Site Search:

Investing in shares

Although the stock market suffers from ups and downs, history shows that it is the best place for your savings over the long term.

So if you are happy that you have enough accessible money to fund your short-term needs and you have money left over to save you could consider investing the surplus in the shares.

Learning about the stock market takes time and there is no guarantee that you will make money - even the most experienced investors get it wrong. So you need to think carefully about the risks involved and if you are able to lose hard-earned cash. If you don't want to take the risk of direct share investment, you could invest in a collective fund such as an investment trust, bond or OEIC. For more information, contact your financial adviser.

You may already own shares as part of company privatisations. If so, you'll know that share ownership is pretty straightfoward. But you may want to add to those shares to build up a portfolio. If you decide to take the plunge, you need to begin by understanding what shares are how the stock market works.

What are shares and why invest?

There are several different types of share you can buy, including bonds and gilts, warrants and preference shares. The most popular type is the ordinary share and these give you the opportunity to share in the success of the company you invest in.

When you buy shares - or equities - you become part-owner of that business and in return for risking your money you benefit from the potential for income and the growth of the money you invested if the business is successful.

There are more than 2000 shares listed on the main UK stock market and 700 on the Alternative Investment Market (AIM). Companies range from large high street stores such as Marks & Spencer to small, unknown companies.

As a shareholder you have the chance to vote at company meetings and have a say in how the company is run. If it does well, the value of your investments should rise, but if it does badly, your share will fall in value.

The benefits and risks of investing in shares

When you invest in a business it reinvests the money to help the business grow. If the company can improve its profits, demand for its shares will grow and the share price will rise. This type of company is known as a growth stock, which means your investment will grow, but you won1t get any income.

Some companies pay a dividend - these are known as income stocks. After deducting costs and reinvesting in the business the company will divide up what is left over and give it to the shareholders.

Companies can return money to shareholders in other ways. They may, for example buy back the shares, which will increase the value of the shares still in circulation.

What affects the share price?

• share prices are influenced by news and information such as the dealings of the directors, political events or movements in interest rates. To invest successfully you need to become sensitive to news that might affect share prices and try to anticipate what will happen in the markets as a result.

The health of the global economy has an influence on share prices because it is responsible for driving company profits. If an economy is growing, company profits improve and shares will become higher in value. If the economy is weakend, company profits will fall and share prices will go down.

According to the London Stock Exchange, you can usually assume that the stock market will anticipate moves in the economy by around six to nine months. If you want to stay ahead of the game, you will need to follow economic data closely.

For example, an anticipated rise in interest rates might affect the building trade as people may not feel comfortable taking on new mortgages. Retailers can be affected too, as people tend to spend less when interest rates are rising.

• The way investors interpret news coming out of companies also has a major influence on share prices. If a company puts out a warning that business is in decline, the shares will drop in value. Most of these announcements will be covered in the financial press, so you need to keep your eye out for news.
• Anaylst's reports can also affect the share price. If an analyst changes their recommendation from a sell to a buy, you will usually see the price of that share rise. You may find summaries of these reports on financial websites.
• Share tips in newspapers and magazines such as What Investment will also affect prices. Price moves can happen quickly so if you want to follow a recommendation, then do't hang around.
• Share prices can often fall for reason that nothing to do with the company or the economic outlook. For example, after a long rally investors may take profits from the shares that have risen, which will cause the share price to drop back. Or share prices can go flat in the summer months just because investors are on holiday.
• Investor sentiment can lead to unpredictable buying and selling. For example, in the technology boom of the late 1990s investors paid high prices for shares and ignored traditional valuation methods such as P/E ratios.

• Delicious
• Digg
• reddit
• Facebook
• StumbleUpon

Sign up for free news e-mailer

Third party contact:

House price search

Enter your postcode here to find out how much your property is worth, based on Land Registry data.