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Investing is the process of buying an asset with the aim of making a profitable ‘return’ from that purchase over a period of time.
The return might come in the form of income, such as rent (in the case of a property purchase), or from dividend payments (in the case of shares, see more below).
There may also be the potential for capital growth. For example, when the value of a property increases, or when a company’s share price rises compared with the asset’s price at the initial time of purchase.
Investment is not the same as saving, where you put money on deposit and receive interest. With an investment, the money used to make the original asset purchase is at risk if, say, a company performs badly and its share price falls in value.
Investing in stocks and shares specifically allows investors to buy and own part of a publicly listed company. Without being explicitly aware, it’s possible that you’re already a stocks and shares investor.
For example, if you’ve been auto-enrolled into a company pension scheme, there’s a likelihood that your contributions are being invested on the stock market, potentially both at home and abroad, as part of the wider retirement planning process.
Whether you’re familiar or not, here’s a closer look at some of the main points that it’s important to be aware of when it comes to investing in stocks and shares.
What are stocks and shares?
Shares are units of ownership in a company and are issued by a company to raise funds.
Although the terms ‘stocks’ and ‘shares’ are often used interchangeably, a share is an individual unit of ownership, whereas a stock denotes more general ownership. Or, put another way, an investor might ‘own stock’ in BP with a holding of 100 shares.
Only shares in publicly-traded companies are available to buy or sell on a stock exchange. In the UK, these companies have ‘plc’ or ‘public limited company’ at the end of their name, and there are nearly 2,000 companies listed on the London Stock Exchange.
Alternatively, many platforms also offer trading in shares listed on overseas stock exchanges. According to a survey by online broker Charles Schwab, two-thirds of UK investors consider the US as the most attractive market to invest in, with a choice of more than 5,000 shares on the New York and Nasdaq stock exchanges.
What are the different ways to invest in shares?
It’s possible to invest in shares directly or indirectly, as follows:
- Invest directly in individual shares: buying shares in individual companies might be an option for investors who are confident in carrying out their own research and keeping abreast of market developments. Even for people who know what they are doing, direct investing is potentially a relatively risky option especially if you keep the number of investments to one, or just a handful, of stocks.
- Invest indirectly via funds: professionally-managed investment funds pool money from investors in a basket of shares and other assets such as bonds and property. The aim of such funds is often to meet or outperform the returns achieved by a specific stock market index, such as the UK’s FTSE 100, or US S&P 500. Funds offer a wide range of options covering different assets, industrial sectors (such as energy and healthcare), and regions around the world.
There are three main types of funds to choose from:
- Investment funds: investors buy units in these investments, more formally referred to as ‘open-ended investment companies or OEICs, which rise and fall in value in line with the underlying assets. These are generally actively-managed investments where a fund manager makes a deliberate choice of the holdings held within his or her portfolio.
- Exchange-traded funds (ETFs): investors can buy shares in an ETF, the value of which will change with the underlying stock index they have been designed to track. These investments, along with ‘index’ or ‘tracker’ funds, are usually passively-managed with computer algorithms dictating the buying and selling decisions.
- Investment trusts: also known ‘close-ended investments’. These are effectively companies in which investors buy shares whose aim is to invest a portfolio of assets. They are mostly actively-managed but, unlike OEICs, the share price may differ from the underlying value of the investments.
Depending on its investment mandate, a fund can either be ‘actively’ or ‘passively’ managed:
- Actively-managed funds: include investments where the manager tries to outperform a benchmark or index through deliberate stock-picking, and typically charges a higher annual management charge as a result, anything between 0.5% and 1.5% of the value of the investment being made.
- Passively-managed funds: these span ETFs, ‘tracker’ and ‘index’ funds. They aim to copy the performance of a stock index such as the FTSE 100, and generally charge a lower annual management charge, typically between 0.1% and 0.4% of the value of the investment being made.
What are the options for share dealing?
Using a trading platform
A popular way of investing in shares is via an online broker or trading platform. There are a range of services from those provided by banks to specialist platforms such as AJ Bell and interactive investor. The UK’s financial regulator, the Financial Conduct Authority, estimates that almost 10% of UK adults hold their investments via a trading service, also known as a direct-to-consumer, or ‘DIY’, platform.
It’s worth comparing the fees applied by different providers as these can vary considerably and erode the value of a portfolio over time. We’ve compared charges, along with other features, in our pick of the best trading platforms.
Using a financial advisor
Another option is to buy and sell shares via a financial advisor or wealth manager. Several of the online platforms mentioned above also offer discretionary wealth management services for clients with higher-value portfolios (typically over £100,000).
A suitably-qualified financial advisor should be able to recommend shares based on individual investment objectives, and execute the trades on their behalf. However, this will be a higher cost option than using an online platform.
Using a robo-advisor
Robo-advisors have grown in popularity as a hybrid option between DIY investing and a financial advisor. They use computer algorithms to construct an automated portfolio tailored to an investor’s appetite for risk.
Robo-advisors are a relatively simple, low-cost way of investing in shares, generally via ETFs and index funds rather than individual shares.
What type of accounts can shares be held in?
Shares and funds can be held in a general trading or investment account, or in a tax-efficient wrapper such as an Individual Savings Account (ISA) or Self-Invested Personal Pension (SIPP).
Investments held in these accounts are free from income and capital gains tax. Given that the capital gains allowance has halved to £3,000 in the current (2024-2025) tax year, from £6,000 12 months earlier, this could help investors shield any gains from tax.
Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
How to choose which shares to invest in
Before making investment decisions, investors should conduct their own research and consult a financial advisor if they are unsure of what they are doing. The composition of an investment portfolio will depend on an individual’s personal investment objectives, including their tolerance for risk and the investing time horizon concerned.
According to the 2022 FCA Financial Lives Survey, these were the top 10 investment objectives among UK investors: