Beginner’s Guide to Stocks and Shares

If you have some spare money to invest, shares often seem like a good starting point. They’re among the more straightforward financial assets, though you do need to take into account risks, administrative costs and taxes. The most important thing to understand about shares is that all the money you put in is at risk. You could lose some of your money if the price has fallen when you choose to sell. You could lose all of your money if the company goes into liquidation.

Buy Online

The simplest way to buy shares is through one of many online platforms that take care of the administrative and legal work for you, in return for fees. The fee structure varies across platforms but can include a regular charge for holding an account, a fixed or percentage fee each time you buy and sell, and in some cases an ‘inactivity’ fee. Which fee structure works best for you may depend on how often you intend to buy and sell shares. Make sure any platform you use is authorised and regulated by the Financial Conduct Authority.

Dividends

One thing that’s easy to forget is that shareholders may get regular payments from the company known as dividends. These often depend on the company’s profits and are a way to encourage people to buy and hold shares, i.e. to keep them for longer rather than sell. If you compare the dividend payments across a year to the money you paid for the share, it can be a favourable ‘interest rate’ on your investment. You do need to check why a company is paying big dividends, however. Sometimes it’s because profits are rising and it has more cash to spare. Sometimes, though, it’s because revenue and profits are falling and the business offers bigger dividends to try to attract investors who’d otherwise be put off.

Tax Implications

Buying and selling shares does have tax implications. Each time you buy shares through an online platform in the UK, you have to pay 0.5% of the purchase price as stamp duty. If you make more than £12,300 profit in a year from selling shares, you’ll need to pay capital gains tax of either 10% or 20% of the profit above the £12,300, depending on your other income. The first £2,000 you receive in dividends each year is tax free. After that you’ll pay a special dividend tax of 7.5%, 32.5% or 38.1%, depending on whether you pay the basic rate, higher rate or additional rate for income tax.

Stocks & Shares ISA

You can reduce the tax costs by investing through a ‘stocks and shares ISA’. The money you put into this counts towards the annual £20,000 limit for all money you put into ISAs. You don’t have to pay capital gains tax or dividend tax for shares that you hold (or sell) through a stocks and shares ISA. How much benefit this brings will depend on your overall financial position.

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