Shares
Shares are ‘what they say on the tin’, a share of a company.
When companies want to raise some money one option is to sell off a portion of the company to the public. They do this by issuing shares that represent a holding (or part ownership) in the company. Once shares are issued they can be traded on an exchange, such as the London Stock Exchange, where people can buy and sell them.
There are lots of different ways in which you can invest in shares – via unit trusts, investment trusts, hedge funds, exchange traded funds (ETFs) or even directly via online trading sites such as ours through our Free Range Portfolio service.
In buying individual shares you have an immediate interest in the success of that company.
If the company performs well it becomes more attractive to purchase and the share price will rise allowing you to make a profit if you sell the shares.
The more profit the company itself makes the more of that profit it can allocate to its shareholders in the form of dividends (the proportion of income paid out that you are entitled to based on the number of shares you hold).
The key factor with shares as an investment is that they are risky. Generally the larger the company the lower the risk, as these are seen to be stable, long standing, financially strong organisations, for example those in the FTSE 100. On the other hand, the smaller and riskier the company then the higher the potential reward.
If at this point you’re thinking Northern Rock was in the FTSE 100 then you’ll realise what we mean when we say they are risky.
The reason for this is that investing in the success of an individual company is putting your eggs in one basket. For relatively small portfolios, unless you can afford some play money and take some risks, it makes sense to use collective investment schemes to spread your risk and increase your chances of success.
If you are thinking of investing in one or a small number of shares directly make sure you:
- Only invest in what you understand
- Can afford to lose the money you invest
- Are investing as part of a sensible overall investment plan
- Do as much research as possible on the company you want to invest in
