The vast majority of people who are looking to create a sizeable nest egg for themselves and their families will want to have part of their money in stocks and shares.

The reason is simple: over the years, investments in shares have produced a better return than investments in bonds or cash. But how do you gain exposure to the stock market? Do you go for direct purchases of shares or opt instead for a wider spread of shares through collective investments such as unit or investment trusts?

If you do choose to buy individual stocks, you will need to contact a stockbroker to carry out the transactions for you. You also need to consider what type of service you want. At one end of the spectrum, you could opt for a discretionary service where the broker takes all the decisions for you. An alternative to this is an advisory service, where the broker makes suggestions, but you have the final say in decision-making.

Both these options can be expensive. Dealing charges tend to be at the higher end of the spectrum, around 1.5 per cent of the bargain rather than the 0.5 per cent to 1 per cent, or flat fees of as little as £10, charged by an execution-only service, which is the cheapest option.

With an execution-only service, you make the decisions and simply give the broker your instructions. Some brokers offer execution-only clients considerable help in the form of background information and analytical tools and one or two, such as The Share Centre, actually offer some advice before investors make their purchases or sales.

Whichever route you opt for you will need to build a portfolio of shares as experts are unanimous in pointing out that buying a single share or a couple of shares does not provide proper diversification for an investor and flouts the cardinal rule that you should never put all your eggs in one basket. Some experts reckon you need a minimum of 20-30 different shares to achieve reasonable diversification. Others think a portfolio of as little as a dozen can do the trick.

Ideally, you need, to ensure that you are not too exposed to any one industry or sector. For example, it would be inadvisable to buy only house building stocks or only oil stocks. If the property market crashed, or oil prices plummeted, your entire portfolio would suffer a heavy hit. In the same way, you should try to avoid buying only blue chip stocks or only smaller company stocks. Instead, you should aim for a portfolio that blends different industry sectors and sizes of company.

The argument in favour of direct investment in stocks and shares is that you have a personal stake in the companies whose shares you buy and, your individual collection of shares could do far better (but equally far worse) than a portfolio of several funds. However, some wealth managers points out that many stockbrokers’ portfolios have tended to be very focused on UK shares and have thus not offered much overseas exposure, which is easier to achieve with funds.

These collective funds pool investors’ money and use it to buy a range of shares (usually at least 50), so in this way investors can gain immediate access with one fund to a portfolio of stocks which would take quite a lot of effort and skill to build up for themselves.

Many wealth managers now choose to gain exposure to equities through funds. Justin Urquhart Stewart of Seven Investment Management, says: “We are interested in broad exposure to a particular market, such as the UK or Europe, rather than to individual shares, which we see as a riskier bet. We make considerable use of trackers, which have very low charges, and also of exchange traded funds, which are like trackers but more flexible as they are traded just like a share on the stock market.

“The key point is that it is asset allocation rather than stock picking that produces most of the returns on our portfolios. Studies suggest that asset allocation makes up about 90 per cent of investment returns.”

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