Shares
You can buy shares as part of a pooled investment or directly, when you buy through the stockmarket. Shares are also known as equities or stocks.
When you buy shares direct in a company, you are buying a part of that company, and you become a shareholder, which usually means you have the right to vote on certain issues. You can either buy new shares when the company starts up and sells them to raise money (through an Initial Public Offering) or buy existing shares which are traded on the stockmarket.
The aim, of course, is for the value of your shares to grow over time as the value of the company increases in line with its profitability and growth. In addition, you may also receive a dividend, which is an income paid out of the company’s profits. Longer-established companies usually pay dividends, whilst growing companies tend to pay lower, or no, dividends – with these you would typically be hoping for better capital growth.
Risk
The level of a stockmarket goes up or down as the prices of the shares that are the constituents of that market go up or down. The main factor determining the price of a share is the perception of its current value to its owner.
One factor that could affect the price of a share is a change in opinion as to how well the company itself is performing or could perform in the future. This opinion is frequently based on predictions about the economic conditions in which a company is operating, which is why it might seem that stockmarkets go up or down depending on economic conditions.
Shares are generally the most volatile of the four asset classes – their value goes up and down more than the others. However, risk and reward tend to go hand in hand and – in the long run – the hope is that these investments would provide better returns than the other asset classes (but this is not guaranteed).
If you are investing in shares you should expect the value of your investment to go down as well as up, and you should be comfortable with this.
Holding shares is high risk. If you have put all your money into one company and that company becomes insolvent then you will probably lose most, if not all, of your money.
In the short term, shares will go up and down in value and this can occasionally be very significant. However, remember that if you have a wide range of shares – see Diversification – you reduce the likelihood of losing all or most of your money. It is important to stress that you need to be looking to the long term when investing in shares – at least five years but preferably longer.
Shares are risky in the short and medium term but if you hold your shares for over, say, ten years, then the risk of you ending up with less than you started decreases, so long as you have a good spread of shares (for example through pooled investments).
Buying and selling
You usually buy and sell individual shares through a stockbroker. You can ask a financial adviser or investment manager to buy or sell shares for you, but they will still go through a stockbroker.
Before you make any decision about buying or selling shares, you should find out as much as you can about the company, either by doing your own research or by taking advice – see Related links.
If you are contacted 'out of the blue' by somebody inviting you to invest in shares, beware – these may be share scams, also known as boiler room scams. See Share scams for more information, including how to report suspected boiler rooms to us or the City of London Police.
For a list of stockbrokers and more information about the services they offer, contact the Association of Private Client Investment Managers and Stockbrokers (APCIMS) or the London Stock Exchange – see Related links.
Alternatively you can buy shares through a pooled investment.
APCIMS and FTSE provide Private Investor Indices Information on the APCIMS website. The Indices provided are a set of calculations which indicate the returns which you might expect from different portfolios. Tehy reflect historic performance and do not give an indication of future performance – see Related links.