What are shares?

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.

What is a share?

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.

What are the benefits of investing in shares?

Investing directly in shares has a number of benefits, including:

• The potential for growth. Like any form of investing, people typically put their money in hoping that the value of their investment will grow over time. And, if a company performs well and the shares increase in value, the returns can be much higher than putting your money in a cash savings account. Success is not guaranteed though – as we explain in the risks, below.
• Shorter-term returns, in the form of dividends. If a company makes a profit, or sometimes even if it doesn’t (depending on the terms of your contract), you may receive small pay-outs in the form of dividends. It’s a bit like receiving an interest payment on a savings account.
• The ability to invest directly in companies that you like. Unlike funds, for example, which spread your investments across multiple companies, with shares you can pick and choose the specific firms you want to put money into. This gives you more nuanced control over exactly where your money goes. For example, you might want to support a new business’s development and future, or to put money into a company that you think is about to take off. Plus, ownership of shares in a company often gives you the right to vote on important company decisions.

What are the risks of investing in shares?

• The value of your shares may go down. If the company doesn’t perform as well as hoped, you may get back less than you put in when you come to sell.
• You may choose an investment portfolio that is not diverse enough. Ideally, when you invest your money, you spread it across lots of different firms and lots of types of investment. This help manage risks if one segment of the market or one type of investment asset doesn’t do as well as others. It’s known as diversification. If you put all of your money into shares in a small number of similar firms, your investments may not be as diverse as ideal.
• You bear responsibility for managing your share portfolio. This means that you are in charge of deciding what specific shares to buy and sell, and when to do so. With funds, on the other hand, you will usually pick the “type” of fund (low-risk or ethical, for example), but the fund manager will be responsible for choosing and managing the specific assets within the fund. For some people, having more nuanced control will be a good thing. However, it means you may need to spend more time and effort researching your options, monitoring performance and making sure your portfolio is diversified.

Does every company have shares?

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.

What is the difference between stocks and shares?

The terms “stocks” and “shares” are often used interchangeably, but there’s a subtle difference.

• Shares are individual units of ownership. You will own a specific number of shares in a company. So you might own 100 shares in Tesco and 50 in Shell, for example.
• Stock refers more generically to a portion of ownership, regardless of how big that is. So you could say you own stock in Tesco and Shell.

How many shares can a company have?

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.

What are the different types of share?

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:

• The right to receive a dividend
• The right to vote at shareholder meetings.

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.

How much is a share worth?

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.

How do I buy shares?

There are a few ways you can buy shares, including:

1. Via an online investment platform. These let you buy shares on an execution-only basis (without any advice). You’ll also be able to monitor performance and sell shares using the platform. Online investment platforms are usually the cheapest way to buy and sell shares.
2. Through a traditional stockbroker. A firm that specialises in buying and selling stock on behalf of clients. Usually you’ll be able to speak to and get guidance, or sometimes regulated advice, from a human specialist. This option is becoming less common and is usually more expensive than using an investment platform.
3. Via a regulated financial adviser. This is likely to be the most expensive option. It’s only really worth considering if you want financial advice that takes the bigger picture, including your personal circumstances, into account. A financial adviser will be able to recommend specific investments and investment strategies that suit your needs, taking into account all forms of saving and investing rather than just shares.

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How do I choose which shares to buy?

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:

• What type of company do you want to invest in? For example you could opt for big name brands you’re familiar with or companies that match your values, such as those with a focus on sustainability.
• How well established is a company? As a general rule of thumb, companies that have been around a while will tend to be lower-risk than new market entrants. This isn’t a guarantee though. Even companies that have been around for years can do badly or even collapse completely.
• Are there any known risks – with a specific company or in a certain market? Check news headlines or recent company announcements.
• How volatile is recent share performance? A share price that’s been leaping around could mean lots of people are buying – or selling. The former could mean that the shares may be unaffordable for your budget. The latter could be a riskier proposition, if there’s a reason for shareholders jumping ship.
• Why are you considering investing in that company? We wouldn’t advocate buying shares just because there’s hype around a company or your Uncle Reggie reckons he’s a dab hand at predicting stock market winners. Always do your own research into a company before buying shares.

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.

Diversifying your portfolio

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.

What are the alternatives to shares?

Bottom line

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.

Frequently asked questions

• Do shareholders get paid?

  In many cases, yes. Part of the profits made by companies limited by shares may be distributed to shareholders in the form of dividends. These may be according to a regular schedule or on an ad hoc basis, depending on the nature of the shareholder rights.

• Can I invest in specific shares in my pension?

  It depends on the type of pension you have. If you have a workplace or regular personal pension, you can usually choose the broad type of investment strategy you want, but you usually can’t choose specific investments. However, if you have a self-invested personal pension (SIPP), this gives you much more nuanced control over where your pension pot is invested. Some SIPP providers let you invest in shares. This varies by provider though, as does the range of shares available. Check the details carefully when choosing your SIPP account.

• What is equity in a company?

  Equity refers to how much of a company you own through your shareholdings. If a company has 20,000 shares and you own 200 of them, you will have a 1% equity stake in the company.

• How do I sell shares?

  If you’ve invested via an online trading platform, selling your shares should be as straightforward as buying them. You might decide to sell your shares if, for example, they’ve made a big profit and you want to take advantage, or if you need to get the money out to pay for the thing you were saving for in the first place. You can also sell via a traditional stock broker, though this may cost more. Our full guide on how to sell shares has more details.

• How can I start trading shares?

  You might assume that “trading” shares refers simply to the act of investing in them in the first place, then selling them when you want to get your money out. But in investment circles, “share trading” usually refers to the act of speculating on the likely movement of shares in the short term, rather than owning the shares yourself. It tends to be for more experienced investors that understand stock markets well. They have the time and inclination to monitor the performance of shares and act quickly to turn a profit. Many of the online share dealing platforms that let you buy and sell shares also offer the ability to trade shares. Some platforms have virtual portfolios, where you use virtual money to try out trading before taking the plunge with real money.