Investing in the stock market is a way to grow wealth in the long run. For many people buying and selling shares is seen as a high risk decision, but when done properly can bring high returns.
What are they?
A share is simply a portion of a company. For example if a company is worth 10 million and there are 5 million shares, each share is worth £2. These can rise and fall depending on the success of the business. Companies offer shares to raise money and in return the share price can go up if the company is successful or dividends can be paid out to the share holders.
Dividends are payments from the company’s profits to the shareholders. However profitable companies don’t need to pay out dividends and may decide to keep the money within the company.
Dividends are paid out twice a year and the shareholders can decide to take the money or to buy more shares in the company.
How can you invest?
There are two main options when buying shares; buying shares yourself or pooling your money with other people, which is known as an investment fund.
Buying individual shares in a company yourself generally involves a lot of work and research and is certainly not the quick and easy way. You can purchase shares directly through contacting the company, a platform or through a stockbroker, although this is not an activity all financial advisers would engage in. Buying shares yourself usually means only investing in a small number of companies. This is a high risk strategy as having only a few companies in your portfolio does not spread the risk. An alternative is to invest into a fund where your money is pooled with others and invested in a variety of companies and sectors, allowing you to choose the amount of risk you are willing to take. These funds can either be actively managed by a fund manger, at a high cost, or passively in tracker funds that follow a market index.
Investing in Shares – The Pros
There are some real benefits of using your spare cash to invest in stocks and shares, one of which is that you don’t need a lot of money to start seeing returns and that you can invest as and when you have spare money available. The biggest advantage is the potential growth that can be made from investments, with the average growth to be seen at 7%, compared to the interest rate of 0.5-1.5% on bank accounts. Another benefit is the use of tax wrappers such as stocks and shares ISA’s, which allow interest to accumulate tax free.
Investing in Shares – The Cons
Of course as with everything there are always some drawbacks. With stocks and shares the main issue is volatility, with markets going up and down significantly. This means that over a short period you could quite easily loose money. For this reason it is important to diversify your portfolio to spread the risk. Another issue is the numerous scams linked to buying stocks and shares so it is important to use a platform that is well known and regulated.
Investing in Shares – Fees
One of the main things that can eat away at your profits is fees and it is important to take into consideration what the charges are before buying and selling shares.
Account fees: Platforms may charge a monthly, quarterly or annual account fee for the use of their platform to buy and sell shares.
Buying and selling: To buy and sell shares there is always a fee and this can vary significantly between different platforms, but for regular traders there can be a discount.
Stamp duty: When purchasing shares in the UK a 0.5% charge is added and an extra £1 added for every transaction above £10,000.
Inactivity fee: If you become inactive for a set amount of time you may well be charged a fee, however many of the platforms no longer charge this to attract new investors.
Investing in Shares – Scams
There are a number of scams than can affect people who buy and sell shares regularly. For instance people may be contacted via email or telephone from someone inviting them to buy some new high interest shares. This is most certainly a scam and you should never buy or sell shares from someone that has called out of the blue. The best way to avoid scams is to meet face to face with a financial adviser, who is able to access the market and determine your risk profile to tailor an investment portfolio for you.
Capital at risk warning
The value of your investments can go down as well as up, so you could get back less than you invested
If you are interested in talking to someone about investing in shares please contact one of our expert advisers