Find out everything you need to know about investing in shares, from the various options at your disposal to the rates of return you might anticipate.
Purchasing individual company shares is one of the oldest and most common ways to invest one’s money in the stock market.
They are part of a larger asset class that is referred to as “equities,” and, historically speaking, they have outperformed more secure investments such as bank deposits and bonds issued by corporations and governments. If held for an extended period of time, shares have the potential to act as the true growth driver for your investment portfolio.
But there is a higher degree of danger associated with this possible gain. When you invest in stocks, you run the risk of losing some or all of the money you put into the investment.
What exactly is a share?
Companies often resort to issuing shares in order to raise capital for their operations. Shares allow those who are not employed by the firm to have the possibility of receiving earnings from the company if it is successful. In essence, companies are selling a portion of their business to investors.
You have certain voting rights and additional perks in addition to the portion of the profits that is allotted to you when you become a shareholder in a company. This is because you are considered to be a part-owner of the business. On the other hand, private investors have a limited amount of influence over how the company is managed.
In point of fact, institutional shareholders such as pension funds and other collective investment funds hold huge numbers of shares and typically have the deciding vote when it comes to shareholder voting. Other types of institutional shareholders include individual investors.
You can purchase any of these two varieties of corporation shares:
Regular or common shares
When you purchase ordinary shares of a firm, you become a part-owner of that company. You have the right to get the lion’s share of the firms’ profits if the company decides to distribute some of its profits to shareholders after it has fulfilled all of its other commitments and the company has decided to distribute part of those profits.
The vast majority of ordinary shares are voting shares, which means you have a say in decisions relating to the firm, such as whether to consent to a takeover or how much directors should be paid.
You run the risk of losing all of your money if you invest in ordinary shares because there is no assurance that you will receive a portion of the company’s profits (for further explanation, see below), and if the company declares bankruptcy, you will be the last person to get your money back from the investment.
The preference share market
These shares do not come with the opportunity to vote, but holding them does provide you other rights, as the name suggests. Ordinary shareholders typically receive a portion of the profits after preference shareholders have received their share, but the amount they receive is typically capped by the issuing corporation.
In addition to this, preference shareholders receive any money paid out by the company prior to the regular shareholders in the event that the company declares bankruptcy. This is the case even if preference shareholders are located near the end of the line for any payout. Payouts for preference shares are often lower than those for ordinary shares because of the perception that preference shares carry a lesser level of risk.
How can you buy shares?
Many businesses choose to have their shares listed on a stock market, such as the London Stock Exchange, so that it is easier for people who are interested in buying shares to find people who are selling their shares (LSE). This ensures that there is a pre-existing market in which shares can be traded.
Many times, unlisted status is given to smaller enterprises; yet, hundreds of companies are traded on the Alternative Investment Market (AIM). When compared to companies that are listed on the main market, it is widely agreed that investments in these companies carry a higher level of risk.
Through the use of an investment platform is the most cost-effective option to purchase shares (sometimes referred to as fund supermarket).
These primarily online services let customers to trade shares in addition to other financial instruments such as funds, bonds, and more.
How much does it cost to trade shares of stock?
It is essential to give careful consideration to the fees that are associated with share trading in order to guarantee that these costs will not diminish your returns.
The following are the primary fees that should be watched out for:
In our assessments of the various investment platforms, we outline the costs that are associated with using those platforms.
How much of a return can you expect from investing in shares?
There are two ways that investors might profit from stock ownership: dividends and capital appreciation.
The transfer of a portion of a company’s profits to shareholders in the form of dividend payments occurs on a semiannual or annual basis.
You have a better chance of receiving dividends from larger companies that have been around for a longer period of time. The more lucrative the company is, the potential size of the dividend payout also increases.
Because they often spend their revenues in the expansion of their operations, smaller companies have a lower probability of paying dividends. However, if a smaller firm is able to effectively expand, the value of your shares may increase (see the section below for more information) and you may have the option to receive dividends at a later time.
The expansion of capital
If the price at which you sell your shares is higher than the price at which you purchased them, you will have made a profit. This results in expansion of your capital, which is the money you initially invested in the venture.
There are elements both inside and external to your company that can influence the price of your shares.
Every six months, companies disclose not only their financial results but also trade updates and announcements of future dividend distributions. These reports are typically made public. If the firm is doing well financially and it is anticipated that it will continue to do well in the future, this should have a favourable effect on the price of the company’s shares. On the other hand, a drop in share price may occur if it appears that future prospects are not favourable.
The health of the economy as a whole is another factor that affects share prices. Demand for company shares tends to rise when general economic conditions are favourable and when investors are optimistic about the growth prospects of businesses. The demand for shares from investors, combined with the current market attitude, can drive up the price. If there is more demand than there is supply, then share prices will rise.
Naturally, if the current state of the economy is not favourable, investors might not have as much faith in the future of a particular company. As a result, the price of a company’s share may decrease even though the business itself is doing well.
A tax on shareholdings
Any returns you make as a shareholder, whether they come in the form of dividends or when you elect to cash in on the development of your investment, will be subject to taxation.
Utilize our dividend tax calculator to determine the amount that will need to be paid.
Buying shares through a stocks and shares Isa, Junior Isa, or Lifetime Isa is a common strategy for minimising the impact of taxes on investment returns.
If you hold investments in an ISA, you won’t be subject to tax on dividends or gains from capital on such investments.
Tax deducted at the source
This refers to a tax that is levied by a government in a foreign country on non-residents’ dividends or other forms of income that they earn. Non-residents of the United States are subject to a tax rate of thirty percent on any income derived from investments made in the United States.
Residents of the United Kingdom are eligible for tax breaks thanks to the “double taxation agreements” that their government has reached with a number of other nations.
Investors may be eligible to get a refund of all or a portion of the withholding tax that they have already paid. To learn more about the standards that must be met, you will need to get in touch with the appropriate tax authorities.
Are there any other investment options besides shares?
If you want to increase your portfolio’s exposure to equities but are searching for a more time- and cost-effective method, an investment fund might be the way to go.
Your holdings can be diversified among hundreds of companies by investing in funds, which also lessens the impact of adverse market conditions. It is feasible to obtain financing that exclude businesses on the basis of their ethical or environmental practises.
You will be required to pay a fee, however tracker funds typically have fees that are extremely reasonable.
When you invest through a fund, you will not have any voting rights, and you will have to rely on the actions of the fund manager to look out for your best interests.