Why invest in shares? The advantages and risks of stock investing

Why invest in stocks?

When you invest in stocks, you buy a share of ownership in a company. If the company grows, the price of your shares rises. Many companies also pay dividends, distributing a portion of their profits as regular income. Over the long term, equities have delivered stronger returns than most other mainstream asset classes.

The S&P 500 has delivered an average annualised total return of approximately 10.4% over the past 30 years to end of 2025. The FTSE 100 has delivered approximately 7-8% per year including dividends reinvested over the same period. Neither is guaranteed to repeat this performance, but both demonstrate the long-term wealth-building potential of equity investing for those who stay invested through market cycles.

Advantages of investing in stocks

Long-term growth potential

No other mainstream asset class has matched equities for long-term capital growth over the past century. Inflation erodes the real value of cash savings; property requires significant capital and management costs; bonds provide income but limited growth. Stocks offer the most direct route to participating in the growth of the global economy.

Dividend income

Many established companies pay regular dividends to shareholders, providing an income stream alongside potential capital growth. The FTSE 100 has historically offered a dividend yield of 3-4%, materially higher than equivalent US indices. Dividend income reinvested within a stocks and shares ISA compounds free from UK tax over time.

Diversification

A well-constructed stock portfolio provides exposure to multiple sectors, geographies and currencies, reducing dependence on any single economy or company. A single global equity ETF gives access to thousands of companies across dozens of countries for an annual fee of as little as 0.07%. Investors can also diversify across asset classes, adding gold, commodities, REITs and other assets alongside equities to reduce overall portfolio volatility.

Tax efficiency

UK investors can shelter all gains and dividend income from equities in a stocks and shares ISA permanently, within the £20,000 annual allowance. No capital gains tax or income tax applies on returns within the ISA wrapper. A SIPP provides upfront tax relief of up to 45% on contributions for longer-term retirement savings.

Liquidity

Listed shares can be bought and sold in seconds during market hours, providing a level of liquidity that property, private equity and many other investments cannot match. If your circumstances change or you need to access capital, you are not locked in.

Accessibility

The cost of investing in stocks has fallen dramatically. We offer £0 dealing commission on US stocks and competitive rates on UK and international shares, with access to over 18,000 markets. A meaningful stock market exposure is accessible to anyone with even a small starting amount.

Risks of investing in stocks

Market volatility

Stock prices can fall sharply in the short term. The S&P 500 experienced a significant intra-year correction in April 2026 before recovering strongly. The FTSE 100 fell 35% in the March 2020 COVID crash. Investors with short time horizons, or who cannot withstand a significant fall in portfolio value without being forced to sell, may find this financially damaging.

Individual company risk

Individual stocks carry the risk of a company performing poorly, losing market share, being disrupted or in extreme cases becoming insolvent. Concentration in a small number of stocks amplifies this risk. Diversification through funds or ETFs mitigates it most effectively.

Inflation and interest rate risk

Rising interest rates increase the discount rate applied to future company earnings, which tends to push down equity valuations, particularly for growth stocks. The 2022 rate-rising cycle demonstrated this clearly, with technology and growth stocks falling significantly more than value and income stocks.

Behavioural risk

The biggest risk many investors face is their own behaviour: buying when markets are high and selling when they fall. Missing the best few days of market recovery can significantly reduce long-term returns. Time in the market, rather than timing the market, produces the best long-term outcomes for most investors.

How stocks compare to other investments

For investors considering how to allocate across asset classes, stocks typically form the growth engine of a long-term portfolio, with bonds providing stability, gold offering a hedge against inflation and systemic risk, and REITs providing property exposure with equity liquidity. More sophisticated investors may consider hedge fund style strategies for downside protection, and exposure to commodities for inflation protection.

How to start investing in stocks in the UK

Getting started is straightforward:

• Choose an account type: for most UK investors, a stocks and shares ISA is the most tax-efficient starting point, sheltering all gains and income from UK tax permanently within the £20,000 annual allowance.
• Decide on your approach: active stock picking, passive index funds, or a combination. For most beginners, a low-cost global equity ETF or S&P 500 tracker provides instant diversification and is a practical starting point.
• Set a budget and time horizon: only invest money you will not need for at least five years. Keep an emergency fund of three to six months' expenses in cash before investing.
• Choose a platform: look for FCA regulation, a range of investments, competitive fees and an ISA wrapper. We offer £0 commission on US stocks, full ISA and SIPP capability and access to over 18,000 markets.
• Start and stay invested: the biggest mistake most investors make is waiting for the perfect moment or selling during downturns. Regular investing through market cycles generally outperforms timing the market.

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