Stock market returns tempt the small investor: Advisers are warning new buyers of the dangers of equities, says Maria Scott

SAVERS can thank the German Bundesbank for helping to keep further cuts in British interest rates at bay this week. But the failure of European rates to fall as quickly as expected after the dismantling of the European exchange rate mechanism underlines the unpredictability of events that determine returns on deposits and shares.

The UK market, as measured by the FT-SE 100 share index, ended the week at a new high of 3,100.6. It is now beckoning to small investors in a way not seen since before the 1987 stock market crash.

Unit trust companies reported booming sales figures this week, with net sales to the public of pounds 453m in July, a 25 per cent rise over June. Goldman Sachs added to the euphoria with a forecast that, worldwide, shares would be the 'best-performing financial asset over the next six to 12 months'.

But first-time investors need to keep these developments in perspective.

Simon Corbett, head of UK private clients at James Capel, said: 'Sentiment in the market is strong at the moment. It is looking forward to being pleasantly surprised. But the market can turn on a sixpence. When interest rates do fall the market may start to come off.'

Capel's forecast for the year-end FT-SE 100 index is 3,200. In other words, investors may have missed the best of this year's surge although Capel is forecasting that it will end 1994 at 3,500.

Nigel Bartram, marketing director of ShareLink, the no-frills dealing service, points out that the highs in the market are a continuation of a trend that became established several months ago.

Advisers are being approached now by first-time share buyers and are having to drive home basic messages: everyone needs a store of emergency cash on deposit; look to postal accounts for higher rates (see page 23); do not put everything into one share or fund; be aware that at worst you can lose everything in shares.

Paul Boni of Berry, Birch & Noble says that, before considering the stock market, people worried about income should look at whether they are receiving all the social security benefits to which they are entitled. 'They should also consider their tax position. I am sure many husbands and wives are not taking advantage of independent taxation by transferring allowances between them.'

With shares at current levels, advisers also caution against plunging large lump sums into the market. Novices should dribble money in gradually, possibly through unit or investment trust savings schemes or a low-cost personal equity plan. Figures from the Association of Unit Trusts and Investment Funds show that pounds 30 a month invested over 10 years through a PEP in the median-performing UK equity income unit trust would have been worth pounds 7,580 by the beginning of July this year, against a total of pounds 3,600 invested.

A share-dealing service being launched next week claims to be the first to allow investors to buy shares on their Switch and Delta cards.

Cardholders will be able to buy shares by sending a form by post or fax to City Deal Services, the Romford-based operators of the new Postrade system. But competitors are surprised by the move. ShareLink, for example, has been unable to find a way of introducing debit cards for its telephone service despite two years of negotiations with the card authorities.

Stephen Pinner, managing director of City Deal Services, said: 'We

had a lot of help from NatWest.'

Postrade will charge a flat commission rate of pounds 9 for each deal with an additional charge of pounds 1 per pounds 1,000 of trade value. As an introductory offer, between Wednesday's launch and 17 September, sales of privatisation stock under pounds 20,000 can be made for pounds 8.50.

(Photograph omitted)