How To Invest In Stocks & Shares

Capital at risk. All investments carry a varying degree of risk and it’s important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in. Where we promote an affiliate partner that provides investment products, our promotion is limited to that of their listed stocks & shares investment platform. We do not promote or encourage any other products such as contract for difference, spread betting or forex. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK. Accurate at the point of publication.

Investing in stocks and shares allows investors to buy and own part of a publicly listed company. This provides the opportunity to make a profit if the share price rises, although there is also a risk of losing money.

While interest rates have risen significantly, soaring inflation has made it challenging for savers to find inflation-beating returns. However, returns from equities (such as stocks and shares) have historically outstripped cash over time.

According to research by robo-advisor Moneyfarm, average annual returns from cash ISAs were 1.2% from 2012 to 2022. However, the average annual return rose to 7.4% for a stocks and shares ISA invested in the FTSE 100, and an even higher annual return of 12.5% for an ISA invested in global equities.

With inflation topping 11% last year in the UK, investing in stocks and shares could provide investors with an opportunity to generate a ‘real’ return, in other words, a return that beats inflation.

This quest for inflation-beating returns has prompted a rise in the popularity of investing amongst private investors. According to the recent Financial Conduct Authority (FCA) Financial Lives Survey, 41% of adults held an investment product in 2022, a rise from the 37% in 2020.

Let’s take a closer look at what investors need to know about investing in stocks and shares.

What are stocks and shares?

Shares are units of ownership in a company and are issued by a company to raise funds.

Although the terms ‘stocks’ and ‘shares’ are often used interchangeably, a share is an individual unit of ownership, whereas a stock denotes more general ownership. Or, put another way, an investor might ‘own stock’ in Barclays with a holding of 100 shares.

Only shares in publicly-traded companies are available to buy or sell on a stock exchange. In the UK, these companies have ‘plc’ or ‘public limited company’ at the end of their name and there are over 1,880 companies listed on the London Stock Exchange for investors to choose from.

Alternatively, many platforms also offer trading in shares listed on overseas stock exchanges. According to a recent survey by broker Charles Schwab, two-thirds of UK investors currently rank the US as the most attractive market to invest in, with the choice of more than 5,000 shares on the Nasdaq and New York stock exchanges.

What are the different ways to invest in shares?

It’s possible to invest in shares directly or indirectly, as follows:

  • Invest directly in individual shares: buying shares in individual companies is an option if investors are confident in carrying out their own research and keeping abreast of market developments. However, it’s a relatively risky option given it puts ‘all the eggs in one basket’.
  • Invest indirectly via funds: professionally-managed funds pool money from investors to invest in a basket of shares and other assets such as bonds and property. There’s a wide range of options covering different assets, sectors and geographies.
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There are three main types of funds to choose from:

  • Open-ended investment companies (OEICs): investors can buy units in OEICs (often just referred to as ‘funds’) which rise and fall in value in line with the underlying assets. These are generally actively-managed.
  • Exchange-traded funds (ETFs): investors can buy shares in an ETF (often called ‘tracker’ or ‘index’ funds), the value of which will change with the underlying index they track. These are usually passively-managed.
  • Investment trusts: also known ‘close-ended investments’, investors can also buy shares in an investment trust. They are mostly actively-managed but, unlike OEICs, the share price may differ from the underlying value of the investments.

Depending on its investment mandate, a fund is either ‘active’ or ‘passively’ managed:

  • Actively-managed funds: the fund manager will try to outperform a benchmark or index through active stock-picking, and typically charges a higher annual management charge of 0.5% to 1.0%.
  • Passively-managed funds: also known as ‘tracker’ or ‘index’ funds, these aim to replicate an index such as the FTSE 100, and generally charge a lower annual management charge of 0.1% to 0.2%.

What are the options for share dealing?

Using a trading platform

A popular way of investing in shares is via a trading platform. There are a range of options from banks to investment providers such as AJ Bell, interactive investor and Fidelity. The FCA reports that almost 10% of UK adults hold their investments on a direct-to-consumer, or ‘DIY’ platform.

It’s worth comparing the fees charged by different providers as these can vary considerably and erode the value of a portfolio over time. We’ve compared fees, along with other features, in our pick of the best trading platforms.

Using a financial advisor

Another option is to buy and sell shares via a financial advisor or wealth manager. Many of the online platforms also offer discretionary wealth management services for clients with higher-value portfolios (typically over £100,000).

A suitably-qualified financial advisor should be able to recommend shares based on individual investment objectives, and execute the trades on their behalf. However, this will be a higher cost option than using an online platform.

Using a robo-advisor

Robo-advisors have grown in popularity as a hybrid option between DIY investing and a financial advisor. They use computer algorithms to construct an automated portfolio tailored to an investor’s appetite for risk.

Robo-advisors are a simple, low-cost way of investing in shares, generally via ETFs and index funds rather than individual shares. We’ve reviewed the options available in our pick of the best robo-advisers.

What type of accounts can shares be held in?

Shares and funds can be held in a general trading or investment account, or in a tax-efficient wrapper such as an Individual Savings Account (ISA) or Self-Invested Personal Pension (SIPP).

Investments held in these accounts are free from income and capital gains tax. Given that the capital gains allowance has halved to £6,000 in the current (2023-2024) tax year and will halve again next year, this could help investors shield any gains from tax.

To help investors compare the options on offer, we’ve produced a guide to our pick of the best ISA providers and SIPP providers.

How to choose which shares to invest in

Before making investment decisions, investors should conduct their own research and consult a financial advisor if needed. The composition of an investment portfolio will depend on an individual’s personal investment objectives, including their tolerance for risk and time horizon.

According to the recent FCA Financial Lives Survey, these were the top 10 investment objectives among UK investors in 2023:

Perhaps unsurprisingly, 18-34 year olds were most likely to invest in order to build a pot for a major expense or to supplement their income. Whereas 55-64 years old tended to invest to generate an income in retirement, and over 65 year olds to cover the cost of long-term care or to leave an inheritance.

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For investors considering buying shares, we produce a monthly guide to the most bought and sold shares by UK investors. We’ve also produced guides to our pick of the best stocks to buy now, best stocks to buy and hold and best artificial intelligence stocks.

We’ve also produced a number of guides to funds, including our pick of the best UK funds, best global funds and best funds when interest rates rise.

Choosing between income and capital growth

The choice of shares will also depend on whether investors are primarily looking for returns from capital growth or income, but what’s the difference?

One of the main aims of investing is to make a profit by selling shares for a higher price than the purchase price, also known as a capital gain (or growth). Alternatively, investors may want a regular income, usually in the form of dividends paid to shareholders.

On the whole, there’s a trade-off between capital growth and income. Typically, the higher-dividend paying shares (often found in the commodity and financial sectors) deliver less in the way of capital growth than the lower-dividend paying shares (such as the large US technology companies).

For income-seeking investors, we’ve produced a guide to our pick of the best dividend-paying shares and exchange-traded funds (ETFs). For more growth-oriented investors, we’ve also taken a look at our pick of the best growth stocks and technology stocks.

How to set a budget for stock market investments

Before setting a budget for investing, most financial advisors recommend that individuals pay off any debt, such as credit cards or personal loans at higher interest rates. It’s also important to put aside enough money in savings accounts to cover at least three to six months of expenses, in case of unexpected costs.

In terms of investing in the stock market, it’s generally recommended that the minimum time frame is at least five years, which gives time for stock markets to recover from any downturns.

The next step is to consider individual investment objectives and attitude to risk. Risk-averse investors may prefer to put more money in lower-risk options (such as savings accounts) and a lower amount in higher-risk stock market investments.

With any stock market investment, there is the risk of losing some (or all) of the money invested so individuals should only invest money that they are willing to lose if the worst happens.

How can investors buy and sell shares?

Step 1: Open a trading account

Accounts can usually be opened online and in as little as 10 minutes. Applicants will need to provide some basic information, such as their bank account and National Insurance details.

Electronic checks may be carried out during the initial application process, although applicants may have to supply further documents to support the verification of their identity.

Step 2: Add funds to the account

Once the account is open, the next step is to fund the account via a debit card or electronic bank transfer.

For individual shares, investors will generally need enough money to buy at least one share. However, some trading platforms offer fractional shares where investors can buy less than one share. This is particularly useful for some of the US companies with high share prices.

For funds, investors can buy a fraction of a unit, but some platforms may have a minimum lump sum investment of £50 to £100 for funds. This can be beneficial if share prices fall as investors pay the average cost over a period of time.

Step 3: Place the trade

Shares on the London Stock Exchange can be traded from 8 am to 4.30 pm on weekdays. After logging into the account, the next step is to search for the name (or ticker) of the fund or company.

At this point, the investor will be given a live quote which they can choose to accept (or let lapse). There is typically the option to either choose the number of shares to buy, or the value of the investment to be made.

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Most companies have a ‘buy-sell’ spread, which is effectively the profit that the provider will make on the transaction, and varies across different shares.

For example, the price may be listed as 98-100 pence for a company. This means that investors will pay 100 pence to buy a share and receive 98 pence to sell a share.

At the point of purchase, the investor will pay any share trading fees (please see the FAQs for further details) and Stamp Duty Reserve Tax (SDRT) of 0.5% on UK shares.

The process for buying (OEIC) funds is slightly different as they are forward, not live, priced. This means that investors submit their dealing instructions but don’t know the price until after the trade has been executed.

Step 4: Monitor the portfolio

Once the purchase has been executed, the shares or funds will be lodged in the account. Most trading platforms provide apps to allow investors to review the performance of their portfolios in real-time.

If the company or fund pays dividends, these are typically held as cash within the portfolio, or may be automatically reinvested to buy additional shares.

Step 5: Selling shares

The process for selling shares is identical to buying, with investors given a live quote that they can choose to accept or let lapse.

It is usually possible to sell a portion of a holding, for example, 40% of the shares held. The proceeds, net of any trading fees, will be credited to the account after the sale has been executed.

What fees are charged on buying shares?

There are various types of fees charged by providers when buying and selling shares:

Share trading fee

This is a flat fee charged by the provider each time an investor buys or sells shares. Some providers charge no share trading fee, while others typically charge between £5 to £10 per trade. Providers may also charge lower trading fees for regular traders, based on trading a minimum number of shares a month or quarter.

Trading fees for funds vary from zero to the same fee as for trading in shares.

Platform fee

This is an annual fee charged for holding the shares and funds in an account. Some providers charge no fee, others charge a flat fee and some charge a percentage, typically 0.25% to 0.45% of the value of the portfolio.

These fees will usually be taken out of any cash held on the account or fees can be paid directly by debit card. However, the provider is likely to sell a proportion of investments held in the account as a last resort if fees remain unpaid.

It’s also worth looking at the types of investments that incur a platform fee as some providers charge for holding funds, but not for shares. When a platform fee is charged for holding shares, this may be subject to a maximum cap per year.

There are two types of percentage-based platform fees:

  • Tiered fee: this is the most usual type of platform fee whereby different rates are charged on different ‘slices’ of the portfolio. For example, for a portfolio worth £300,000, a 0.45% fee might be charged on the first £250,000, then 0.25% on the next £50,000.
  • Non-tiered fee: a few providers charges a non-tiered fee, whereby the same fee is charged across the whole portfolio. For example, for a portfolio worth £300,000, a 0.2% fee might be charged on the whole £300,000.

Foreign exchange fee

If shares are denominated in a currency other than pounds sterling, the majority of providers charge a foreign exchange fee. This is also referred to as a foreign currency conversion fee and typically varies from 0.5% to 1.5%. Some providers also charge a higher trading fee for non-UK shares and funds.

A small number of providers allow investors to hold their funds in a foreign currency, which enables them to convert it once and use this ‘pot’ for buying and selling shares in the same currency.

Other fees

Providers may charge other fees, such as inactivity fees and withdrawal fees (for accounts held in a currency other than sterling) and fees for trading by telephone rather than online.