If you have some spare money to invest, shares often seem like a good starting point. They’re among the more straightforward financial assets, though you do need to take into account risks, administrative costs and taxes.
A share is simply an ownership stake in a company that you can buy or sell, with the price determined by supply and demand on the stock markets. For each share, you own a tiny percentage of the company. People sometimes talk about ‘stocks and shares’: in the UK, ‘stock’ refers to a collection of shares from multiple companies.
The most important thing to understand about shares is that all the money you put in is at risk. You could lose some of your money if the price has fallen when you choose to sell. You could lose all of your money if the company goes into liquidation.
The simplest way to buy shares is through one of many online platforms that take care of the administrative and legal work for you, in return for fees. The fee structure varies across platforms but can include a regular charge for holding an account, a fixed or percentage fee each time you buy and sell, and in some cases an ‘inactivity’ fee.
Which fee structure works best for you may depend on how often you intend to buy and sell shares, for example whether you want to aim for quick profits from shares that fluctuate in value suddenly, or more steady profits from shares that slowly rise over time. Make sure any platform you use is authorised and regulated by the Financial Conduct Authority.
One thing that’s easy to forget is that shareholders may get regular payments from the company known as dividends. These often depend on the company’s profits and are a way to encourage people to buy and hold shares, i.e. to keep them for longer rather than sell.
If you compare the dividend payments across a year to the money you paid for the share, it can be a favourable ‘interest rate’ on your investment. You do need to check why a company is paying big dividends, however. Sometimes it’s because profits are rising and it has more cash to spare. Sometimes, though, it’s because revenue and profits are falling and the business offers bigger dividends to try to attract investors who’d otherwise be put off.
Buying and selling shares does have tax implications. Each time you buy shares through an online platform in the UK, you have to pay 0.5% of the purchase price as stamp duty. If you make more than £12,300 profit in a year from selling shares, you’ll need to pay capital gains tax of either 10% or 20% of the profit above the £12,300, depending on your other income.
The first £2,000 you receive in dividends each year is tax free. After that you’ll pay a special dividend tax of 7.5%, 32.5% or 38.1%, depending on whether you pay the basic rate, higher rate or additional rate for income tax.
Stocks & Shares ISA
You can reduce the tax costs by investing through a ‘stocks and shares ISA’. The money you put into this counts towards the annual £20,000 limit for all money you put into ISAs. You don’t have to pay capital gains tax or dividend tax for shares that you hold (or sell) through a stocks and shares ISA. How much benefit this brings will depend on your overall financial position.
As well as buying and selling shares in specific companies yourself, you can invest in a fund. This is where a fund manager pools together money from multiple investors and buys and sells shares in multiple companies. Rather than owning the shares, you own a piece of the fund, which you can buy and sell.
Fund managers will take differing approaches to picking shares and you’ll need to check which they use. Some will pick a particular balance between prioritizing potential profits and minimising risk. The simplest are called tracker funds, which try to buy a mix of shares that reflects the stock market as a whole, or a particular collection, such as the FTSE 100, which is made up of 100 big companies.