Today, more than ten million people own shares, while many more belong to a pension scheme, have an insurance policy, an Isa, unit trust or another form of collective savings invested in shares traded on the London markets.
What are the pros and cons?
Compared to saving with a bank or building society, investing in stocks and shares carries an element of risk because prices can go down as well as up. There is, however, the possibility of greater rewards. Funds invested in equities in the long term (ten or more years) have outperformed regular savings accounts.
Before investing in stocks and shares you must be clear about your own financial position and what you hope to achieve with your investments. Your regular financial commitments should be covered and provision made for unexpected expenses.
Having done this, you are ready to consider investing the surplus in stocks and shares.
What are shares?
Shares, as the name says, are shares in a limited company. Each shareholder is a part-owner of the company in which they have bought shares.
Shares in UK companies are traded on the London Stock Exchange. Investors can buy and sell their shares whenever they wish.
Shares, also called equities, are issued by companies on incorporation and later perhaps when they are building up a business. The original shareholders might still own them, or they may have sold them to someone else through the stock market.
If the company makes a profit, the shareholders normally have some of it passed to them. This is paid in the form of dividends.
The amount paid in dividends varies year by year, depending on how profitable the company has been and how much money the directors want to keep in reserve for future expansion.
There are different ways in which you can participate in the stock market:
Why should I buy shares?
Almost everyone in the UK has an interest in shares, whether they realise it or not.
More than 10m people own shares directly. But many millions more have an indirect stake in the stock market through pension schemes, life insurance policies, personal equity plans and unit trusts. All of these invest in shares traded on the stock market.
Investing in shares is different from saving in a bank or building society deposit account. There is more risk - but there is the opportunity for greater reward over the longer term.
With deposit accounts, you earn interest on your capital. When you cash in, you get back exactly the same amount that you first deposited (plus the interest it has earned).
With shares, you may receive dividends but when you sell them, you might get back more than you started with. That is your reward for taking a risk.
But, because shares can go up as well as down in value, it is important to understand that taking a risk means you might get back less than you invested at the outset. You can spread your risk by investing in different shares or a collective vehicle such as a unit trust.
You should remember that saving through the stock market should be seen as a long-term investment. Evidence shows that money invested in shares over the long term (ten or more years) almost always outperforms savings accounts.
How to buy and sell shares
You can buy shares when a company first comes to market - that is, at flotation or privatisation; or you can buy them through the stock market once they are in circulation and being traded.
Companies which are about to issue shares often advertise the fact in a daily newspaper. If you decide to buy these shares, you can clip the coupon printed in the advertisement or ask the company for a prospectus. Fill out the application form and post this off with your cheque. There is nothing more to pay. Or you can go to a stockbroker who will buy them for you.
Most share dealing, though, involves shares in what is called the secondary market. This is where existing shareholders sell and new investors buy.
Today, share-buying is easy. You can buy and sell shares by making contact with a stockbroker, bank or financial adviser, either in person or over the telephone.
How to decide which shares to buy
A stockbroker or financial adviser can help you choose which shares to buy, and advise on the best time to sell. You need to decide:
How to find a stockbroker
Stockbrokers today have a range of services tailored for the needs of the growing numbers of small shareholders. Some operate from City offices, some from High Street branches, some only by telephone. Most large banks and building societies offer share dealing services as well.
Before choosing a stockbroker, contact several of them and ask how much they will charge. They expect you to compare their fees with those of other brokers.
There are three levels of service you can take:
You can get a list of stockbrokers:
What does a stockbroker do?
When you buy
Once you instruct a broker to buy shares, he/she telephones a market maker - the person who actually gets hold of the shares for you.
Your broker will buy them at the best price available at the time.
A few days later, you will receive a contract note. This shows the details of the transaction. Your broker will indicate when he/she needs to have your money to pay for the shares.
When you sell
Immediately you give your broker an order to sell, he/she again negotiates the best possible price.
A few days later, you receive a contract note confirming the deal.
If you hold the share certificate, you must send this to your broker in accordance with his/her instructions.
If your shares are held in a nominee account, you will not have a share certificate to worry about.
Alternatively...
You will find a number of financial advisers in your local area - including your High Street bank - who should be able to give you more assistance and advice on your best options.
How do you hold the shares?
Once you have bought your shares, there are two ways to hold them: as a certificate or electronically. Your stockbroker can advise which option suits you better.
Traditionally shares have been held in paper form known as certificates. A share certificate is a piece of paper which is evidence that you are the owner of the shares. Your name will appear on the company's share register and this entitles you to receive direct all the benefits of share ownership including dividends, the right to vote at a company's annual meeting and to receive company reports twice a year.
If you decide to sell your shares you will normally need to deliver the certificate to the broker in time for the transaction to be completed.
Today you can choose to hold your shares as an electronic record, receiving a statement from time to time. This is similar to your bank statement, which shows your cash balance as held by the bank.
If you choose to hold your shares electronically they are placed in a nominee account. These accounts are often run by stockbrokers who administer the shareholding on your behalf. You do not have a certificate to keep safe or deliver to your broker in time for the transaction to be completed. You remain the real, or beneficial, owner of the shares and you receive the dividends, even though the shares are registered in the name of the nominee.
Many nominees can also provide you with copies of the company reports and with the right to vote at general meetings, but this may be an additional service.
You should check in advance what services are included and whether there is an additional charge.
All shares in Personal Equity Plans (Peps) are held in nominee accounts but otherwise nominee accounts are not compulsory.
When you have bought or sold the shares, your transaction is completed (or settled) electronically through a service known as CREST. This system links banks, stockbrokers and company registrars.
CREST also provides an alternative electronic service for investors who buy and sell shares regularly. You can become a sponsored member of CREST which allows you to hold shares electronically, and still have them registered in your name to take advantage of shareholders' rights. Your broker will advise you on whether this option is suitable for you.
How much does it cost to buy shares?
Stockbroking costs vary according to the level of service you use. You should select the service that meets your needs and level of experience, which may not necessarily be the cheapest. Execution-only will generally be the cheapest service. You will pay more for advice or for handing over the management of your investments to a stockbroker.
Before you start dealing in shares, you need to check how much you will pay the stockbroker for their services. Stockbrokers expect you to compare their charges and shop around for the right service. Charges will, of course, differ according to whether you wish to invest directly or indirectly.
The most important figure to ask about is the minimum commission you will be charged. You should also ask whether there are any other charges for their services.
Ask if there are any ongoing costs, other than dealing commission, each time you buy or sell.
You should note that you will pay a tax, known as stamp duty, when you buy shares but not when you sell. This is currently 0.5 per cent of the price of the shares (ie 5p for every �10).
The way you choose to hold your shares will also vary in cost. If you decide to hold a certificate, there may be an additional charge as it will be necessary to transfer it to you or the new owner.
How to keep track of your shares
Once you have bought shares, you can put them away for the long term. Or you can keep an eye on how the price is moving.
Details of share prices are published in most national newspapers every day.
They show the highest price the shares have reached that year, the lowest, where they stood yesterday, and how many pence they moved up or down from the day before.
The newspapers' financial pages will comment on companies that are in the news - perhaps because they have published their profit figures, or they are subject to a takeover bid, or they have opened a new factory.
Every piece of information about your company helps you build a clear picture of how it is faring.
Also there are several specialist magazines aimed at private investors.
As a shareholder, and therefore part-owner, of a business, you can contact the company secretary if you want information.
Or your stockbroker might keep you informed through a regular newsletter.
Stock market indices
Many investors like to keep track of how companies are performing in general.
When a company's share price moves up or down, this shows them whether or not it is currently well thought of.
Movements in share prices are measured by various indices. These provide a benchmark against which you can compare the performance of your shareholdings.
The most quoted index is the FTSE 100. The full name is Financial Times Stock Exchange 100 but it is usually known as the Footsie. It comprises the 100 largest companies on the Stock Exchange. It is updated minute by minute during trading hours.
The index for all companies on the Stock Exchange is the FTSE Actuaries All-Share.
The FT Ordinary Share Index comprises the top 30 companies.
The full list of indices for UK and European shares:
There are also three indices calculated to help private investors track the performance of their investment portfolios:
The indices are made up of three broad types of asset: UK equities, foreign equities, bonds and gilts.
Shares and tax
Income tax
When you receive your dividend cheque, income tax has already been deducted by the company at basic rate.
Basic-rate taxpayers have nothing more to pay.
Higher-rate taxpayers have to pay the difference between basic and higher rate at the end of the tax year.
Non-taxpayers can reclaim the tax deducted through their local tax office.
Capital gains tax
You make a capital gain when you sell shares at a higher price than you paid. If you sell at a lower price, you make a loss.
You have to pay capital gains tax when your total gains, minus losses, in a tax year exceed a certain figure set down by the government. You can deduct an amount to allow for inflation.Personal equity plans
If you put your shares in a personal equity plan, there is no income tax or capital gains tax to pay at all.
Tax is a very complex subject - you should always speak to a properly qualified tax adviser to make sure you have a complete picture of the tax rules.
This Q&A session was provided by the London Stock Exchange. Click here to visit the LSE's website
