Investing in Shares

When it comes to investing, there are no guarantees. Past performance is not a reliable indicator of future results. Your investments can go down and up in value, so you could get back less than you put in. It is generally recommended that you hang on to your investments for at least five years, to give your investments the best chance of providing the returns you’re hoping for. Even if you wait five years, you might still get back less than you put in. It would help if you were comfortable with this before you begin.

Investing in shares can be a great way to grow your money and can offer you higher long-term returns than leaving your money in a savings or current account. There are two ways you could benefit from investing in shares:

1. Capital Gain
   If the company performs well and the value of your shares rises, you'll make a nice little profit if you choose to sell your shares at the new price. This profit is called a capital gain. Suppose you bought 100 shares in a company at £10 per share (usually listed as 1000p). The total value of your investment will be £1,000. If the price of your shares rises to £12 and you decide to sell your entire shareholding, you'll sell it for £1,200, making a capital gain of £200.
2. Dividends
   ‍You might also receive regular income from the companies you invest in when they make a profit. This income is called a dividend. A dividend is your share of the company's profit. Suppose the company in the example above paid you a 5% dividend before you sold your holding. You would have received an income of £50. This would bring your total gains (dividend and capital gain) to £250. Dividends, just like capital gains, are not guaranteed.
   

Additionally, as a shareholder, you might receive shareholder perks (such as discounts on the company's products or services) and opportunities to attend and vote at shareholder meetings.

The stock market is a marketplace where shares and other assets are bought and sold. There are several stock markets around the world, and in the UK, the main exchange is the London Stock Exchange (LSE). The LSE offers trading in shares from big names you'd have heard of, such as Vodafone on its main market to smaller companies such as ASOS listed on the Alternative Investment Market (AIM), its junior market. Anyone can buy shares on the London Stock Exchange, but you need to go through a stockbroker.
‍
As you progress with your research, you'll come across market indices. An index is simply a group of shares of companies representing a particular segment. These companies are usually grouped by size and value. In the UK, for example, the main indices are the FTSE 100 (an index of the 100 largest companies on the LSE), the FTSE 250 (an index of the next 250 largest companies) and the FTSE All-Share (an index of all shares listed on the LSE's main market). Indices are used as benchmarks to gauge the movement and performance of market segments. For example, the FTSE 250 can be used to gauge the fortunes of the UK economy.

Share prices are initially set by the company issuing the shares and subsequently determined by demand and supply. Demand means the number of people who want to buy the shares and supply means the number of people who want to sell. While there is no perfect equation that tells us exactly how share prices will behave, several factors can affect demand and supply. Factors such as:

1. The company's financial performance;
2. The health of the UK or global economy;
   
3. The company's operations such as changes in its top-management or business strategy;
   
4. The competition. For instance, if fizzy drinks are struggling, it could mean people are drinking something else, perhaps healthier drinks. So, companies that produce healthy drinks could be in line to profit.
   

These factors and more affect shareholder sentiment, which could cause shareholders to buy or sell shares and consequently cause share prices to rise or fall. Suppose that a company you invested in changes its management structure, and this change leads to dissatisfaction and constant troubles in the boardroom. If you have access to this information and are no longer confident in its management, you might decide to sell your shares in such a company. Suppose there are many people equally aware of the company's troubles, and they all choose to sell their shares. The more people sell the shares, the more the share price falls.

It would help if you kept up-to-date with current news on the companies you invest in. We recommend the following websites for company news, research and commentary: Motley Fool, ADVFN, Hargreaves Lansdown, Interactive Investor and Citywire.

Deciding what shares to buy can be intimidating for the first-time investor, but it doesn’t have to be. Anyone can invest in shares. We’ve summarised five methods that should help you get started in picking and choosing shares:

1. Research
   Investing in shares requires knowledge about the companies you want to invest in. You can only acquire such knowledge through research. Websites such as Motley Fool, ADVFN, Hargreaves Lansdown, Interactive Investor and Citywire provide company news, analysis, and commentary to help your decision making.
2. Consider economic cycles‍
   ‍The global economy will grow and shrink over time. When the economy is growing, most sectors tend to do well. But when the economy is shrinking, and things aren’t as rosy, only certain sectors continue to do well. Industries that produce or sell everyday essentials such as food, beverages and pharmaceuticals tend to do well in every economic climate. In comparison, industries such as retailing and aerospace that provide non-essential products or services tend to mirror the health of the economy. Understanding these cycles can help you decide which shares you buy and at which time.
   
3. What will happen in the next 10 to 20 years?‍
   ‍If you can make predictions about how the world will change in the next 10 to 20 years and what industries are poised to benefit from this change, you can begin to invest in shares accordingly. For example, how will climate change affect energy companies and automobile manufacturers in the next 10 or 20 years? What changes do you anticipate in online retailing, financial services and healthcare? Remember, there are no guarantees as shares will rise and fall in value, and there is a considerable amount of guesswork involved in predictions like these.
   
4. Think about your favourite brands‍
   ‍It might be worth looking at and researching brands you know, love and use often. The world’s biggest, popular and most loved brands tend to be the most profitable.
   
5. Build a diversified portfolio‍
   ‍When picking shares, it is risky to invest in only one company. If the company gets into difficulty, you could lose all that you invested. It is better to build a diversified portfolio. This means you should consider investing in multiple companies, across different industries and in various geographies. Most people, including those who are experienced investors, use funds when investing. Funds give you access to a diversified portfolio of investments saving you the trouble of buying shares in multiple companies. They are also safer and cheaper since you share the risks and costs with other investors.
   

There are two ways to buy shares. You can either buy individual company shares directly (through a stockbroker) or invest in a fund (which pools money from you and other investors to buy lots of shares). Depending on the amount you have to invest and your investing savviness, funds tend to be a cheaper and less risky way to invest in shares as you'll be spreading the costs and risks with other investors in the fund.
‍
The first opportunity you'll have to invest in shares is when the shares are created and offered to the public for the first time. This is called an Initial Public Offering (IPO) or 'Going Public.' Companies go public to raise money to fund their activities. Once these shares have been created, they can be bought or sold on the stock exchange. This is called the secondary market because it comes after the IPO.
‍
Most platforms are online and would allow you to invest a lump sum (e.g. £1,000) or regular amounts (e.g. £25 per month). To buy shares, whether online or offline, you need the services of a stockbroker or share-dealing platform. Stockbrokers offer three types of services - execution-only, advisory or discretionary. You will need to open an ISA, personal pension or general investment account with the platform you choose. A Stocks and Shares ISA should always be your first port of call because you do not pay any taxes when you hold your shares in a Stocks and Shares ISA, and you can access your money anytime. You'll find more information about the taxes below.

Finally, you may use our top provider list below as a general guide and starting point to understanding and choosing stockbrokers or share-dealing platforms. If you prefer to invest in funds, have a look at our top picks here.

Yes. See the main ones below:

1. Platform Charge: Share-dealing platforms charge this fee for providing a platform for you to invest. It can be a fixed fee or a percentage.
2. Dealing Charge: Also known as a trading fee. This is the fee for buying and selling shares or any other type of investment on the platform. There are usually discounts available for frequent traders.
   
3. Transfer Out Fee: ‍Also called an exit fee. It is the fee you pay for moving your investments from one provider to another.
   
4. Inactivity Fee: Most platforms don't charge this, but those that do usually charge you for making less than a certain number of trades within a specified period.
   
5. Stamp Duty: ‍When you purchase UK shares, you'll be expected to pay a 0.5% stamp duty to the government and an extra £1 on transactions above £10,000. Stamp Duty on Irish companies is 1%. You do not pay Stamp Duty on AIM stocks or Exchange Traded Funds (ETFs).
   

Yes. You enjoy tax benefits when you hold your investments in an ISA or pension. This tax year (2020 - 21), you can invest up to £20,000 in a Stocks & Shares ISA tax-free. If you choose to invest in a general investment account (non-ISA), you are allowed to make £12,300 of gains tax-free. Additionally, the first £2,000 you receive in dividend is tax-free. Read our Stocks and Shares ISA Guide for more information.

1. Bid Price
   The price you can sell a share.
2. Offer Price
   ‍The price you can buy a share.
   
3. Bid-Offer Spread‍
   ‍The difference between the bid and offer price.
   
4. FTSE 100
   ‍An index of the 100 largest companies on the London Stock Exchange (LSE).
   
5. FTSE 250 ‍
   ‍An index of the next 250 largest companies on the LSE.
   
6. FTSE All-Share‍
   ‍An index of all shares listed on the LSE’s main market, including all shares in the FTSE 100, FTSE 250 and FTSE Small-Cap indices.
   
7. Dividend‍
   ‍A dividend is your share of a company's profit. When a company whose shares you own makes a profit, they might send some of it to you. This is called a dividend.
   
8. Dividend Yield‍
   This shows you the portion of a company's share price that is paid out in dividends. It is calculated as the dividend per share divided by the price per share. For example, if a company paid a dividend per share of 7p and the share price was 100p, the dividend yield would be 7%.
   
9. Market Capitalisation ‍
   Also called market cap. This is the value of a company based on its current share price. It is calculated as the total number of a company’s outstanding shares multiplied by the current share price.
   
10. Price to Earnings Ratio‍
    ‍You can use this ratio to compare similar companies. A lower PE ratio could imply that a company is of better value. But it could also highlight a company with poor future prospects. It is calculated as the share price divided by the profit per share.