services mean it's a struggle to see any reason for the share price to be pushed higher in the shorter term."
"The troubles in Europe were reflected in the company’s recent full-year results, where the benign southern European market led to revenues for the region slipping."
"The challenging regulatory environment of the region as a whole has also had an impact."
"Vodafone is, however, seeking new areas of potential growth for its business. It continues to pursue its debt-reduction plan, concentrating on its core growth activities, and cash-flow is expected to strengthen this financial year," he added.
Vodafone is one of the most popular shares among UK fund managers, appearing in the top-10 of 349 funds overall. Bill Mott’s Psigma Income fund has 6.6 per cent in the stock.
Performance of stock vs index over 1yr
Source: FE Analytics
The stock has beaten the FTSE 100 over three, five and 10 years, but has struggled over the last year.
