Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.

Government stocks

Some years ago, I inherited under £1,000 in 6.5 per cent Exchequer stock 2000/05, originally purchased many years previously. The stock produced a small annual dividend which, as the years went by, became less and less in value. Recently, I received a letter from the Central Bank that informed me that the stock had been redeemed on June 27th last. On inquiring whether the stock could be held until 2005, I was informed the Minister for Finance had decided to terminate the stock this year. When interest rates were high some years back, 6.5 per cent had to be tolerated; now, when 6.5 per cent would give the holder some minor benefit, the Minister decides to block this. The stock is, of course, being redeemed at face value, now worth only a fraction of its original value some 30/40 years ago. Is there any logic attached to the purchase of such stock?

T.C., Dublin It may seem unfair to you but the Government is only doing the same as any well-organised borrower, paying of its most expensive debts at the earliest opportunity. In fact, in this it is only doing what it has been advised to do by every armchair economist down the years.

The stock you refer to was a loan by someone, presumably whomever bequeathed you the stock, to the Government at the time the stock was issued. This was, and is, common practice. The State has no income, bar what it can raise in revenue (taxes) and what it can borrow. Right now in an era of Exchequer surpluses, there is little need to borrow, although it can still be advantageous to the State to borrow at today's lower rates and use the money to pay loans carrying higher interest. Remember, the more it has to pay back, the more it has to raise in revenue from us, the taxpayers.

Exchequer stock, otherwise known as government bonds or gilts, are a financial instrument carrying a preordained interest rate and a guarantee on the return of the capital. They are known as gilts because they are seen as a gilt-edged top of the range investment. The investor carries no risk.

Generally, a specific date is set for their redemption - you can see some examples of this in the table of government stocks carried on The Irish Times's market pages every day of the week.

However, some have variable redemption dates, such as the one to which you refer. In such instances, the Government in the person of the Minister for Finance is free to redeem these bonds at any time within that period. If current interest rates are lower than those offered on the bond, they are likely to be redeemed as early as possible in the available window; if higher, they may be redeemed as late as possible. The Minister and his advisers are simply acting with sound financial sense as anyone owing money should.

Why does the investor carry no risk? Well, they know at the outset how much they will receive by way of dividend and they are guaranteed to see their money back at the end of the term. It is not true, strictly, to say that the investor cannot lose.

Periods of high inflation will eat into the value of the money and what the bond was worth when it first was issued will be more than its current value if the average rate of interest over the period of the bond's issue tops the 6.5 per cent interest rate.

Naturally, the guarantee carries a value and so one generally finds the rate of interest offered on such stocks - and other financial instruments where the rate of return is guaranteed, such as postal savings certificates - carry a lower rate of interest than competing products not gilded with such guarantees.

It is true to say that over the longer term, the rate of return on equities and property has been higher than with government bonds, but not everyone has won. There have been those who have lost their entire investment in both areas. Look at the current situation with Eircom investors.

People investing in gilts cannot suffer such a fate. Indeed, over the longer term, despite your feelings, gilts have been shown to outperform cash, implying that the rate of return has bettered inflation.

One other fact about such bonds is that they can be traded. In this paper, you will see a price against most such bonds. This shows the price per £100 (€142.85) of such a bond.

The guarantee of a set rate of interest and the guarantee of the return of the capital invested at the end of the term are the reasons people should invest in such government bonds, especially where, by nature or circumstance, they are not inclined to adopt a risky strategy with their investment.

Stocks/shares

I am interested in investing in stocks, say Elan. I would appreciate knowing if I could invest directly without going through a broker to eliminate costs. Could you please quote low-cost brokers?

Ms M.B., Westmeath

When you are talking about publicly quoted stocks, as you are, then the answer is no. You cannot invest directly in such companies without going through a broker. You see, the shares are already in circulation. Some people want to buy them and some to sell. The market place in which this happens is called the stock exchange and you have to be licensed to trade on the stock exchange. The people licensed to trade in this market place are the very brokers whom you want to avoid.

Only the brokers can buy and sell shares. Most do so on behalf of customers who have asked them to do so. A limited number can do so on their own account.

Regarding costs, there are a couple of things to bear in mind. First, you get what you pay for. If you want a broker only to execute a deal for you - say buy 1,000 Elan shares - then the cost will be lower and some brokers specialise in this type of business. However, if you want/need advice, then you must expect to pay for it. If you are a novice at investing in shares directly, it is even more important that you go to a broker where you can get advice.

At that stage, you are in the realm of whom gives the best advice and that is nearly as much of a gamble as buying the stocks. Quite frankly, the drive to conduct ever-increasing amounts of business - and therefore generate ever-growing profits - has put pressure on brokers and on the quality and amount of advice on offer. It is well worth shopping around.

The other thing to remember is that the valid expenses incurred in investing in shares can be offset against profits, if there are any, before capital gains tax is applied.