The benefits of investing in shares
Share ownership in the UK is close to its lowest level ever, but investors are missing out on an opportunity. As with any investment, there are risks, particularly over the short term, but shares have historically offered strong returns over the longer term.
Only about 12% of shares listed as UK-domiciled companies by value are owned by UK individuals, and about another 3% are owned through pension funds. That means many investors are missing out on an asset that offers attractive income opportunities, diversity within an investment portfolio, and exposure to a range of companies, industries and sectors.
Shares as an investment are relatively simple to understand — you are taking a stake in companies you recognise. Your shareholder vote gives you a say in how the company is run.
Most novice investors start by buying shares in big companies that are household names in their home market — maybe a high street retailer, a big utility company, or their own employer through a share scheme. The advantage here is that they will already have some knowledge about what the business does and how it makes money.
However, buying shares can cater for many different investment goals. For example, some people see themselves as impact investors, and will only use their money to support companies of which principles they admire, and that are doing things to improve conditions for their workers, their supply chain, the environment or wider society.
In the current environment, it’s important to look at equities in the context of low interest rates. Ultra-low interest rates and rising inflation in the UK combined, led to erosion in the value of cash savings pots.
If you put a £15,000 lump sum into a savings account for 20 years, spent the interest and the inflation rate remained at the February 2017 rate of 2.3% then your pot would only be worth £9,418 in real terms at the end of the period because of inflation.
Even if you keep the interest, your cash savings may not grow all that much. Research from Fidelity International reveals that £15,000 put into the average UK savings account in 1987 would over the next 20 years have turned into £19,877. By contrast, the same investment put into the FTSE All Share index would have returned £53,974 over that time. That’s a huge difference of £34,097.
On top of potential capital gains, investors in shares can enjoy a source of income by investing in stocks with high dividend yields. Dividends may actually have some inflation built in, as earnings can rise when companies can pass cost increases on to customers.
Risk and reward
Studies have shown that stocks tend to outperform other major asset classes such as corporate and government bonds and property over the long term. But no reward comes without a degree of risk. Share prices can go down as well as up, and you can’t predict future returns by looking at historic performance.
A common mistake inexperienced investors make is to let their emotions guide their investment decisions, so they end up panic selling along with everyone else when markets sink. A much better strategy is to take a view of 10 or even 20 years, stay put and ride out market dips.
An investor in shares would have likely lost money during 2008 at the height of the financial crisis, but if they’d held their nerve and stayed invested, then they’d have enjoyed the strong market recovery since then.
Drip-feeding money into the market regularly is a better idea than putting in a lump sum all at once. Known as pound cost averaging, this technique means you buy more shares when prices are low and fewer when prices are high, reducing your exposure to market falls.
Growth or income?
Before you start investing, it’s a good idea to set your investment objectives. Ask yourself if you want to invest primarily for capital growth or income. Income stocks will typically pay out dividends quarterly or annually, as long as the company has cash on the balance sheet to return to shareholders.
It’s easier than ever to invest in shares
Technology has made it simple for anyone to invest. Gone are the days of paper share certificates. Although you can still use a traditional broker, now you can also take a do-it-yourself approach. With online share dealing accounts, it’s very easy to trade stocks and monitor how your investments are performing, even on your smartphone.