Buying shares can help you grow your money over the long term. While holding cash in the bank in a savings account is the safest option, cash gradually loses its buying power. As the years go by, costs rise and the value of your money is eroded by inflation.
Buying shares carries more risk than a cash deposit account, but it can protect your money from the worst effects of inflation and even grow into a tidy sum.
Investing in stock markets is a long-term strategy as on any given day or for any given period the value of an individual share price may go down instead of up.
A quick note on terminology: Equities is the name given to the investment class for buying and holding shares. In the UK, you hold individual shares that are collectively known as stocks. Stocks are traded on stock exchanges, such as the London Stock Exchange or the NASDAQ in the US. Collectively these exchanges are called stock markets.
US investors do not use the term ‘shares’ but call them stocks. In the UK, owners of shares are called shareholders and in the US, stockholders. You can attend and vote at the annual, or any special, shareholder (stockholder) meetings.
There are two areas of potential growth from equity investing:
The individual share price can rise taking it well above the price you paid for your shares so you can sell for a profit
Your shares can earn you dividend income. Companies pay shareholders dividends when they make profits, often twice a year or even quarterly. You can either take this cash as income or reinvest it.
Many equity investors do not own the shares direct, but invest through funds, managed by professional investors. These funds may be general or may specialise in particular markets, such as tech stocks, blue chip firms or ethical companies.
Find out more about High Interest Savings Accounts
While buying stocks and shares can give your money some protection against inflation and produce long-term growth, there are some issues to consider. Investment carries risk because when you buy shares the value can go up and down and you may not get back what you paid for.
Therefore, while investing in shares can help you grow your money, you should not take any risks with money you might need in a hurry. Make sure you have a fund of short-term cash equivalent to at least three months’ worth of household bills in an easy-access savings account.
Find out about what to do if you have debt and can’t repay your loan with our Loans Guide.
Stocks and shares are suitable for people who are prepared to put their money away for the medium to long term – for example five to ten years or longer. They are most suitable for people who can take a long-term view as stock markets often rise and fall and selling your shares after a fall can lose you a lot of money.
You need to be patient and see buying shares as a long term project. If you have a lot of debt it is better to clear your debts before buying shares. Likewise, if you are saving up for a house deposit, then a savings account is a better home for your money rather than a more risky investment in shares.
Read more about Investment Risk with our Uswitch guide so you understand how risk is measured and which level of risk is appropriate for you.
An investment is an asset that you buy that is not cash. It might be property, bonds, shares or another financial product. An investment in the stock market is when you buy shares, or funds that hold shares, in the hope that they will increase in value while you own them. An investment is a long-term prospect and you should not use money you will need in a hurry to buy an investment.
Read about the Different Types of Investments with our Uswitch guide and find out which is best for you
A share is part ownership of a company. Also known as equities, shares represent a share of ownership in a company. You own a small portion of a company and potentially share in its growth and profits.
Shares are listed on a stock exchange where they are bought and sold by investors. When you invest in shares, you're buying a small stake in a company. You become a joint-owner of the company along with all the other shareholders. You benefit from any growth in the value of the company, but you also take a hit if the company’s profits fall because the value of the shares you own may fall too.
As a shareholder you will also receive dividend income from the company’s profits. When companies announce their financial results they often issue dividends to share some of their profit among their shareholders.
When looking to buy shares, the aim is for the shares to grow in value over time. Shareholders may also benefit from a share in the profits of the company in the form of a regular payment, known as a dividend.
Shares give investors the opportunity for a steady income and capital growth, although neither of these is guaranteed. Some people buy shares for growth, others for the regular dividends. Some shares provide both growth and dividends. Neither is guaranteed.
Some investors buy shares in order to receive a regular dividend income. You can do this either by holding a number of different companies that pay dividends, or by buying a share in a fund, which aims to pay a regular income to its investors.
Find out about Top savings accounts and ISAs and how they work
Historically, over the longer term, which is considered to be at least ten years, shares have generally been a better performing asset than many other forms of investment, such as cash and bonds.
Any underlying growth in the value of the shares you own, known as the capital growth, will protect you against the effects of inflation. This is the rise in the cost of living which affects the real buying power of your money.
By keeping all of your money in cash in the bank your wealth will be affected by inflation gradually reducing its real value. This is one of the main reasons that people look to invest in stocks and shares on stock markets.
However, financial experts will always point out that past performance is not necessarily an indicator of how well an asset will perform in the future. You should aim to hold shares for the medium to long term because their value can rise and fall.
Read how to understand and assess Investment Risk with our guide.
Share prices can fluctuate suddenly, and sometimes sharply, and this is why shares are considered a higher-risk investment than cash, bonds and property. It's also the reason why they are more suitable as a longer-term investment - if you invest over a longer period you're in a better position to ride out any fluctuations in the market.
Not all share investments carry an equal risk, the level of risk depends on the company you are looking to buy shares in.
A small start-up with an innovative product will have a higher risk profile than a larger company, for instance, but the attraction of the small start-up is that it may offer the potential for higher returns. In addition, the small start-up may not pay out dividends - it may need to reinvest any profits back in the company, whereas the larger, more established corporation may offer attractive dividend payouts.
It's important to be clear about your investment goals and risk profile before buying stocks and shares. Don't use cash you will need in a hurry, as that might mean you have to sell your shares at a loss rather than hold them and hope to see them grow in value over the long term.
You should only invest money that you can afford to tuck away for five years or more. The stock market is not a good home for short-term cash – you are better off keeping your emergency savings in an easy- access deposit account.
It's important to research any companies you intend to buy shares in to ensure they offer a suitable investment opportunity for you. The value of shares may increase as company profits increase, or as a result of market expectation, but the opposite is also true. The value of a share may fall, and if a company collapses, you may lose all of your original investment.
The risk of this happening depends on the profile of the particular company you want to invest in, but there's no certainty about the outcome of an investment in shares, unlike a fixed-interest deposit where you are certain of getting your capital back and earning a fixed rate of interest
You can buy shares directly from a stockbroker or online trading platform, or you can buy shares through an investment fund. An investment fund pools your money with other investors and it also invests in the stock of many companies.
Because a fund has built-in diversification, the risk is spread and is therefore generally lower than buying shares in a single company. You can also choose a fund that matches your risk profile, but an investment of this type is not risk-free - you're still exposed to the risk of the stock market falling in value
First you will need to open an account with an online stockbroker. By using a trading platform you can choose the stocks, shares or funds that you want to buy and carry out an electronic trade. You will need to have money in your account before you can begin to trade – you can’t trade on credit.
You can search for the shares you want to buy and put in an online trade instruction. You can set various instructions, to buy at the market price, or to buy if the shares drop to a certain price, for example. You will receive an electronic contract note to confirm this has been carried out.
Normally you can only trade during the stock market opening hours, which, for the London Stock Exchange are 8am to 4.30pm Monday to Friday. You can pre-order trades outside these times, but the price will not be confirmed until the stock market reopens.
It's simple to buy and sell shares if you have a trading account. You can sell shares electronically by putting in a sell order in your online account. Again you can set an instruction to sell at the current market price or if the share price either rises to a certain value or falls below a value, for example.
Some investors still have a personal stockbroker to call in order to buy and sell shares, but this is generally a more expensive option than an online stockbroking service, because the trading and commission fees will be lower.
When buying shares you will have to pay a government tax known as Stamp Duty, which is normally equivalent to 0.5% of the transaction.
You will also have to pay commission to your broker, fund platform or online trading platform when you buy or sell shares. It pays to shop around to find a low-cost broker, especially if you are planning to trade frequently, because high charges can quickly start to eat into any profits you may make.
Stock markets are a place where investors buy and sell shares. Different countries have their own stock markets where their companies are registered. In the UK, the London Stock Exchange is the place where mainstream UK shares are traded.
Stock markets match buyers and sellers of shares and other financial products. If supply outstrips demand, for example more people want to sell their shares than buy them, then the price of the shares will fall. Sometimes stock markets rise or fall because of the sentiment of investors – that is, they are influenced by economic or political news rather than the underlying health of a company. If there is a sudden stock market fall, even good qualify profitable companies may see their shares decline in value.
Sometimes stocks get shorted. Short-selling is where an investor, or investors, borrow stocks, sell them and then try to get the share price to fall so they can buy back the borrowed shares cheaper, making a profit. In recent years, thousands of retail sellers have tried to combat short sellers by deliberately buying shorted stocks to make the price rise - these have become known as meme stocks.
You can invest by opening a trading account with an online trading platform, or you can open an Individual Savings Account (ISA) and buy shares within your ISA.
You can invest in funds, either within or outside an ISA, via a fund supermarket. This is a type of online broker which gives you access to hundreds of different funds at a low cost.
If you already have an ISA, read our guide about Why you should stick with your ISA
An ISA, known as an Individual Savings Account, is a tax-free wrapper into which you can invest your savings.
You can invest in shares by opening a Stocks and Shares ISA, and you can invest in cash with a Cash ISA. You annual ISA allowance is £20,000. This means that if you want to invest in shares you can invest up to £20,000 in the 2022 to 2023 tax year in a Stocks & Shares ISA.
Find out more about ISAs and discover the Top Ten questions about ISAs with our guide.
All underlying growth (capital growth) is tax-free within an ISA, as is any income or dividends from the shares or funds that you hold within the ISA.
When do I have to pay tax on stocks and shares?
Dividend income and tax
If you receive dividends from shares that you hold outside an ISA, you may have to pay tax. You can earn dividend income each year without paying tax, and this is known as your dividend allowance. In the 2022 to 2023 tax year the dividend allowance is £2,000.
Sale of shares and capital gains tax
If you dispose of an asset for more money than you bought it for, you are said to have made a capital gain, or in more familiar terms, a profit. The gain you make - not the amount of money you receive for the asset - is liable to capital gains tax (CGT) if you hold the asset outside an ISA.
Under the current tax rules, each adult has an annual CGT allowance of £12,300. Where you make gains of more than this within the tax year you will have to pay tax. You may be able to reduce your tax bill by claiming reliefs or deducting losses you have made on the sale of shares.
The tax rates on Capital Gains depend on whether you are a higher rate taxpayer or not. You pay tax at 20% if you are a higher rate taxpayer and have made gains above your annual CGT allowance. You pay CGT at 10% if you are a basic rate taxpayer and have exceeded your CGT allowance for the year.