While many of us are familiar with the term ‘stocks and shares’, not all of us understand how trading stocks and shares works.
Shares, synonymous with equities, represent part ownership of a PLC (Public Limited Company). This means that when you purchase a share, you are becoming a joint owner of the company alongside other shareholders. Even though you only own a small part of the company, you will be invited to offer your input in a number of important company decisions.
In order to earn a return on your investment, you should aim to purchase shares that will increase in value over time so that you can later sell them for a profit. In addition to earning money when you sell a share that has increased in value, shares also pay out dividends to shareholders, allowing for a steady income.
How to Start
In order to start buying and selling shares, you will usually have to purchase them via a trader or a stockbroker. Alternatively, you may wish to purchase shares through an investment fund. Investment funds club your money together with funds of other investors in order to invest in a number of diverse markets.
The Risks Associated With Stocks and Shares
While historically shares have proven themselves to be a better perming asset than property and cash, they are not devoid of risk. Indeed, they are in fact more financially risky than other investments.
One of the major risks associated with this type of investment is that prices can vary suddenly. In addition, price variations can be very sharp. While this can affect the value of your share during the short-term many investors invest for a long period of time, allowing them to ride out any fluctuations.
In addition, the risk associated with a share varies considerably from company-to-company. For example a well-established company is likely to be less risky than an innovative, new company. However, investing in a new company can potentially lead to higher returns.
Shares and Tax
If you earn money through dividends, you will need to pay income tax. The amount that you pay varies according to which tax bracket you fall into.
If you sell a share for more than what you originally paid for it, you will be charged capital gains tax for the amount of profit you made on the sale.
Factors to Take into Account
- As with any type of investment, it is important that you decide how much you want to invest and for how long. Having clear limits is important.
- When buying shares it is important that you compare the fees charged by different companies. Indeed, if you are not careful high fees can eat away at your returns.
- Most importantly, you need to remember that shares are not risk-free. So do not invest money that you cannot afford to lose.