Interactive Investor

Guide to investing

What are Stocks and Shares?

In order to grow and develop, companies need to invest in their businesses. Stock markets provide them with an opportunity to raise money by selling parts of their businesses as shares, also known as ‘equities’. If you buy a share, you own a small part of that company and become a shareholder.

Why invest in shares?

When you invest your money in the stock market, it has the potential to grow quicker than if you leave it in a savings account, albeit with more risk.

There are two ways that you can make money from shares:

Capital growth

Capital growth basically means selling shares for more than you bought them for. The market price of shares fluctuates due to supply and demand, driven by the attractiveness of a company and its performance.

Income

Receive regular payments in the form of dividends, which are your share of company profits. These are typically paid twice a year – an interim dividend half-way through the company’s financial year and final dividend at year-end. So-called growth companies typically choose to invest most, if not all, of their spare cash back into the business rather than pay dividends.

What are the risks?

Share prices can change suddenly - for example, due to a company announcement or significant global event. Shares are therefore more suitable as a medium/long-term investment, since they will have more time to recover from any dips.

It’s a case of balancing risk and reward. For example, small start-up firms are often more risky than larger, more established companies (‘blue chips’), but might offer faster growth. It’s therefore a good idea to set goals and timescales before getting started. A diversified portfolio can also help smooth out market fluctuations.


How to buy stocks and shares

You will need to start by opening an account. From there, you can log in and choose the shares you want to buy. If you're not sure what to choose, our share tips and ideas might help you.

You can buy shares in a variety of ways:

  • Individual companies, which you’ll need to keep a close eye on.
  • Collective investments, such as funds or investment trusts, which can spread risk and offer you a more ‘hands off’ approach.
  • Exchange-Traded Funds (ETFs) are investment funds that can be traded on stock exchanges in the same way as shares. They track a broad basket of stocks, such as an index, bonds, property, currencies and a wide variety of other investment strategies.

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These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The value of your investments, and the income derived from them, may go down as well as up. If in doubt, please seek advice from a qualified investment adviser.