What are shares?
Shares represent part-ownership of a company. It’s possible to own a stake in both publicly-listed and non-publicly listed companies, as long as they’re a Public Limited Company (PLC). As a shareholder you own a piece of the pie and the monetary value attached to it, which can be sold to other investors.
You might’ve also heard the terms stocks or equities? They’re often used interchangeably with shares, but here in the UK, shares are the most common term.
Before the introduction of the internet and online trading platforms, physical share certificates were issued as proof of ownership. These days, however, the majority of shares are held electronically and it’s now possible for investors to manage and trade their shareholdings online.
Shareholders have privileges to certain rights and benefits. Such as:
- The right to vote on company matters at Annual General Meetings (AGMs)
- Dividend payments
- Potential capital growth through share price valuation
- Corporate actions such as rights issues and share buybacks
- Shareholder perks e.g. discount cards
Types of shares
Shareholders rights and benefits can depend on the type of shares you own. Listed below are some of the most common types of shares and their characteristics.
Ordinary shares are the most common share type. They carry one voting right per share, and are entitled to any dividends should the company decide to return profits back to shareholders. Ordinary shareholders are the last in line for any pay outs if the company goes bankrupt.
As the name suggests, non-voting shares carry no right to vote and no right to attend AGMs. Non-voting shares are typically offered when the directors or founders of a company want to raise new share capital without losing their control of the company. They can also be offered as part of directors and employees reward packages.
Preference shares give shareholders a priority over ordinary shareholders when it comes to being paid company dividends. Preference shareholders receive a fixed dividend amount each year – providing the company pays one. If the company goes bust, preference shareholders have priority over ordinary shareholders to any cash returned by the company. Preference shares are non-voting shares.
Redeemable shares are shares the company can buy back in the future. It’s common for these shares to be given to employees. That way, they can be bought back by the company if the employee moves on.
Why do share prices move?
The price of a share is determined by supply and demand.
The demand element is essentially the number of people who’d like to buy the share and supply part is the number of people who want to sell. This balance between supply and demand is largely dependent on investors’ sentiment toward the future prospects of the company. Are things set to get better or worse?
If the outlook is a positive one, more investors might want to buy the shares causing the share price to rise. Likewise, if the company’s prospects are less optimistic, people might look to sell shares which will cause the price to fall.
Factors that can contribute to buyer demand for a share include, but are by no means limited to:
- The state of the economy – for example, an increase in consumer confidence can lead to extra spending, raising the prospects for businesses to become profitable.
- Sector-specific events – a mining company, for example, is open to changes in the price of the commodities it mines.
- Competition – if the company is doing better or worse than its competitors, this can either support or depress the share price. For instance, if Sainsbury’s is struggling, this could mean shoppers are going elsewhere, so Tesco could be in line to benefit.
- Company-specific factors – these could include management, strategy changes or speculation.
How do I buy shares?
While shares are most frequently traded on the stock exchange, the first opportunity investors get to buy shares is when they’re first created.
Initial Public Offerings (IPOs)
When shares in a company are issued for the first time, the ownership of the company, which may have been family owned or in private hands, is split into shares. These shares are then offered for sale to the public.
If this is happening for the first time, it’s called an ‘Initial Public Offering’ (IPO), which is also known as ‘floating’ or ‘listing’ on the stock market. Once the shares have been issued, anyone can buy and sell them.
There are many reasons why companies do this. It could be to raise money to fund future investments or so that an early investor can withdraw some of their money. Shares are issued at the start of a PLC’s life, though further shares might be issued later to raise more money.
The secondary market
Once a company has created shares, they can be bought and sold via the stock exchange. Because buying and selling shares in this way comes after the IPO stage, it’s known as the secondary market.
When you buy shares on the secondary market, you do so by using the services of a stockbroker. The vast majority of accounts are held online offering a range of ways to deal shares.
Stockbrokers usually offer three levels of service:
Execution-only is DIY investing. Investors make their own investment decisions and place instructions with a broker, often online, who will then ‘execute’ those instructions. This way of investing usually has the lowest costs.
You can find out more about Hargreaves Lansdown’s execution-only dealing services here.
An advisory service involves taking advice from a financial expert based upon your personal circumstances, attitude to investment risk and financial goals.
An adviser will suggest investments based on your investment goals and financial position.
Please note, HL’s investment advice services do not cover advice on individual share holdings.
3. Discretionary management
Discretionary management means leaving the management of your investments to the experts, with all investment decisions being made on your behalf.
Discretionary management is suitable for those with larger portfolios and limited time or expertise.
The cost of discretionary management services will depend on how much money you have to invest and the types of investments made.
Investing in shares with HL
A common misconception is that you have to have a large sum to start investing. While investing a lump sum is certainly possible, you can also regularly invest smaller sums, known as regular savings.
You can open a Hargreaves Lansdown account with as little as £25 each month by Direct Debit. Not only is this an affordable route into building an investment portfolio, but it can help to reduce risk.
By investing little and often, you have the potential to smooth out market fluctuations, as investing monthly can ‘average-out’ the price paid for shares. This means the share price going up and down can actually benefit you as you could end up purchasing more shares, but conversely it should be remembered that if the share price rises and never looks back, fewer shares are purchased via regular savings and investors could have been better served by investing a lump sum.
All investments can fall as well as rise in value, so you could get less than you invest.
Investing in individual companies isn’t right for everyone – it’s higher risk than investing in funds as your investment is dependent on the fate of that company. If the company fails, you risk losing your whole investment. If you cannot afford to lose your investment, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.
Lump sum investment
Lots of people find themselves with a lump sum at some point in their lives. This could be through inheritance, a bonus or cash from the sale of a home.
Lump sum investing doesn’t have to involve a six-figure amount, though. When investing in funds, Hargreaves Lansdown accounts have a minimum starting lump sum of just £100, and there is no set minimum for investing in shares.
Need help buying shares on your HL account?
Here’s a step-by-step video guide to buying shares with HL.