If you want to start investing your money, rather than keeping it in cash savings, buying shares in companies is one option to consider. Like any form of saving, investing in shares has pros and cons. Here’s what you need to know.
A share is a small investment unit representing a “share” of the overall value of a company. Let’s say (theoretically) a company is worth £10 million and it has 2 million shares. Each share would be worth £5. When you check the values of shares on stock market listings, they’re usually listed in pence rather than pounds – so in this case 500p. Like any investment, the value of shares can rise and fall depending on the success and popularity of the company, plus other factors.
As well as benefiting, in theory, from growth in the share value, shareholders may also receive what’s known as “dividends“. These are typically paid when the company makes a profit. They may be paid on a regular or ad-hoc basis, depending on the type of shares you’ve bought.
Investing directly in shares has a number of benefits, including:
Most limited companies have shares. They’re what’s known as “limited by shares”. This means they’re effectively owned by the shareholders, who have certain rights. Companies that want to make a profit will typically be limited by shares.
The other type of company you might come across is “limited by guarantee”. This usually applies to “not-for-profit” companies, which are backed by guarantors and where profits are invested back into the company.
A company that is limited by shares has to have at least 1 shareholder – the company’s director, for example. If someone is the only shareholder, they will own 100% of the company. However, many companies choose to sell their shares to multiple investors. This might apply particularly if they want to grow and need finance to do so.
The terms “stocks” and “shares” are often used interchangeably, but there’s a subtle difference.
A share-limited company has to have at least 1 share, though this would only really work if a single person owned 100% of a company.
There’s no maximum limit to how many shares a company can have. It can vary between companies.
When a share-limited company is first registered with Companies House, it has to provide information including the number of shares it has (and their total value), as well as the names and addresses of all shareholders.
However, the number of shares is not fixed forever. A company can start off with a relatively small number of shares, owned by its founders, then later issue more shares to sell to investors.
The most common type of share in the UK is what’s known as “ordinary shares” (also sometimes called “common shares”). These come with shareholder rights, typically including:
You might also come across less common types of share, such as “preferred shares”. These may not offer voting rights and may offer less potential for growth, but are generally regarded as less risky because they offer a higher claim to earnings, such as a regularly paid dividend.
Meanwhile “deferred shares” may only give shareholders the right to dividends after a certain period or when certain conditions have been met. The company hitting a pre-defined target, for example.
Shares in different companies will be worth different amounts, depending on the value of the company and how many shares it has issued. And this can change over time, based on how the company performs.
There are a few ways you can buy shares, including:
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Which companies you choose to buy shares in is completely up to you. A traditional stockbroker or financial adviser may be able to offer advice – for a fee. Our full guide on how to buy shares is packed with tips on buying shares without advice using an online platform. Here are a few things to think about:
If you’re a less experienced investor and want to keep an eye on things before buying, most trading platforms will have watchlists to help you monitor share performance over time.
Importantly, ploughing all your savings into shares in a single company – or even 2 or 3 companies – is a high-risk strategy. You should always aim for a diverse investment portfolio. If you can’t afford to spread your money across shares in multiple firms, you might be better off starting out with an investment fund. This will be naturally more diverse as the money in the fund will be split across lots of different investment assets, including shares.
If you have some money to put aside – whether that’s for a proverbial “rainy day” or a specific savings goal – you have a few choices.
One of them is, of course, a traditional cash savings account. There are plenty of cash saving options to choose from, depending on how long you’re able to tie your money up for, as we explain in our guide to the best savings accounts to save money.
Cash savings have traditionally been regarded as a low-risk option, because your capital (the money you put in) is not at risk. And they are often a good option if you need access to your money at short notice. However, in a period of high inflation and comparatively low interest rates on savings, the “real terms” value of your money will actually go down. This is because the interest you earn on cash savings won’t be enough to keep up with inflation, so your money will gradually be worth less and less.
If you can afford to tie up your money for 5 years or more, investments are worth considering. They offer the potential for greater growth than cash savings, meaning your money has a better chance of keeping up with inflation. But you also risk losing money if your investments perform badly. This risk typically smooths out over time, which is why you need to be able to commit your money for at least 5 years.
Shares are an option to consider, but other investments that might suit those new to investing include:
Buying shares can be an exciting way to save for the future. It lets you pick and choose the specific companies you want to invest in and receive dividends. In many cases you’ll also have the right to vote in important company decisions. But you’ll need to be prepared to spend time researching the finances of the companies you’re thinking of buying shares in. And having a diversified investment portfolio is key, so don’t put all your eggs in too few baskets.
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