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A guide to stocks and shares

Want to build a nest egg for your retirement or save up to get on the property ladder? Investing in shares can be an efficient way to grow your money and achieve your long-term financial goals, but it’s not without risk. Read our guide to the basics of investing, including how to buy and sell shares.

Want to build a nest egg for your retirement or save up to get on the property ladder? Investing in shares can be an efficient way to grow your money and achieve your long-term financial goals, but it’s not without risk. Read our guide to the basics of investing, including how to buy and sell shares.

Written by
Sajni Shah
Consumer expert on money and utilities
Last Updated
5 APRIL 2023
11 min read
Share article

What are stocks and shares?

Stocks and shares represent units of ownership in a company. When you buy shares, you’re buying a stake in a company – a bit like getting a slice of the pie. You own a tiny portion of the business and become a shareholder.

Shares are monetary assets. Say a company is worth £500 million and issues 100 million shares, that means each share is worth £5. The price would be listed as 500p on the stock market and the shares could go up or down in value, based on supply and demand.

How does the stock market work?

A stock market is a place where shares in publicly listed companies are bought and sold.

When you think of a trading floor, you might picture swarms of brokers in pinstripe suits shouting ‘sell, sell, sell’ and frantically waving around bits of paper. But these days, many traditional processes have been automated, so most trades are carried out on a computer screen.

In the UK, shares are traded on the London Stock Exchange. Stock indices are often quoted as a measure of market performance for a particular country, region or sector. The most well-known stock index in the UK is the FTSE 100, which is made up of the 100 biggest companies on the London Stock Exchange. It includes brands you’ll have heard of, like BT, Tesco and AstraZeneca.

Why invest in shares?

When you invest your money in the stock market, it has the potential for better returns than if you leave it in a savings account. Over time, the stock market tends to outperform cash, but there is more risk involved. Investment returns aren’t guaranteed and your investment may go down as well as up - so you could get back less than you paid in and lose money.

There are two ways you can make money from shares:

  • Share price growth If shares rise in value, you can sell them for more than you bought them. The market price of shares fluctuates due to how desirable they are to investors. Share prices are affected by everything from a company’s performance to world events (like the global pandemic).
  • Income Some stocks will pay you a share of company profits, usually per quarter or half-year. These are called dividends. Shares that pay regular dividends are a good way to get a regular income. Or you can reinvest the money you earn to grow your capital.

Is investing right for me?

Although investing in the stock market isn’t as scary as it might first appear, it’s not to be taken lightly and isn’t right for everyone. The key thing to ask yourself is whether it’s the right way to reach your financial goals. For example, if you want money to pay for a wedding in a couple of years, you could find that the stock market takes a tumble just before you need to take out your money. On the other hand, if you’re saving for your retirement and want better returns than cash savings can give you, shares can be a good option.

Investing should be seen as a medium to long-term savings strategy. Be prepared to hold on to your investments for at least five years. This enables you to ride out any downturns in the market caused by events like the coronavirus crisis.

Never look at investing as a way to make money fast, especially if you’re struggling to pay off your debts. You could end up making your debt situation far worse.

Remember that the value of investments can fall as well as rise, so you could get back less than you put in.

Beware of investment scams

Unfortunately, there are fraudsters who target would-be investors, tricking them out of their money.

More than £78 million was scammed from investors in 2020 as ‘clone’ investment firms took advantage of people wanting to improve their financial situation during the pandemic.

To find out more about investment risks and to search a list of firms that the FCA knows are operating without its authorisation, check the FCA Warning List.

Also look out for warning signs including:

  • unexpected contact including through email, cold calls or on social media
  • time pressure – like the seller offering you a discount if you invest before a certain date
  • fake reviews
  • promises of returns that are too good to be true
  • convincing-looking websites and claims of being regulated
  • flattery – the seller trying to build a friendship with you.

You can check a firm is authorised by using the FCA Financial Services Register.

How to buy shares

The easiest way to buy stocks and shares directly is through an online trading platform. This works in a similar way to internet banking. You’ll need to open an account and put money in it before you can begin to trade.

A share dealing account allows you to buy shares from any company listed on the stock exchange, as well as several foreign exchanges. Just be aware that stock availability (domestic and foreign) varies between online platforms, so check that the stock you want to buy is available before you open an account.

Investing in shares through pooled funds

You can also buy shares online through investment funds. Here, your money is pooled together with that of other investors and is managed by a fund manager, who will invest in several companies to spread the risk. If you’re new to investing, funds can be a good way to start.

There are two main types of pooled investments that each work a little differently:

  • Unit trusts and OEICs (open ended investment companies) – funds run by investment managers to follow a particular investment strategy. You buy units in a fund, which the fund manager then invests. Some funds invest in bonds as well as shares.
  • Investment trusts – an investment trust is a publicly listed company, designed to generate profits for its shareholders by investing in other companies. You buy shares in the company on the stock market.

Both types of pooled funds will have a theme – so, for example, they might concentrate on growth companies, sustainable energy, particular regions, property or small companies.

There are fewer investment trusts to choose from than unit trusts. Investment trusts can be more risky than unit trusts (prices can change a lot and quite rapidly) but, over the long term, investment trusts have tended to outperform unit trusts. And historically, investment trusts have had lower running costs than unit trusts, although the gap is beginning to narrow. Just be aware that past performance isn’t a guide to how a trust might perform in the future.

Collective investments can work well for people who want to invest money each month – £25 a month is the minimum for some funds, but it can be lower or higher depending on which investment platform you use. You can also invest a lump sum.

Times you can trade

You can generally only trade during stock market opening hours. The London Stock Exchange is open 8am-4.30pm, Monday-Friday excluding bank holidays.

Top tip

if you’re not sure how to invest, it’s best to seek independent financial advice. See more on finding a financial adviser on the Money Advice Service website.

How much will it cost to buy shares?

Before you open a share account, there are some share dealing costs and fees to think about:

  • Account charge: trading platforms may charge a monthly, quarterly or annual account fee to look after your money.
  • Buying/selling shares: each time you buy or sell shares, you’ll be charged a fee (although commission-free platforms are available). Frequent traders may be offered discounts.
  • Stamp duty: in the UK, you’ll usually pay 0.5% Stamp Duty Reserve Tax (to give it its full name) to buy shares electronically. If you use a share-buying platform, the tax will be automatically deducted from trades and paid to HMRC. If you buy shares using a stock transfer form, you’ll pay stamp duty if the transaction is over £1,000.

Frequently asked questions

What are the risks of share trading?

Every investment carries an element of risk because the value of shares can go down as well as up. It’s important to remember that you might get back less than you invested.

Before you invest, consider your attitude to risk. If you’re naturally cautious and can’t tolerate the thought of losing any money, investing may not be for you and you might feel more comfortable putting your cash in a savings account. And financial advisers usually suggest that you have an emergency savings fund to tide you over any financial difficulties, before you start investing.

Generally speaking, the more risk you take, the greater the potential for higher returns. It’s a case of weighing up how much you’re prepared to lose against the potential rewards you could achieve. Investing in small start-up firms, for instance, is riskier than established blue-chip companies - your money might grow faster, but the risk of you losing your money is higher.

Top tip

The mantra to remember when share trading is: don’t put all your eggs in one basket. It’s safer to diversify, which means holding a combination of funds, bonds and shares in your portfolio across different sectors and regions

What is a stocks and shares ISA?

Most online platforms will let you hold your investments in a stocks and shares ISA. This allows you to save without paying tax on any profits or dividends you receive.

The ISA allowance for the tax year 2023/24 is £20,000. You can choose to put all your allowance in stocks and shares or split it across different ISAs if you have them, including a cash ISA and a Lifetime ISA.

If you have more than the allowance limit to invest, you could put the first £20,000 into an ISA and the rest in a separate share-dealing account.

What’s the difference between stocks and shares?

To all intents and purposes, stocks and shares refer to the same thing – units of ownership in companies. The terms are often used interchangeably in investing, but there are some subtle differences. ‘Stock’ is a more generic term, often used to describe ownership in multiple companies. A ‘share’ refers to a portion of ownership in a specific company. Stocks are divided into shares. Here in the UK, we tend to talk about shares rather than stocks, so it’s not really something you need to worry about.

Why do shares go up and down?

The price of a share is determined by supply and demand. If the outlook is positive, investors will want to buy and the price may go up. But when investors are rattled, they’ll want to cash in their shares and the price may drop. If supply and demand are about equal, the price won’t budge much. Things that can affect investor confidence include:

  • Economic outlook, both nationally and globally
  • World events like natural disasters, pandemics, political unrest
  • Industry trends – for example, healthcare and tech sectors have generally done well in the pandemic, while hospitality shares have taken a tumble
  • Market sentiment – the overall feeling investors have about a stock
  • Company news or financial results

How much should I invest?

As a rule, you should never invest more than you can afford to lose. Stock markets have been known to crash, so there’s a chance you could end up losing a large amount of your money…

As part of your investment strategy, you’ll need to decide whether to invest a lump sum, make regular monthly payments or use a combination of both. If you’re new to investing, it’s best to start small to see how you get on.

How do I sell shares?

If you want to cash in your shares, you can either sell a specific number of shares or sell shares by value.

Once you place a deal to sell, you’ll be quoted a real-time price for the sale of the shares. You have to be quick to secure the quoted price though – you’ll usually get no more than 15 seconds. Any money you’ve made from the sale will show up immediately in your account balance.

Selling unit trust funds takes longer as they’re priced once a day only. When you place an order to sell, it will trade at the price on the next valuation point - this could be up to a whole working day later. Shares in investment trusts can be traded like normal shares.

Can I practise share dealing without using real money?

Yes, many trading platforms allow you to set up a demo account or ‘dummy’ portfolio to practise trading. This can help build confidence if you’re new to investing and want to dip your toe in the water.

You’ll get virtual funds so you can buy and sell shares as if you were trading for real. If you get it wrong, the good thing is that you haven’t lost any real money. But, on the flip side, if you make a huge profit, you’ll be wishing it were real.

Are share-trading apps safe?

With the upsurge in mobile apps allowing you to ‘play’ the stock market on your smartphone, you’ll need to be wary of fake platforms and investment scams. If you’re looking to invest online using an app, make sure the provider you choose is regulated by the FCA. The best apps will make sure your funds are safe and will be simple to use.

How do I get started with share dealing?

Contrary to popular belief, you don’t have to be super-rich to invest in the stock market. Any UK resident over the age of 18 can open a stocks and shares ISA and you can start investing with as little as £25 a month – or even less with some platforms.

Opening an online share dealing account is easy, and you can start buying stocks and funds as soon as you’re set up. It’s important to keep track of your investments, but try not to monitor them obsessively as – remember – you’re in it for the long haul.

Please note, Compare the Market doesn’t offer a stocks and shares comparison service.

Will I need to pay capital gains tax?

You might have to pay capital gains tax on shares you own if you sell them for a profit. You'll need to work out the gain (the profit) to find out whether you need to pay tax or not.

There are certain instances when you won't need to pay tax, for example, if you gift shares to a family member. Check GOV.UK for more information.

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Sajni Shah - Consumer expert on utilities and money

Sajni is passionate about building products, allowing Compare the Market to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.

Learn more about Sajni