Shares

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Shares

The shareholders of a company are its owners and share in the profits of the company. Your shares also give you the right to have a say in how the company is run (by exercising your voting rights at shareholder meetings). Minimum investment: No set minimum, but dealing charges mean that buying less than, say, £1,000-£1,500 worth of a company's shares at a time is usually uneconomical.

Type of return This can come in two forms. An established company usually pays dividends every six months (with some companies, every three months) to its shareholders. The amount paid is variable, although most companies are reluctant to reduce or miss a dividend payment. Companies still establishing themselves or those facing difficulties might not pay any dividends at all. Shareholders might be quite happy to accept this, if they can see profits being ploughed back into the growth of the company, giving the promise of future rewards. As shares are traded on the stock market, you also stand to make a capital gain or loss if you sell your shares, depending on the prices at which you bought and sold them.

Tax treatment Dividends count as income for tax purposes. They are paid after deduction of tax at a special rate of 10%, and you receive a tax voucher along with the dividend cheque showing how much tax has been deducted. Both starting-rate and basic-rate taxpayers have no further tax to pay. Non-taxpayers cannot reclaim the tax. Higher-rate taxpayers have a further tax to pay, bringing their total tax rate on dividends to 32.5%.

Capital gains on shares are taxable, though you can set your capital gains tax allowances against them. How long you invest for No set period, but this is not the home for money you might need back at a set time or at short notice, when share prices might be low. Charges For the purchase of newly issued shares, no charges.

For other shares and stockbroker's commission see the table titles "Stockbrokers' commissions when you invest in shares. This gives an indication of the amount you might pay. Stamp duty of 0.5% on purchases but not sales. Spread between the prices at which you buy and sell: say, 1.5% for large, well-established companies, but, a much higher percentage for small companies whose shares are not often traded. In addition, on a purchase or sale of £10,000 or more, you have to pay the PTM levy of £2, which helps fund the City's Panel on Takeovers and Mergers. Some brokers also make a separate 'compliance charge', which goes towards the cost of meeting the regulatory rules for the industry.

You may be encouraged to hold your shares in electronic form through your broker's 'nominee account'. Using a nominee account might be free or there could be charges; e.g., on a regular basis or each time the broker hands over dividends. With nominee accounts, watch out too for extra charges if you want to receive company reports and accounts or to attend a company's AGM.

As an alternative to using a nominee account, you could become a 'sponsored member' of Crest, in which case you directly hold your electronic shares. You have to be sponsored by a broker, who usually charges. You do not have to hold shares electronically, but, if you choose to hang on to paper share certificates, you will probably face higher charges when you sell or buy. Also, you will probably need to deal under a slower system than normal or else face fines if your money or certificates do not reach your broker in time.

Capital is at risk, because the value of your shares can fall as well as rise. In addition, there is the risk that a company you invest in goes out of business, in which case you would lose all your capital. On the inflation front, shares offer a good chance of keeping abreast of, or bettering, inflation over the long term - but no guarantee of doing so. Income can vary. You can reduce risk by investing in shares of different companies from different sectors. Risk rating: from around seven for shares in a single, sound, well-established company to ten for a high-risk venture (see chart).

Warning Beware of stock market 'bubbles'. Throughout the centuries, there have been periods when investors get overly enthusiastic about a particular company or sector. One of the most notorious incidents was the South Sea Bubble in the 1700s; one of the most recent has been the passion for 'dot.com.shares'. If you get in on a bubble early and sell your shares before the bubble bursts, you can make a real killing. However, don't be the last one left holding the shares when their price suddenly plunges back to reality. Chasing stock market bubbles must be viewed as a high-risk 'fun investment', not a tool for financial planning.

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