In a nutshell
The FTSE 100 is simply the biggest 100 companies in the UK you can buy shares in
Buying single shares is riskier than pooling your investments and buying a fund
Online brokers typically charge about £8-£12 a pop to buy or sell shares
What are Shares?
Shares simply let us own a small slice of a company. If they do well, so do we. If they flop, we lose money.
Also known as stocks, or equities, shares exist to enable companies to raise money to fund their activity and growth. Individuals or companies buy shares, and give that company some money in return for ownership of a small piece of that business.
The thought process behind buying a share is no more complicated than what you see on Dragon's Den. You're the dragon trying to work out if you should invest in the company or not.
But buying a single share can actually be a risky way to access the stock market. Why? Well you're putting all your eggs in one basket.
We spoke to a lady who was horrified that she bought M&S shares and they went down. "I mean, it was M&S! They're really busy!" Just because it's a big brand which looks safe and solid, doesn't mean they are making decent profits that year or tracking to plan. Unless you really know what you're doing and can track analyst updates, we wouldn't advise your average Josephine to buy individual shares.
19% of UK adults own company shares
Returns since 2003
Just like the weather, it's impossible to know what the future holds. All we can do is show what has happened in the past. Shares are a bumpier ride than cash – and not a short-term thing. Anyone who says they can guarantee you'll make money is probably a spiv. There are risks. But research tells us that shares have done better than cash 9 times out of 10 over any 10 year period since the stock markets began.
You buy and sell them on the stock market and, just like eBay, people make bids and offers. But it all happens super fast. Prices bounce up and down and at the end of the day it all comes down to sentiment – if loads of people want a slice of the action and these things are flavour of the month (think Nintendo after Pokemon Go) then prices rise as the sellers get a bit cockier. If people get turned off and the share in question is uncool, then everyone tries to offload them and the asking price falls.
Stocks and Shares vs Cash
HOW CAN I BUY SHARES?
You can either buy shares directly – through an online broker – or in a basket of investments which someone else picks for you – called a fund. A single fund will typically house about 30 – 60 shares. Funds are the same concept of buying a mixed case of wine because you don’t have time to pick individual bottles, or aren’t confident that you’ll pick good stuff. You’re outsourcing the selection of individual components to someone else.
If you buy shares directly there are trading costs. You will typically pay about £10 a pop and 0.5% stamp duty to the Government. So this can be an expensive way of buying small amounts. In comparison, many funds don’t have trading or transaction fees.
However, after the initial purchase of shares, there are no management fees as you would have with a fund (there’s nothing to manage!). You have a single company and you have tied your fortunes to theirs. If it goes up – bonza! If it goes down – ouch. For less experienced investors buying a couple of individual shares is a risky way to get exposure to the markets. Why? Well, let’s say you have £1,000 to invest and you buy one share. If that goes badly, you’re in trouble. If you take that same £1,000 and put it in a fund, that fund will have about 30-60 shares in it, mitigating the risk of any one group doing badly. Spreading your bets.
If you want to buy a parcel of shares then it's usually best to open up an account online - and use your annual tax-free ISA allowance if you can. If you really enjoy all the broker reports and the detail and charts then have a look at Interactive Investor or The Share Centre. Halifax is cheap as chips and extremely 'basic'! But cheap.
WHAT ARE MY OPTIONS?
If you’re not a confident investor, buying a single share can be risky as you’re betting heavily on the fortunes of just one company.
Typically it makes sense to have small collection of shares so you don’t have all your eggs in one basket.
You also need to think about whether you are investing for income or growth. This will affect the type of shares you buy. Many investors will actively look for shares which pay out part of their profits as a dividend. Some large shares pay 4-5% a year or higher out to their investors – for example Vodafone and Royal Dutch Shell, which are income -seeking investor favourites.
If you are investing for growth, do your research. Is it a sector you understand well and think is positioned for growth? Have you read the reports of this particular company and think that their future looks positive? Larger shares will have plenty of analyst reports and research available online for you to consider. Aj Bell Youinvest, Hargreaves Lansdown and The Share Centre have detailed research and details.
OK. WHAT'S THE SHARES FOR DUMMIES APPROACH?
Have a look at funds. A fund is simply a collection of shares which is put together for you by a fund manager. It's a bit like getting a playlist on Spotify when you want someone better informed than you to put together a collection for you.
If you own a fund and one share in it has a shocker of a year, it doesn't matter so much because you typically will have about 30-50 other shares in your one fund. So this dilutes the impact.
Alternatively, try a robo adviser. This is the easiest way possible to get a bundle of shares. You'll answer a few simple questions and they will match you to a ready-made collection of shares.
Have a look at Vanguard's low-cost LifeStrategy funds – cheap and easy way to access stock markets