Stock market-based investments – with their inherent risk of losing money – aren’t for everyone. But buying stocks and shares can help your money grow faster compared with leaving cash in savings accounts.
Although interest rates have risen significantly, soaring inflation has made it challenging for savers to find inflation-beating returns.
Equity-based investments – those that include stocks and shares – provide no guarantees but have, historically, outstripped cash over time.
For example, according to research by online trading platform IG, the FTSE 100 index – the UK’s basket of leading blue-chip companies – has delivered an average annual return of nearly 8% over the last 35 years.
In comparison, the average interest rate for instant access savings accounts was 1.6% (in February 2023), based on Bank of England data.
The Bank rate has moved steadily upwards since the end of 2021, to its current level of 4.0%. But this will still be far adrift of the expected rate of inflation for the foreseeable future.
With UK inflation topping 10% last year, investing in stocks and shares could provide investors with an opportunity to generate a ‘real’ return – that is, one that beats inflation.
Here’s what you need to know.
Note: before you consider investing in stocks and shares, it’s wise to build up a ‘rainy day’ cash fund worth at least three (and preferably six) months of your usual outgoings.
What are stocks and shares?
Shares are units of ownership in a company and are issued by the company to raise funds.
Don’t worry about any difference between ‘stocks’ and ‘shares’ – the terms are used interchangeably.
Only shares in publicly-traded companies are available to buy or sell on the stock exchange. In the UK, ‘plc’ after the name of a business means that it’s a ‘public limited company’.
What are the different ways to invest in shares?
You can invest in shares directly or indirectly, depending on your investment goals and whether you want to manage your portfolio or delegate the responsibility to a third party.
- Invest directly in individual shares: buying shares in individual companies may be a good option if you can do your own research and keep abreast of market developments. However, it’s a relatively risky option due to the risk of an individual company underperforming.
- Invest in shares via funds: professionally-managed funds pool money from potentially thousands of investors. Thousands of funds exist, investing in shares or in other assets such as bonds and property. Some are country-specific (eg, UK funds), while others have a wider international mandate. Some funds concentrate on a particular sector, such as mining or healthcare.
If you are looking to invest in funds, there are two main types:
- Unit trusts/open-ended investment companies (OEICs): both are collective arrangements that enable investors to pool their money for a common purpose. Investors’ cash buys units, which rise and fall in value in line with the underlying assets.
- Investment trusts: these are companies created for the purpose of investing. Also referred to as ‘close-ended investments’ (they have a finite number of shares, whereas unitised investments can create units to meet demand), investors can buy and sell investment trusts on the London Stock Exchange.
Depending on its investment mandate, a fund is managed either ‘actively’ or ‘passively’:
- Actively-managed funds require a fund manager to follow a particular investment brief, for example, to outperform a stock index such as the FTSE 100. To achieve this, the manager buys and sells stocks. Actively-managed funds tend to charge a higher fee than passive funds.
- Passively-managed funds: also known as ‘tracker’ or ‘index’ funds, these aim to replicate the performance of an index such as the FTSE 100 by making share trading decisions that mimic what is happening in the target index. Most exchange-traded funds (ETFs), another type of collective fund, are passive investments.
What are the options for share dealing?
Online platforms
A popular way of investing in shares is through an online platform. These are provided by a number of UK brokers, banks and other providers, including investment managers such as Fidelity and Vanguard.
You should always check that a broker is authorised and regulated by the appropriate regulatory body, such as the Financial Conduct Authority, and that client money is covered by the Financial Services Compensation Scheme.
When comparing online platforms, it’s worth considering the amount you will have to pay in fees. We’ve compared fees, along with other features, in our pick of the best trading platforms and stocks & shares ISA providers.
There are two main types of brokerage fees for share dealing – the share dealing fee and the platform fee.
The share dealing fee is charged on the purchase or sale of shares and typically ranges from £3 to £10, although a number of brokers (such as eToro) offer commission-free share trading.
Some brokers also charge an annual platform fee which is usually around 0.25% to 0.45% of the value of your shares.
Platform fees may differ depending on whether you hold the shares in a general share account or an Individual Savings Account (ISA). Several brokers apply an overall annual cap of between £50 to £100 on share-based platform fees.
Some online platforms provide the option to deal shares via an app on your phone or tablet. Share trading options from some providers are app-only.
You will also need to consider your choice of investments.
Most online platforms offer access to a range of UK shares and many allow trading in overseas shares. Trading in non-UK shares will usually incur foreign currency fees and you may have to complete additional documentation, such as the W-8BEN form for US shares. The platform should be able to guide you.
Financial advisors
Another option is to buy and sell shares via a financial advisor or wealth manager. Many of the online platforms offer discretionary wealth management services for clients with higher-value portfolios (often over £100,000).
A suitably-qualified financial advisor should be able to recommend shares based on your investment objectives, and execute the trades on your behalf. However, this will be a higher fee option than using an online platform.
If you are looking for a financial advisor, you can search by specialism on Unbiased or by local area on The Personal Finance Society’s website. Your advisor should be qualified and FCA-authorised. They should also provide information about their fee structure and whether they offer restricted or independent (whole of market) advice.
Robo-advisors
Robo-advisors have grown in popularity as a hybrid option between DIY investing and using a financial advisor. Through an automated process they suggest a basket of investments based on a questionnaire about your objectives, and manage these on your behalf.
Robo-advisors are a simple, low-cost way of investing in shares, generally via ETFs and index funds rather than individual shares. Robo-advice providers include Nutmeg, Wealthify and Moneybox. We’ve reviewed the options available in our pick of the best robo-advisers.
What type of accounts can you hold shares in?
Shares can be held in a normal share account with your platform, broker or advisor, in an ISA, or you can simply hold the shares directly (such as when you buy shares in your employer via a payroll share purchase scheme).
The way you hold shares matters for tax purposes. Outside an ISA, income tax will be charged on dividend income you receive (see below), subject to a £2,000 tax-free dividend allowance (in the current tax year).
You may also be liable to pay capital gains tax on any profits you make when you sell shares. Everyone has a capital gains allowance (£12,300 for the current tax year). This is the amount of profit you can make before tax is payable. You will also have to pay stamp duty of 0.5% on the value of the transaction when you buy the shares.
Alternatively, shares can be held in an ISA, which is a tax-efficient way of holding shares as there is no income or capital gains tax to pay. Everyone has an annual ISA limit (£20,000 in the current tax year).
If you’re considering an ISA, read our pick of the best stocks and shares ISA providers.
How do you fund share purchases?
For lump sum investments, most brokers will require you to fund your share account before you are able to buy shares. This can be via a debit card or electronic transfer.
Your broker may offer the option of buying shares each month. Here, you set up a monthly direct debit (say, £25) and the broker buys shares on your behalf on a fixed day of the month. Share-dealing fees are typically lower for monthly investing.
Regular monthly investing allows you to benefit from ‘pound-cost averaging’, a stock market technique used by investors to spread out the cost of buying shares over time.
Are you looking for income or capital growth?
If you’re hoping to generate income from your investment, you’ll be interested in companies that pay healthy cash dividends to shareholders, usually on a yearly or half-yearly basis. In addition to these regular dividends, companies may pay one-off dividends, often to return cash to shareholders after the sale of an asset.
Dividend yield is a good indicator of the expected annual return from dividends. It is calculated as the dividend per share divided by the current price per share.
For example, if a company pays a dividend of 5 pence and has a share price of 100 pence, its dividend yield would be 5% (being 5 pence divided by 100 pence).
Dividends are not guaranteed. And some high-growth shares such as Tesla, Amazon and Alphabet do not pay dividends, preferring to reinvest surplus funds.
If you are looking for capital growth, you will likely favour companies in areas of the economy with potential for sustained growth over the medium to long term of three to five years or more.
This could lead you towards the technology, environmental and pharmaceutical sectors, although you would need to research the market before arriving at your decision.
How do you make a share trade?
You can trade UK shares on a real-time basis from 8 am to 4.30 pm when the London Stock Exchange is open. After logging into your account, search by company name or ‘ticker’ to select the share you want to buy.
There are different ways of buying and selling shares:
Buying and selling “live”
Each share will have a live buy and sell ‘spread’ – this is one way that brokers make money on share trades. A typical buy-sell spread might be 99 to 100 pence, meaning you would pay 100 pence to buy a share and receive 99 pence per share if you were selling.
It’s worth keeping an eye on the spread as this can vary substantially. There tends to be a larger spread on companies traded outside the FTSE 100 which, in turn, can make a dent in your returns.
You usually have the option to specify the amount you’d like to invest or the number of shares.
Many of the mainstream brokers do not typically offer the option of buying a fraction of a share. This can be an issue if you want to invest a small amount in a company with a high share price such as, say, Apple.
If this is the case, you might want to look at specialist brokers such as Trading 212 and FreeTrade.
If you’re happy with the buy price, click on the option to deal. You’ll be given a quoted price which is usually valid for around 10-20 seconds. You either confirm the order at that price, or let the quote lapse (and obtain another quote).
At the point of purchase, you will pay any share dealing fees (usually around £3 to £10), together with stamp duty.
You should receive a contract note (in your account, by email or by post) and the shares will be deposited into your account.
Setting a “buy” limit
Alternatively, you can set a “buy limit” which is an order to buy a share that is triggered if the offer price falls to, or below, the price you set. This can be useful if you don’t want to monitor share prices in real time, or if you only want to invest in a share at a particular price.
For example, you might want to buy shares in a company with a current share price of 100 pence. You could set a buy limit of 95 pence and, if the share price drops to 95 pence or lower, the specified number of shares would automatically be bought on your behalf.
There is a similar tactic for selling when a certain price is reached – see details of ‘stop loss’ below.
What happens after you place the share trade?
Once your purchase has been executed, the shares will be lodged in your account. You are likely to have three options for receiving dividend income:
- paid in cash to a nominated bank or building society account
- held as cash in your share account
- used to buy additional shares (there is usually a lower dealing fee for reinvestment purchases).
Keep an eye on the share price
Many platforms offer an app where you can track the value of your shares in real-time. Alternatively, you can set up a virtual portfolio on many financial websites that allows you to monitor price movements.
When should you sell your shares?
In general, investing in shares should be seen as a long-term investment of five years or more to limit the impact of stock market downturns.
However, if a company’s share price is falling suddenly, particularly in a rising market, you should investigate. Factors could include poor results, loss of a major customer, legal issues or management changes. It can be better to cut your losses than continue to hold the share in the hope its price recovers.
A ‘stop loss’ can be a useful tool to limit downside exposure from investing in shares. This is an order to sell shares if the price falls to, or below, a level you set.
For example, you might have bought shares in a particular company at 100 pence. If you set the stop loss at 90 pence, this would limit your downside risk to 10% of the current share price.
Is your portfolio balanced?
If a share performs well enough to represent a significant chunk (such as over 10-20%) of your portfolio, you may wish to rebalance your share holdings to a more equal split to reduce your exposure to the fortunes of one company.
Your investment objectives may also change over time, depending on whether you’re looking for capital growth, income or both.
In addition, you may seek to change your investments depending on the state of the economy and markets.
No guarantees
Investing in shares can be a good way to produce higher returns than cash-based investments. However, your investment can go down as well as up, and you may not get your money back.
Investing in a diversified portfolio of shares via a fund, investment trust or ETF, may help to reduce your exposure to an individual company underperforming. However, if you are unsure as to the right path, seek financial advice.