COMMENT

How I Make Money From Lots Of Firms

By Cliff D'Arcy
March 30, 2006

I don't own shares in mining firms Kazakhmys (LSE: KAZ), Antofagasta (LSE: ANTO) or BHP Billiton (LSE: BLT), the three biggest blue-chip risers this morning, yet I make money when their shares go up and when they pay dividends to their shareholders.

Huh? How can this be? Surely only shareholders in these firms benefit from their rising share prices or when they pay income to these owners, right? True, but, in a way, I am a shareholder in these firms, only not directly.

You see, all of these firms are members of the FTSE 100, the index which measure the value of the UK's one hundred largest stock market-listed companies, also known as the "Footsie". They are also members of the FTSE All-Share: an index which numbers almost seven hundred of the UK's largest listed firms among its members.

What's more, by investing directly into one of these indices, you gain a small stake in each of their constituent companies. So, by buying into the Footsie, you buy into each of the one hundred firms which make up this index. What's more, by spreading your risk across so many firms, you don't end up with too many eggs in one basket, which can happen if you invest in too few individual shares.

So, how can you buy into the FTSE 100 or FTSE All-Share? The good news is that it's a doddle, thanks to these cheap, simple investments:

1. Index-tracking funds

An index tracker does what it says on the tin: it tracks a particular index or group of shares, whether in the UK or overseas. These funds are passively managed, which means that you don't have to pay for the services of a Ferrari-driving City fund manager.

Although most individual investors put their cash into expensive, actively managed funds, around a quarter of institutional capital is held in low-cost index trackers. That's because City firms know that, over long periods, few fund managers actually beat their benchmark index, partly thanks to their high charges.

Since all trackers passively follow the market up and down, the decisive factor you should look at when choosing a tracker is its charges. All other things being equal, the lower its charges, the better a tracker should perform. Thus, you should look for a tracker with no upfront or exit charges and the lowest possible total expense ratio (which includes its annual management charge plus other running expenses).

Happily, you can invest in two of the UK's cheapest index trackers via the Fool. For example, the Fidelity MoneyBuilder UK Index Fund, which tracks the FTSE All-Shares, has no charges other than total running costs of 0.3% a year, making it the UK's cheapest index tracker.

Also, the Legal & General UK Index Trust (one of the UK's biggest investment funds) has a total expense ratio of 0.52%. In addition, it has a special cashback offer: if you transfer or invest £4,000+ into this fund by 30 April and keep it there until the end of this year, your annual management charge for 2006 will be refunded in February 2007. In effect, it's a free ride on the stock market!

2. iShares

iShares are Exchange Traded Fund (ETFs), which behave like funds, but are listed on the London Stock Exchange. Therefore, they can be bought and sold in the same way as any other LSE-listed share. Indeed, ETFs combine the best of both funds and shares, because they:

· have no initial or exit charges;

· have low annual management charges; just 0.4% for the iFTSE 100 (LSE: ISF);

· are registered in Dublin, which means that you don't have to pay stamp duty of 0.5%, which applies to other share purchases (this saves you £1 for every £200 invested);

· can be traded in real time while the London Stock Exchange is open;

· have small bid-offer spreads, which means that the difference between the (higher) buying price and the (lower) selling price is very small for the more popular iShares*;

· can be bought via online stockbroker Squaregain's iPlan, which means that you don't pay any buying commission; and

· can be bought inside a tax-free ISA shelter, which keeps the taxman's greedy mitts off your dividends and profits!

* For example, as I write, you can buy iFTSE 100 shares for 607p, or sell them for 606.5p, which is a very narrow spread of 0.08%.

Finally, the FTSE 100 is up around four-fifths (80%) over the past three years, so is there still life left in it? I firmly believe so, because with a price-earnings ratio of thirteen and a yield of 3.1%, the Footsie still looks cheap in historical terms, thanks to booming corporate earnings. So, don't wait until the end of the tax year on 5 April, get stuck in now!

More: Claim your £7,000 ISA allowance before it's too late | Check out the deals in our Broker centre.

Disclosure: Cliff owns iFTSE 100 and Legal & General shares, and invests in index-tracking funds.