Shares are like fractions of a company. If you own one, you ‘own’ a small part of the company and its value. Shares can offer high returns but they also carry high risk.
When you own shares directly you become a shareholder. This usually means you have certain rights, including the right to vote on some company decisions.
Not all shares are offered to the general public but when a company is publicly listed its shares are bought and sold on the stock exchange. Shares from large companies are traded on the London Stock Exchange (LSE) – you’ll hear these called ‘listed shares’. Smaller companies are traded on the Alternative Investments Market (AIM) and the smallest of these are often called ‘penny shares’.
How investing in shares works
Investing in shares means buying and holding them for a while with the aim of making a return. There are two ways of making a return from shares:
- If the company grows and generates profits it becomes more valuable, its shares are worth more – so your investment’s worth more too.
- Some companies pay away part of the company’s profits each year to shareholders. This is called a dividend.
If you buy shares in larger, long-established companies, you’re likely to receive dividends, but you might not get rapid growth. Shares that pay regular dividends are good if you’re investing for income. And if you’re investing for growth, you can also reinvest the dividends by buying more shares. However, dividends depend on the company’s ability to continue to make profits and are paid at the discretion of the company’s board of directors.
Smaller companies often don’t pay dividends. However they might grow more quickly, so the value of your shares might rise quickly too. But be warned – smaller companies can be more risky, so their shares can fall further and more rapidly too.
If you are thinking of investing in shares, bear in mind that they do carry more risk than most other investments; this is because you rely entirely on the performance of a single company. This can offer the potential for higher returns if the company performs well, but equally you could lose your entire investment in extreme cases.
When economic conditions are positive, markets are likely to be stable and therefore companies more likely to perform well. This makes investors more confident, and can make the demand for shares rise and share prices increase.
If economic conditions are difficult, markets are likely to be unstable and therefore companies’ profits may suffer as a result of tough market conditions. This will make investors nervous, and demand for shares may slow and so share prices could fall.
How to buy shares
You can buy and sell shares through our tax-efficient Investment ISA or Self Invested Personal Pension (SIPP) or through our flexible general investment account, MarketMaster®.
Things to remember
- Shares can fall in value as well as rise. You could get back less than you initially invested.
- If you invest in individual shares, your portfolio might not be diversified. Shares are only generally considered suitable for investors who are experienced and who have high value portfolios, as these may allow them to achieve a desirable level of diversification
- If you’re unsure whether shares are right for you, please seek independent financial advice
- If holding shares in an ISA or SIPP remember that tax rules can change and whether they benefit you will depend on your individual circumstances. SIPPs are only generally considered suitable for experienced investors.
Capital - Financial assets or the financial value of assets
Stock exchange - A market in which securities are bought and sold.