What you need to know before investing in shares
Trading in shares can be a good way to make a return on your money, but is less rewarding if you're paying through the nose for someone to make that trade for you. This guide runs you through the basics of what shares are and what you need to know before investing.
Warning: there are no guarantees when you're investing
Investing comes with risk, as the value of your investments can go down as well as up. If you decide to do it, it's recommended you invest for the long term (five years or more), as the longer you invest, the longer you have to ride out any bumps in the market.
What is a share?
A share is simply a divided up unit of the value of a company. For example, if a company is worth £100 million, and there are 50 million shares, then each share is worth £2 (usually listed as 200p). Those shares can and do go up and down in value for various reasons.
Companies issue shares to raise money and investors (that's you) buy shares in businesses because they believe the company will do well and they want to 'share' in its success.
How can investing in shares make (or lose) me money?
There are two ways you could make money from investing. One is if the shares increase in value, meaning you reap a profit when you sell them. The other is if they pay dividends.
Dividends are a bit like interest on a savings account. If a company makes a profit, it can choose to give some of it back to you – it could be on a regular basis or as a one-off. The first £1,000/year paid in dividends is tax-free, though above this it's taxed at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.
Note: the tax free dividend allowance is set to drop to £500/year from April 2024.
However, shares could also decrease in value and/or the company may decide not to pay a dividend, so there are no guarantees.
Should I invest in shares?
This really is a personal decision, as only you will know whether you're willing to risk some of your cash, and if so, how much – we can't tell you whether investing is right for you. But if you're going to do it, and are sure you could afford to potentially lose the amount you invest, here are some key points to consider. (First-time investor? Read our beginners' guide to investing to get a broader idea of what's involved).
- Investing is generally a long-term option – you should invest for at least five years. As a rule of thumb, five years allows enough time to ride out any bumps in the market that might see you make a loss on your money. If you know you're going to need access to your money earlier, then perhaps investing isn't the right route for you.
- Don't put all your eggs in one basket – holding shares in one company is high risk. If that company gets into difficulty then you could lose some or all of your money. Instead, many investors choose to spread their risk by buying shares in a variety of companies. The idea behind this is that if one share does badly, you hope that the other shares you've picked do well to make up for it.
You can choose the individual shares to buy yourself or you can pool your money with other people in a collective investment known as a fund. For more information on funds, see our Fund need-to-knows.
- The market is unpredictable – invest on a regular basis to smooth out ups and downs. It's tempting to try to time the market, but it's almost impossible and even the most experienced investors get it wrong. By pulling out of the market as soon as a share dips or trying to second-guess when a share will reach its peak, you could lose out on sharp recoveries or see the price go down again.
Instead, many investors choose to invest smaller amounts on a regular basis. This will give you an added benefit of something called 'pound cost averaging'. For example, invest £10,000 to buy shares valued at £10 each and you have 1,000 shares. Yet if you invest the same amount over two months, you'd get 500 shares in the first month, but if the share price went down to £9.50 in the second month, you'd get 526 shares.
- Watch out for share scams – never buy shares from a cold caller. If you're contacted out of the blue by someone inviting you to invest in shares, say 'no'. It is almost certainly a share scam, often referred to as a 'boiler room' scam. Here fraudsters will cold-call investors offering them worthless, overpriced or even non-existent shares.
While they promise high returns, those who invest usually end up losing their money. And remember, if it sounds too good to be true, it probably is.
How to buy and sell shares
The good news is that buying and selling shares is not complicated. Provided a company is listed on a stock exchange, you can buy and sell its shares.
The London Stock Exchange (LSE) is the primary one in the UK, where you get a whole host of companies including the really big players such as Marks & Spencer. Then there's the Alternative Investment Market (AIM), which lists smaller developing companies that you may not have heard of.
How to buy shares
The easiest and cheapest way to buy shares is online from a 'share dealing platform' (see platforms to try). These platforms allow you to buy shares from listed companies.
Once you have an account, you simply search for the share you want to buy and choose a quantity or value – whichever you choose, you need to have enough money in your dealing account to cover both this and any dealing charges. Accept the quote it generates and the shares will then show in your account with your chosen platform (your account and the shares in it are often known as your portfolio).
However prices change all the time, sometimes even between you submitting the order and the confirmation – so be prepared for slight variations. The price is determined by supply and demand from prospective buyers and sellers at any particular time – high demand will drive up the cost (while low demand will do the opposite).
What charges do I need to pay?
One of the biggest things to take into consideration when buying, holding and selling shares is how much it'll cost you in charges. The main ones to look out for are:
- Platform charge: You may be charged a monthly, quarterly or annual account fee – either as a flat-fee or as a percentage of your investments. However in some cases this is waived if you make a minimum number of trades, or your account is of a certain size.
- Trading fees: The fee you pay each time you buy or sell shares. You'll often find discounts for frequent traders.
- Transfer out/exit fee: Some platforms will charge if you want to transfer your investments to a different provider, usually per company you hold, or sometimes even just to close your account.
- Stamp duty: When purchasing UK shares, expect to pay 0.5% stamp duty and an extra £1 on transactions above £10,000.
Who really owns the shares?
It's also worth bearing in mind, using a platform to buy your shares means that rather than directly purchasing the shares yourself, you pay the platform to buy them for you. This often comes with the benefit of being able to purchase fractions of shares, which you might otherwise have found too expensive to do.
However, a side effect of this is that usually the shares are legally owned either by the platform itself or a nominee company, and you become what is known as a beneficiary owner.
This means that, in the rare event of the platform collapsing, you wouldn't have ultimate control over your shares. In this case, your assets (for example: shares, funds) would either be transferred to another broker or sold and the cash returned to you.
For this reason, most platforms keep your assets separate from theirs – known as ringfencing – so that, in theory, they wouldn't be able to touch them even if they went bankrupt.
How to sell shares
Selling shares is just as easy as buying them. Each platform's website will work slightly differently, but the principle is the same for each.
When selling, you can choose either number (for example, sell 500 or all shares) or value (sell £500 worth of shares). Once you place the deal, you will be shown a quoted price for the sale of the shares, though again this can vary between getting the quote and the sell order being carried out. Any money you have made from the sale will show in your shares account.
When should I sell my shares?
Well, if we knew this, we'd already be millionaires!
It usually doesn't pay to try and 'time the market' – this is where you try and buy shares at their lowest and sell them at their peak. It's hard to do and usually doesn't work.
Instead, take a dispassionate look at the share you're thinking of selling and ask yourself – do I think this company will continue to grow? Do I think it'll continue to pay dividends? Or would I be better cashing it in at its current value and using that to invest in a different company (or companies) that I think will do better. This question (and our answer to it) may help you with your thinking...
Q. I bought shares in Company X a few years ago. The value of this investment has now plummeted. Should I sell it or hold on?
A. Don't consider it as an amount lost. For the sake of illustration let's imagine it was worth £4,000 and is now worth £2,000. The big problem is that many people then think: 'How do I recoup my losses?' Yet it just doesn't work this way. There is no 'what goes down must come up' rule. You have to let go of the past value and clinically think – I have a £2,000 investment in company X.
Forget whatever it was worth and make the decision on this alone. This means the real question to ask yourself is – would I be willing to invest that £2,000 in the stock market right now, and if I did, is this the investment I would choose? There is no difference in the risk profile between buying a share new or having a share that you've held for a long time, it doesn't change the chances of what will happen. So considering it to be a fresh investment is the only way to go.
Share dealing platforms to try
Consider investing through a stocks & shares ISA
Before looking at share dealing platforms, it's worth you knowing that you can invest up to £20,000 in a stocks & shares ISA. Doing so means you're sheltered from various taxes that are often charged on investments made outside an ISA. For full details, read the Stocks & Shares ISA guide.
Investing isn't MoneySavingExpert's area of expertise. So, we don't tell you here what the 'best' sharedealing platform for you is, or give you any top picks. What we've done is pull out some of the cheaper platforms so you have somewhere to start your own research.
|Freetrade*||£2 (or min £50 for a free share)||None||None||None||App|
||£1 (plus newbies can get a free share with code MSE) (2)||None||None||None||Online/ app|
|Fidelity*||£1,000, or £25/mth||None||£7.50||None||Online/ app|
|AJ Bell*||None, or £25/mth||0.25% (max £3.50/mth)||£9.95||£0 as cash, or £9.95 as shares (per holding)||Online/ app|
|Hargreaves Lansdown*||£100, or £25/mth||None||£11.95||None||Online/ app|
We don't cover what to invest in because we never want to have told you to put your money in something, only for you to lose money on it. These sites do recommend shares to buy, so are a decent place to start your research:
- ADVFN – Live news, lists of gaining and losing companies, company-by-company performance charts, news and discussion forums.
- Hargreaves Lansdown* – Offers news, guides and tools – and you can download a free guide on how to select shares. You can also sign up to a free weekly share insight email.
- Interactive Investor* – Offers information, news and a discussion forum.
- Motley Fool – A wealth of company-by-company information, including news, commentary and comparisons of fund performance.
- Citywire – Features financial information on companies, and is also a news source. You can watch shares in a virtual portfolio if you sign up for an account.
If you're not sure about how to invest and what to invest in, seek independent financial advice. Read the Financial Advice guide for more information.
Share dealing FAQs
If you're worried about diving straight in at the deep end with investing, but you're serious about doing it, then dummy portfolios let you build up your confidence first.
A lot of the platforms these days have 'dummy' or 'virtual' portfolios you can practise with. You trade exactly as you would if it were real, except you're not actually exchanging any money or buying any real shares, so if you do make a mistake, there's no harm done.
You have to be an existing investing customer with some companies first before they allow you to set up virtual portfolios alongside your real ones.
Have a look at our research section, which has a lot of good info for beginners, including a few companies that'll let you set up a virtual account.
If you decide to buy shares online, then the easiest thing to do is open what's called a 'nominee account'. This allows you to own shares without becoming involved in any of the paperwork.
Often, this account's known as a general investment account (GIA). You are still the legal owner of the shares, but your name will not appear on the company's share register.
While you're holding your shares, it's important that you don't forget about them. When you're new to investing, the excitement of it all may mean that you keep an avid eye on how your shares are performing.
However, as you build your portfolio up and invest in more shares, it's easy to let things slide, so make sure you keep a track of everything you've got by reviewing your portfolio regularly.
This is possible, but be aware that you will pay for the privilege and not all platforms offer this service. For your name to be on the share register, you'll need to become a personal member of CREST, the electronic settlement service. You can be sponsored for CREST membership by a platform.
Once a special nominee account has been set up within CREST, you'll then receive information directly from the company and you can attend and vote at company meetings and receive shareholder perks, such as discounts on products sold by the company.
This is usually something that few first-time small investors embark on and is reserved for fairly active investors with a large number of shares.
While investments should be chosen for their potential to hopefully make you some money, shareholder perks can be a welcome bonus. These are no longer automatically given as they were when people held paper certificates, but some platforms still pass them on through the accounts.
For example, a simple search will show that if you buy Marks & Spencer shares through a platform such as Hargreaves Lansdown, you'll be sent vouchers offering discounts across the Marks & Spencer product ranges. In order to get these, you'd need to get in contact with the broker – the same applies if you want to attend shareholder meetings.
A direct transfer of your shares into a stocks & shares ISA or pension is not allowed. Instead you have to sell them and repurchase them within the ISA or SIPP.
This is called 'bed & ISA' or 'bed & SIPP'. The sale and repurchase are done immediately after each other to limit any exposure to the market.
Before things moved online, all shares were traded through paper certificates. Trading in paper shares is a more expensive and cumbersome option. Online trading is quicker and easier for not only you but also the stockbroker.
As time is money, if you still want to trade in paper share certificates you'll be penalised for this by the broker who'll have to spend more of his time and therefore your money on the trade. So if you still have paper shares, your best option is to convert these to online shares.
Most platforms will allow you to do this at no cost, you'll just have to fill in a form and it will take a few days to convert them to online shares.
If the shares are held in a nominee account, you'll need to contact the platform on which the shares are held. The shares are valued from the date of death of the person who held them.
Executors of the estate (the person/people dealing with the deceased person's estate) have the choice of selling these investments and receiving cash, or transferring the ownership to one or more of the beneficiaries, but only once probate has been granted (for example, when the administration of the deceased person's estate has been sorted).
Paper share certificates are slightly more difficult to sort out and will probably cost more, but if you approach a platform it will probably be able to help you value them and help with the administration.
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