Guide to Stocks & Shares
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When you invest in a company you own a small piece of that company and when they do well so do you. That small piece is called a share and if you own shares you’re a shareholder.
In this guide:
Stock is simply the collective name for all the shares you own. So if you own more than one share, especially across different companies, you could call this your ‘stocks’ (Americans love using this word).
Sounds simple enough. Tell me more about shares…
If the company makes money you do too because it gives shareholders some of this money. Profit paid to shareholders is known as ‘dividends’. You’ll also make money if the company continues to be successful because its share price will rise. Why? It’s a bit like Kanye West’s soldout Yeezys, which fetched huge sums re-selling on eBay. Success of a company means more people want to be a part of it as they believe it will do well in the future and are prepared to pay more for it. Big heads up here: If the share price rises you can sell your shares for a profit.
Say the share price of Burberry is £10 and you buy 100 shares, you’ve invested £1,000 (100 times £10). If the dividend payout is 35p it means you receive £35 income (100 times 35p) which is a 3.5% return. And, if the share price rises to £12 it means the value of your investment has increased to £1,200 (100 shares times £12) a gain of £200 which is a 20% increase. Simple and even more satisfying than buying one of their handbags.
Are there any cons?
You’re in it to win it with the company and if it doesn’t make a profit you won’t be paid dividends. Also, if it under-performs less people want to own the shares and the share price is likely to go down. So, if you wanted to sell your shares you’ll get less than you paid for them. Back to Burberry, if the share price fell from £10 to £7, for example, your shares would be worth £700 (100 times £7) which is £300 less than the original £1,000 you paid.
How do I avoid this?
We’ve got two tips. Companies can go through periods of high performance and low performance, which increases and decreases the share price. If you can afford to hold shares for a minimum of five years you’re in a stronger position (but if the company does well before then you can always cash-in!). This way, if the company initially underperforms and you believe they need more time to improve the business you can afford to hang-on in there.
Second tip: Invest in more than one company in different industries and different countries. This is called creating a diverse portfolio. You’re essentially spreading your risk of losing money around as it’s unlikely all industries, countries and companies will collapse at the same time.
I want to be a shareholder!
There are thousands of companies to choose from and you can buy their shares via an online bank account or stock broker. It’s easier to buy and sell shares of a public company than a private company because their shares are available to ‘everyone’. Not sure what the difference is between public and private? Read this guide.
When a company is set-up the founders decide how many shares they want to break down their company into. If they choose 100 shares it means each one is worth 1% of the company. These shares are then divvied up to all who are involved in starting the company.
Side note: We’ve chosen 100 shares for this example but it could be 1, 20, 1,000, as many shares as the company wants! If they’re expecting to grow and have lots of shareholders in the future they would normally choose a bigger number since it makes it easier to manage. Think of Facebook for example. It has millions of shareholders around the world so they need a lot of shares to divide up their company!
Got it. That sounds simple enough
It is, but there’s more to it. As the company gets bigger more shares may be added and given to new employees or to a person who has put money into the company to help it grow (hello private investor!). With these new additions, let’s say there are 200 shares, it now means each share is worth 0.5% of the company.
So, back up please, a share is…?
A portion of a company. At the start, shares are used to divide a company amongst its founders. Then, as the company grows, shares are added to attract new people who are key to the business, like employees or investors.
I need an example
Say you set up a company selling hand-printed cashmere scarves (divine, right?!) and register the company with 100 shares. Since you’re the only founder, all 100 shares are put in your name. You are the 100% shareholder.
Now you need help marketing your scarves and you want to hire someone to do this but you can’t afford to pay a salary. Instead you agree to give this person shares. This is called giving ‘equity’ in your business. You issue 25 new shares in the name of your new head of marketing, which takes the total number of shares to 125. You still hold 100 of these but now you no longer own 100% of the business, you own 80% and your new partner owns 20%.
Your business is successful in its first year but you need more money to build a website and for advertising to boost sales. You don’t have this money so you need a ‘private investor’. An investor will give you money in exchange for shares in your business. You issue another 25 shares to the investor taking the total number of shares to 150. You own 100 of these (66%), your partner owns 25 shares (16%) and the investor owns 25 (16%).
As the business develops, this process of adding shares can carry on to produce hundreds if not thousands of shareholders. So, the company gets divided up into smaller pieces amongst more owners.
Like schools, clubs and dining rooms, add the word ‘private’ before each of these and they’re suddenly more exclusive. Same goes for a company, which is considered private when it’s – yep, you got it - privately-owned by the founders, managers or private investors. That’s why the shares of a private company aren’t available to just anyone. In fact, it’s usually an expensive and long process to buy these shares because it involves complicated agreements and boring legal fees. ‘Private’ deals are normally done when the buyer has an interest in being involved in the running of the business or they’re a large investor.
Most companies start off as private. But, when a company is large enough the shareholders may choose to invite the public to invest in their company. This makes it possible for anyone in the world (well, almost) to buy some of the shares.
Why would they want do that?
To make money. The more people are interested in buying a company’s shares the more money the company can raise to invest in growing the business.
How do they do it?
You may have heard of the London Stock Exchange (LSE) or the New York Stock Exchange (NYSE). There are many stock exchanges around the world and most countries have at least one. Shares of different companies are bought and sold on these exchanges. Previously, exchanges were a room full of men shouting at each other (Wolf of Wall Street anyone?). These days, everything is done online. For a company to become public it has to apply to a stock exchange and if accepted its shares will be listed on that exchange.
Talk me through it in real life…
In 2012 Facebook went public by listing on the NASDAQ stock exchange (a big, American, old-school exchange). At the time, you could scoop up shares at a price of $38 each but today they cost around $132!
Before going public, Facebook was a private company with a limited number of shareholders. Mark Zuckerberg, a co-founder and CEO, was the largest holder. Today it’s owned by millions of shareholders. This allowed Facebook’s founders – the original shareholders - that were around in the days when it was private, to sell some of their shares and in the process make some (ahem, A LOT OF) money. It also meant Facebook as a business could raise cash to invest in growing the company.
So how can I buy shares?
Well, you can’t go directly to the exchange. You need to open a stock broker account because only they have access to stock exchanges. There are plenty online to choose from so to help you narrow them down MOXI has selected the best investment accounts out there.
UK brokers provide access to the largest stock exchanges and ultimately the largest public companies in the world. But if you’re looking for a specific company on a specific exchange you may have to find the right broker.
Private or Public: Which to invest in?
It may sound like we're contradicting ourselves but in some cases it IS possible to invest in a private company. Enter crowdfunding. It’s a new wave of investing that makes it easy to buy shares in private companies. It’s done via online platforms – like Seedrs - which help private companies raise money from many individuals (this is where ‘the crowd’ part of crowdfunding comes in). The upside? Even if you haven’t got Mark Zuckerberg’s cash or a genius business acumen to add to the company’s caché, you can still play Dragon’s Den and buy into up-and-coming companies before they become hugely successful. Well, that's the idea. But these companies come with a risk.
Side note: If you are interested in investing in up-and-coming companies there may be seriously good tax relief up for grabs that comes with it. To help new and small businesses attract investment, the UK government have two schemes – SEIS and EIS – which provide 50% and 30% tax-back. We have a guide for this.
Got it. Tell me about the risk
When you buy shares it’s helpful to know how you can sell them in the future and cash-in on a raise in share price. However, shares of a private company can’t be sold through a stock broker (that’s only for public companies). So, you have to either wait for the company to be sold or for it to ‘go public’. These events normally don’t happen quickly so you could be invested for a very long time until they do. And, if the company doesn’t do well you won’t get any of your money back. End of story. Here’s where a public company ticks all the boxes. If you buy shares in one of them, there’s a marketplace – the exchange – where you can go to sell your shares, or in other words, there’s ‘liquidity’.
Liquidity refers to how easy it is to buy or sell shares of a company. The shares of a public company are more ‘liquid’. They’re easier to buy or sell because there’s a place provided to do that (that’s the exchange). Shares in a private company are 'less liquid' or ‘illiquid’ because while it may be possible to buy shares via crowdfunding platforms it’s not easy to sell them.
Investing in private companies can be a great opportunity to back a project you really believe in and companies that are crowdfunding will most likely benefit from your cash a lot more than a large corporation. However, MOXI tags them as high risk because a lot will fail. If you still decide to go for it you need to invest in many companies with the strategy that one will pay off for all. The good news is that the entrance fee is low so you don’t need much to get into the game. For example, the minimum on Seedrs is £10. One final word: If you can’t afford to throw this money away, then don’t get involved.
Ok, so we’ve got to the boring bit. But it’s also arguably the most important bit as you’ll need to know why your money seems to vanish as quickly as its made. Grab a latte, turn on a bright light or just open a window – we’ve summarised the most important points so you’ll really only need to stay awake for a few paragraphs.
Your stockbroker provides information and data on companies, as well as an online account to buy or sell shares and monitor your investments. It’s a great service but it doesn’t come for free. There are, unfortunately, numerous charges to be aware of (oy vey!)
Dealing Fee... Ranging from £5 - £13 charged every time you buy or sell (aka 'trade') via your online account (and higher if you trade over the phone).
Spread Fee... The difference between the sell and buy price, like a ‘middle-man’ fee. For example, say you can buy Waitrose shares at 265p (or £2.65) but at the same time you could sell them at 264p the difference between the prices is 1p. This doesn’t sound like much but if you buy 1000 shares it’s a cost of £10.
Annual Account Fee...Ranging from a zero to £50 fixed-fee or a percentage of your total investments.
Here’s the good news: If you’re planning on buying and holding shares for a few years the trading fees won’t add up to much. To make life easier, MOXI has compared the fees of the largest UK brokers and selected the best.
Don’t forget there are two ways to make money from owning shares: From the dividends and/or an increase in share price. These are taxed differently. Here's our guide to what you need to know...
Tax on profits from selling shares
If you sell shares for more than you bought them for, you make money (woohoo!). This is called a capital gain and will be taxed at 20% (or 10% for basic-rate tax payers). But, the first £11,300 of capital gains each year are tax-free (phew!). Above this you’ll pay tax depending on which income band you’re in. See below...
|Your income band||Tax rate on capital gains over £11,000|
|Basic Rate (earning £11,501 to £45,000)||10%|
|Higher Rate (earning £45,001 to £150,000)||20%|
|Additional Rate (earning over £150,000)||20%|
MOXI top tip: Capital gains tax is applied to many things not just your profit from the sale of shares. See HMRC's full list.
Tax on dividends
You won’t pay tax on the first £5,000 of dividends each year (and this will be lowered to £2,000 in April 2018). Above this you’ll pay tax depending on which income band you’re in. See below...
|Your income band||Tax rate of dividends over £5,000|
|Basic Rate (earning £11,501 to £45,000)||7.5%|
|Higher Rate (earning £45,001 to £150,000)||32.5%|
|Additional Rate (earning over £150,000)||38.1%|
MOXI top tip: Unless you’re a company owner paying dividends to yourself, you’d likely need a portfolio of £50,000 or more before you reach the ‘dividend tax zone’. If you do own a company or have a good share package with your job, speak to your accountant for the best solution.
Can I avoid paying tax once my yearly allowance is reached?
Yes. If you expect to earn more than £11,300 in capital gains or more than £5,000 in dividends each year you might want to consider a Stocks & Shares ISA. This account is available with your bank or an online broker and it lets you make investments without being taxed on the profits.