Investing directly in shares
One of the most obvious ways to invest your money is to buy shares in individual companies.
They form the asset class known as 'equities' and, historically, they have outperformed safer investments such as cash deposits and government and corporate bonds. Over the long term, shares can act as the real driver for growth in your investments.
However, with this potential reward comes greater risk. Investing in shares exposes you to the potential to lose some, or all, of your money.
What are shares?
Shares are issued by companies as a means of raising money. Essentially, companies are selling part of their business to investors, and shares offer people outside the company the opportunity to receive profits if the company is successful.
As a shareholder, you become a part-owner of the company, which gives you certain voting rights and additional benefits beyond the receipt of your share of the profits. However, private investors have relatively little say in how the company is run.
In reality, institutional shareholders such as pension funds and other collective investment funds hold large numbers of shares and usually carry the day when it comes to shareholder votes.
There are two types of company shares you can buy:
How can you buy shares?
Many companies opt to have their shares listed on a stock exchange, for example the London Stock Exchange (LSE). This ensures that there is ready-made market to trade shares.
Smaller companies are often unlisted, but hundreds are traded on the Alternative Investment Market (AIM). These companies are generally seen to be more risky investments than those companies listed on the main market.
The cheapest way to buy shares is through an investment platform (sometimes referred to as fund supermarket).
These predominantly online services offer share trading as well as funds, bonds and more.
- Find out more: Best investment platforms
How much does share trading cost?
The charges involved with share trading are really important to consider so you can ensure they don't eat away your returns.
The main charges to look out for include:
- Platform fees: each platform charges a fee for the use of its services, this can be a flat fee or a percentage of your returns
- Stamp duty: trades of shares in the UK are liable for stamp duty at 0.5%, plus an extra £1 for every transaction over £10,000
- Exit fees: some platforms charge an exit fee for you to move your investments to another platform, but sometimes the platform you switch to will cover the costs
- Trading fees: paid each time you trade a share, these costs also vary by platform
You can find out what fees are charged by each investment platform in our platform reviews and compare investment platform fees and charges.
What kind of returns can you get from shares?
The return from shares comes in two forms: dividends and capital growth.
Dividends
Dividend payments are the distribution of the profits that the company has made, usually paid out twice a year.
You're more likely to receive dividends from larger, long-established companies - the more profitable the company is, the larger the dividend pay-out could be.
Smaller companies are less likely to pay out a dividend, as they reinvest their profits to grow their business. However, if a smaller company does manage to successfully expand, the value of your shares could expand (see below) and provide opportunity for dividends at a later date.
Dividends are not guaranteed - even regular dividend-paying firms may cut or suspend dividend payments in extraordinary circumstances, as happened in during the early days of the Covid-19 pandemic.
Capital growth
You can make a profit if you sell your shares for a higher price than what you bought them for. This provides you with capital (the money you invested to begin with) growth.
The price of your shares is affected by both internal and external factors.
Companies publish their financial results every six months, as well as trading updates and announcements of dividend distributions for the future.
If the company is performing well and is expected to do so in the future, this should have a positive effect on the share price. Conversely, if the prospects aren't looking good, the share price can fall.
Value investing
You can also generate capital growth by buying shares at a price lower than what they're truly worth.
But, this isn't the same as buying a cheap stock - because often a company will receive a low valuation for a reason, and these are called 'value traps'.
That's why you need to look beyond share price when deciding whether to buy. Here we've listed the factors to consider when comparing two fictional companies:
| Company A | Company B | What it means | |
|---|---|---|---|
| Share price | $25 | $19 | Company A has a higher share price |
| Earnings per share (EPS) | $2.76 | $1.12 | Each share bought in Company A will equate to higher earnings |
| Price-to-earnings (P/E ratio) | 9x | 17x | Company A's share price under-represents how much you'd earn |
| EPS growth rate over five years | 14 % | 10 % | Company A's earnings are likely to grow faster than those of Company B |
| Market cap | $5bn | $500m | Company A is more well established so less likely to collapse |
Although the share price of Company B is cheaper, Company A is better value
Economic conditions
The wider economy is also influential on the share prices. If economic conditions are good and investors have confidence in companies' ability to grow, the demand for shares increases.
This market sentiment and investor demand for shares can increase the price. If demand outweighs supply, share prices will go up.
Of course, if the economic climate is not good, investors may not be so confident in a company's prospects. Therefore, the share price can fall, even if the company is performing well.
- Find out more: our template investment portfolios
Tax on shares
You will be taxed on any returns you make as a shareholder, either through dividends or when you decide to cash in on capital growth by selling your shares. Use our dividend tax calculator to find out how much you'll pay.
One popular way to invest in shares tax-efficiently is to buy within a stocks and shares Isa, junior Isa, or lifetime Isa.
You won't have to pay dividend tax or capital gains tax on investments held within an Isa.
Withholding tax
This is a tax levied by an overseas government on dividends or income received by non-residents. For example, the US Government charges 30% on any income received from US investments for non-residents.
The UK government has 'double taxation agreements' in place with many countries to reduce the amount of tax paid by UK residents.
It may be possible for investors to reclaim all or part of the withholding tax paid. You will need to contact the relevant tax authorities to determine their requirements.
- Find out more: use our tax calculators to help you with your tax return
Are there any alternatives to shares?
If you're looking to gain exposure to equities in your portfolio, then an investment fund or investment trust could be a more efficient approach.
Funds can include thousands of companies, diversifying your holdings and reducing the impact of market downturns. It's possible to get funds that screen out companies on environmental or ethical grounds.
You will have to pay a fee, although these can be very low for tracker funds.
Investing through a fund also means you won't have any voting rights; you'll be reliant on the fund manager to act in your interest.
- Find our more: Investment funds explained