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.

Anelda Knoesen
From the Money team
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Posted 14 DECEMBER 2020

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.

In the UK, shares are traded on the London Stock Exchange.

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 are not guaranteed, and your investment will go up and down so you could get back less than you paid in and lose money.

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.

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.
  • Income Some stocks will pay you a share of company profits. These are called dividends. Shares that pay regular dividends are a good way to get a regular income, or you can reinvest the money to grow your capital.

Beware of investment scams

Unfortunately, there are fraudsters who target would-be investors, tricking them out of their money. An incredible £197 million was reported lost to scammers in 2018, mainly involving shares and bonds, forex and cryptocurrencies by firms not authorised by the Financial Conduct Authority (FCA).

To find out more about investment risks and to search a list of firms 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 to be 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. 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.

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 both 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 from the fund manager. 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 the shares of other companies. You buy shares in the company on the stock market.

Both types of pooled funds will have follow a strategy – so, for example, they might concentrate on growth companies, 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. 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 – £20 a month is the minimum for some funds, but it can be £50 or £100 for others. 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 of 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 to sell shares

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

Fees to watch out for when stock market trading

Before you open a share account, there are some share dealing costs 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. 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.

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 2020/21 is £20,000.

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

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 towards risk. If you’re naturally cautious and can’t tolerate the thought of losing any of your money, investing may not be for you. You might feel more comfortable putting your money in a savings account. And financial advisers generally suggest that it’s a good idea to have an emergency rainy-day savings fund to tide you over any financial difficulties, before you start investing.

You should also consider if investing is the right way to reach your 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. If you were able to leave those investments in, you could find that they regain value in a few years.

Think about how long you can tie up your money. The rule of thumb for stock market investments is a minimum of five years to be able to ride out the ups and downs of the market.

Generally speaking, the more risk you take, the more 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.

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