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Table of Contents
To boost personal wealth, investing in the stock market has the potential to produce greater rewards than simply leaving cash on deposit. It can also head off the corrosive effect of rising prices.
Inflation reduces the purchasing power of cash. Crucially, when the inflation figure is larger than the interest rate that’s being paid to cash in a savings account, the overall effect is likely to reduce the ‘real’ or ‘purchasing’ power of that money over time.
Investing has the ability to offset this, because the aim is to build capital in such a way that your wealth potentially keeps pace with, or outstrips, inflation. The problem is that this doesn’t always work. Especially over short timeframes such as months, or a few years.
While there are never any guarantees, over longer periods however, decades for example, money invested via the stock market tends to grow at a faster rate than the interest returns available from cash.
As a guide to investing in stocks and shares, here’s a run-through of the important basics, plus a look at the options for beginners weighing up a move into this sector.
Understanding investment basics
Investing is the process of using money to potentially generate a profitable return. It’s always worth noting that investing carries with it the risk of loss, except where holdings are kept as cash. Even with the latter, elevated inflation has a corrosive effect on savings that will ultimately reduce the buying power of a cash pile.
The investing process involves putting your money into a range of investments.
Types of investments
There are four main types, which are often referred to as ‘asset classes’. These are:
- cash – savings that are built up in a bank or building society account
- bonds – also known as ‘fixed-interest securities’. A bond is an IOU that pays its holder interest in exchange for a loan to the bond issuer. There are several different types of bonds. Each type of bond has its own sellers, purposes, buyers, and levels of risk vs. return. For example, if the issuer is the UK government, the bond is known as a ‘gilt’ – companies also issue IOUs known as ‘corporate bonds’.
- property – an investment in bricks and mortar, either in the hope that a building’s value will rise, or that the owner will benefit from rental income. Or a combination of both.
- stocks and shares – these are interchangeable terms, also commonly referred to as equities. Equity investing involves buy a stake in a company either directly, in the form of shares, or via a fund (a form of collective investment, where money is pooled on behalf of potentially thousands of other investors). Shareholders are effectively part-owners of a business, and share in both its financial successes and failures.
Other asset classes exist such as fine wine, art and classic cars and these are often referred to as ‘alternative investments’. But mainstream financial products tend to focus on the above list.
An accumulation of assets is often referred to as a ‘portfolio’. There’s nothing to stop an investor focusing on just one asset type, but there’s an ‘all-your-eggs-in-one-basket’ risk associated with doing this.
Spreading your money among different asset classes – known as ‘diversification’ – has proven to be a sound investing policy.
According to the Financial Conduct Authority’s latest ‘Financial Lives’ research, in May 2022 41% of UK adults (21.8 million people) held an investment product, up from 32% five years earlier.
Excluding adults with an investment property, or who owned ‘alternative’ assets such as wine or jewellery, this proportion fell to 37% in 2022, larger than the figure of 29% obtained in 2017.
Why consider buying shares?
Historically, the return on equity investments – between 3% and 6% a year going back over 120 years, according to Credit Suisse – has outstripped other asset classes (although past performance is no guarantee for the future).
However, before parting with any cash, it’s worth would-be investors taking time to weigh up whether investing in shares is definitely for them and to ensure they do it in a sensible and secure way.
Should I consider investing in shares?
With equity investing, it’s important to keep one’s ultimate financial goals in mind and be prepared to ride out stock market ups and downs.
Whichever the preferred method (see below), there’s always a cost consideration to factor in as well. It doesn’t cost anything to open a deposit account with a high street bank. But, when buying shares, extra charges will be incurred beyond the cost of owning a piece of the company itself.
Investing in shares also means there may be tax considerations to weigh up. When the time comes to sell up part of your portfolio, for example.
Before taking the plunge with any form of stock market-linked investment, you may want to ask five questions:
- Should I get financial advice?
- Am I comfortable with the level of risk and can I afford to lose money?
- Do I understand the investment in question and could I get my money out easily?
- Are my investments regulated?
- Am I protected if an investment provider or my adviser goes out of business?
Risks attached
Every investment carries a degree of risk, some greater than others. As a rule of thumb, the higher an investment’s potential return, the higher the risk there is of an investor losing his or her money.
In terms of the asset classes outlined above, the risk associated with each tends to increase as you read down the list.
For example, with savings accounts, the risk of UK savers losing their money is virtually zero thanks to strict compensation rules as set out by the Financial Services Compensation Scheme.
The trade-off, however, is that the returns you can expect are modest at best, from virtually nothing up to, say, a few percentage points a year.
UK inflation has been falling in recent months, but still sits above the Bank of England’s long-term 2% target. This means that the real value of money held on deposit will only increase year-on-year if the interest rate on offer is greater than that of prevailing rising prices.
Bonds are riskier than cash because there’s the chance an issuer will not meet its interest payments and ‘default’. Again, there are several types of bonds which carry different levels of risk. For example, a UK government ‘gilt’ is considered a low-risk bond as opposed to High-yield bonds (also known as Junk bonds) which carry much higher risk.
Shares and property have the potential to generate better returns and therefore sit at the top of the risk/return ladder.
Share are often an investor’s first foray into stock markets, so that’s where we’ll focus on for the rest of this article.
Where can I buy shares?
The most convenient way is via an online investment platform (see below), although you can also do so via an appropriate stockbroker or financial advisor. Provided an investor has the necessary paperwork to hand, including bank account details, National Insurance number and proof of identity, the account opening process can usually be carried out within an hour.
Ways to own stocks and shares
There are several ways to invest. You can opt for one, some or all of the following. It boils down to personal goals and how actively involved a would-be investor wants to get in managing a portfolio. The main options are:
- Buying individual shares. This is probably the most time-intensive option. Investors need to do plenty of research and ultimately ‘own’ their decisions.
- Invest in share-based exchange-traded funds (ETFs). ETFs are a half-way house between buying shares direct (above) and buying funds (below). ETFs invest in a range of individual shares to track an underlying stock index such as the UK’s FT-SE 100. Investing via ETFs is like buying into the companies that are on the same index. ETFs are traded on exchanges in the same way as companies, but offer greater diversification.
- Invest in collective/pooled investment funds. These are run by professional managers, who run portfolios of shares and other asset classes on behalf of investors. Funds focus on specific countries or geographic regions (such as the UK, Far East, etc) or sectors (such as technology). Actively managed funds are where managers decide which companies to include in their portfolio. Passively managed funds use algorithms to track the performance of a particular stock market index.
How to buy stocks and shares?
1) Open an investment account
DIY investors require access to a dealing account, such as the ones offered by online investment platforms and trading apps. These provide would-be investors with a range of share dealing services.
Investment platforms are represented by some of the biggest names in stock broking and fund management and include the likes of Hargreaves Lansdown, interactive investor and Fidelity. Several providers have created a choice of ready-made portfolios featuring a range of investments based on the investor’s tolerance to risk.
According to the FCA’s latest Financial Lives research, 9.1% of UK adults held investment or pension assets on a ‘direct to consumer’, or D2C, trading platform, in other words, a service allowing consumers to manage their investments themselves.
Investors can also choose from an increasing array of dedicated share trading apps.
Some platforms provide users with the chance to practise trading using virtual money before taking the plunge for real.
No single investment platform or app is going to suit all types of user. Personal preference, look and feel, will play a part when making a choice. On top of these considerations, it’s important that a provider offers access to the investments you’re looking for.
It’s also to pay as little as possible for each trade you make and to minimise any other administration charges. Read more here about the charges levied by investment platforms and apps.
If you’re going to opt for the DIY investing route, consider opening a stocks and shares individual savings account (ISA). This is a tax-efficient savings product that acts as a wrapper around your investments, sheltering any profits from three key areas of tax: income tax, dividend tax and capital gains tax.
Most platforms enable investors to run a stocks and shares ISA within their service.
2) Choose a robo-advisor
If you have a sizeable amount to invest (say £10,000) but the prospect of being responsible for all your own trades seems a little daunting, you could opt to use a robo-advisor.
Robo-advisors are designed to be a simpler, relatively inexpensive way to invest in stocks – a half-way house between a DIY approach (above) and full-blown face-to-face investment advice (below). The customer provides information on how he or she earns, why they want to invest, financial goals and attitude to risk and are given a ready-made investment portfolio by an automated system.
Once up and running, the robo-advisor provides the investor with updates on your investment performance. This approach is convenient and relatively cheap – typically charging customers a few hundred pounds to get started. They’re also fast – it’s possible to have a live portfolio up and running within an hour or two.
But because the process is automated and uses data provided by the customer, robo-advisers do not make intuitive recommendations. Depending on the provider, there may also be limited choice in terms of the options on offer.
3) Choose a financial advisor or wealth manager
For those with a larger amount to invest, for example a six-figure inheritance or windfall, consider paying for the services of a financial advisor.
Would-be clients of advisors still need to decide what kind of guidance they need and the goals that they are working towards. For example, investing with a particular event in mind, such as retirement.
Would-be investors also need to decide their appetite for risk, how long they want to tie up their money, and whether they need advice on different types of investment such as ones run according to ethical or environmental principles.
On meeting an advisor, expect to receive the following information:
- Whether the advice is independent or restricted – restricted means an advisor is limited to the number of providers s/he can recommend. An independent advisor can access the whole market.
- Level of advice – depending on whether the information is to help inform a decision, or because an advisor is being enlisted to manage investments.
- Plan of charges – this may include an hourly rate, a set fee, a monthly retainer, or a percentage of the money being invested. Fees can vary so it’s worth shopping around.
- How an advisor is regulated – the firm should appear on a register published by the financial watchdog, the Financial Conduct Authority.
Find out more information about financial advice from Citizens Advice. For lists of independent and restricted advisers consider taking a look at the Unbiased, Personal Finance Society and VouchedFor websites.
What’s the easiest way of buying stocks?
It depends on how you define ‘easy’. Some investors, happy to do all their own company research, are keen to take an entirely hands-on, do-it-yourself approach to buying and selling shares for their investment portfolio. In which case, an investment platform with research and other tools will suit their purpose.
Others, while keen to gain exposure to shares may be less keen to take on board all the research work themselves. In which case, relying on the expertise of a third-party makes more sense. Whichever route an investor chooses, he or she can expect to pay a fee for the privilege – whether in the form of platform charges or advisory fees.
How do I sell shares?
If you’re pleased with the performance of your shares and want to take a profit, you’ll need to sell your holdings – or a proportion of them. To do so, log into your investing platform, type in the company’s stock market ticker symbol and select the amount that you want to sell.
Note that if you’ve made a substantial profit, you may be liable to pay capital gains tax (CGT) when you come to sell your holdings, especially if your shares were held outside of a tax-exempt wrapper such as an ISA. The CGT tax-free allowance for the tax year 2023-24 is £6,000. Find out more here about CGT rates and allowances.
Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
If you require any personal advice, please speak such advice from an independently qualified financial advisor.
Frequently Asked Questions (FAQs)
How can investing in shares earn (or lose) me money?
Buying shares – units of ownership in a particular company – is a form of investing, the practice of potentially generating returns by holding a basket of assets such as stocks and shares (‘equities’), commodities and bonds. Equity investing can reward investors both with capital growth (assuming there’s a rise in the business’s share price) plus an income in the form of dividends.
Dividends are payouts made by companies to shareholders usually from annual profits. Note that not all companies pay dividends, nor is there an obligation for them to do so. The share price of a company depends on numerous factors. These include the fundamental basics that make up an organisation (revenues, profits, competitiveness against its peers, attractiveness to potential shareholders, etc) as well as wider considerations such as overall demand for a certain product or service, the state of the economy, geo-political factors, and so on.
Share prices are not guaranteed to rise, so equity investing is not a sure-fire means of making money. Prices are liable to fluctuate especially in times of wider market turbulence, which means it’s possible for investors to lose some, and potentially all, of their money in investments that go wrong (for example, when companies go bust).
How do I know which shares to consider buying?
There are approximately 1,500 companies listed on the London Stock Exchange. Many thousands more are available on other stock markets worldwide. Enthusiastic investors with time on their hands who have opened an investment account (see above) research companies, scrutinise corporate data, and then decide whether to make investments based on sound fundamental decisions.
Refer to this table to see which companies have proved popular with UK investors.
Other investors prefer to delegate the ‘heavy lifting’ of investing by paying wealth managers or financial advisors (see above) to construct tailored investment portfolios on their behalf. This might be with the aim of achieving specific financial goals (for example, building up a retirement nest egg).
Alternatively, some investors may decide to invest in stocks and shares by buying into equity-based investment funds. Robo-advisors (see above) are a halfway house option for investors who don’t want to go it alone, but decide not to pay for full-blown (and ongoing) investment advice from a dedicated financial planner or advisor.
What charges do I need to pay?
In addition to the actual assets in which an investor decides to invest, charges and fees are another important consideration because these will ultimately have an impact on a portfolio’s performance.
The more money that’s paid by an investor in fees – whether related to advice, administration or trading – the less there is initially to grow which will affect potential returns. Nowadays, many retail investors buy shares and investment funds via an online investing platform or trading app.
What happens to my shares once I’ve bought them?
If you choose to buy shares online, typically the easiest way to do this is via an investing platform’s general investment account (sometimes known as ‘nominee account’).
Opting for this route means that while an investor is regarded as the ‘beneficial owner’ of the shares in question, his/her name does not appear on a company’s share register.
This is because the investing platform, in its role as stockbroker, is the legal owner of the shares and directly receives the dividends and shareholder rights attached to the shares before passing them on to nominees.
How do I get my name on a share register?
It’s possible to do this, but be aware that there will be an extra charge for doing so and not all investing platforms offer such a service. For an investor’s name to appear on a company’s share register, that person has to become a personal member of CREST, the electronic settlement service. Some platforms sponsor individuals for CREST membership.
Am I entitled to shareholder benefits?
In previous, paper-based, times shareholders were entitled to all the shareholder benefits conferred on them by the companies in which shares were held. Nowadays, this is a more limited service so, if shareholder perks are your thing, it’s important to choose a platform/broker that passes on all the anticipated benefits.
Can I move my shares into a stocks and shares ISA or a SIPP?
No. To move their holdings from, say, a general investment account to either a tax-friendly Individual Savings Account (ISA) or Self Invested Personal Pension (SIPP), an investor would have to sell their shares and then re-purchase them in a process known as ‘Bed ISA’ or ‘Bed SIPP’.
What should I do with inherited shares?
If the shares are held in a general investment or nominee account, it’s a case of contacting the platform on which the shares are held. The shares will be valued from the date of death of the person who held them.
Executors of the estate can, once probate has been granted, choose either to sell the holdings for cash, or to transfer the shares into the ownership of one or more of the stated beneficiaries.
