Investing in shares: The Basics
Investing in shares is a long game and is not for the faint hearted; you must be prepared to lock your money away for a minimum of 5 years or so, as you’ll probably see your funds fall in value as well as rise overtime.
Shares (also known as equities) are one of the main asset classes along with cash, fixed income and real estate. They are like tiny fractions that make up a company’s value.
How to buy and sell shares
When a company offers shares to the public for the first time, you can apply for the shares directly from that firm. This is known as initial public offering (IPO).
However, shares are usually bought through a stockbroker, an online platform or a financial services firm. Firms will allow you to buy and sell shares online simply by filling out an online form, which is a lot cheaper. You can also buy and sell shares over phone.
Top Investment Platforms:
- - AJ Bell YouInvest
- - Barclays Direct Investing
- - Charles Stanley Direct
- - Fidelity
- - Hargreaves Lansdown
Invest for income
If you own shares, you may get income in the form of dividends. Dividends are a portion of the profits made by the company that sold the shares you’ve invested.
Dividends from shares can deliver either a regular income, or be reinvested and compounded to boost your returns. Income from investments can be helpful to fund retirement or spending.
In April 2016, a new tax-free Dividend Allowance of £5,000 a year was introduced for all taxpayers. Note that this tax-free allowance will fall to £2,000 in April 2018.
Dividends above this level are taxed at:
- - 7.5% (for basic rate taxpayers)
- - 32.5% (for higher rate taxpayers)
- - 38.1% (for additional rate taxpayers)
Don’t put all your eggs in one basket
Investing all your hard-earned cash into shares in one company is very risky. If the company tanks you can lose it all. The idea is to diversify, which involves dividing up your lump sum across a portfolio and investing portions into varied companies.
Think about investing through a fund
Picking individual shares is not easy. You need to make sure you research the companies you invest in, learn to understand how to read their balance sheets and financial statements and to not get distracted by what the hot tips of the moments are. This results into buying too few different companies, which is a huge mistake.
A simple way to avoid these mistakes is to invest in either active funds or investment trusts, where a fund manager chooses a basket of shares for you, or in a passive tracker funds, which follow an index up or down.
Make sure to pick the right fund manager. Many consistently fail to beat their benchmark and still levy their fees, it is only a handful that actually outperform year after year.
Spend time choosing the right share
There are thousands of investment funds, so you need to do your homework to pick one that meets your financial objective and suits your risk appetite. Funds invest in different sectors such as technology and property, categorised by geography.
Analyse the performance of a fund over a period of time, 5 – 8 years. Below are the best equity funds to buy:
- - ICICI Pru Top Fund
- - Kotak Select Focus Fund – Regular
- - SBI Blue Chip Fund
- - Birla Sun Life Equity Fund
- - Birla SL India GenNext
- - Principal Emerging Bluechip
Invest regularly to minimise losses
Improve your chances of maximising your returns by slowly feeding your money into a fund on a regular basis, probably once a month.
To find out other ways to invest, check out this blog post