Share Dealing Guide

The value of investments, and the income from them, can fall as well as rise and you may not get back the full amount you invest.

Shares. What are they? How do you buy them? And what are the risks and rewards?



Shares are also referred to as stocks or equities. They represent a stake or ownership in a company. As a shareholder you usually have the right to vote on issues affecting the company.

  • You can buy and sell shares either within the UK market or International markets e.g. New York Stock Exchange.
  • Shares can be bought either through collective investment or the stock exchange via a stockbroker.
  • You may receive dividends for the shares you own. A dividend is paid from the company profits to the shareholder. However, the company may wish to use their profits to re-invest in the business - this is called retained earnings.
  • Stock symbols: is the standard abbreviation of its name. This information is found together with the performance indicators wherever stock information is published i.e. newspaper listings.

For example:
Mrs Jones buys 1,000 shares of stock in a mobile phone company. This company has issued a total of 100,000 shares. Therefore Mrs Jones is a shareholder and owns 1% of the company.

  • The stock exchange is simply a marketplace which allows investors and borrowers to trade stocks easily.
  • This is where existing shares are traded. However, not all shares can be traded on the stock exchange. Each exchange has its own requirements and some exchanges are more particular than others.
  • You can't buy or sell shares on a stock exchange yourself. Instead, you place your order with a stockbroker who buys and sells on your behalf.
  • A stock can be listed on more than one exchange. This is called a dual listing.
  • You can also invest in different market segments, depending on your own preferences and objectives.

Stock Indices:

  • Stock indices are measurement tools.
  • Investors use them to track the market, gauge its performance and consider the implications of its ups and downs.
  • Indices present a broad picture of market trends.

The Calculation of Indices:

  • Most indices are weighted. This means larger companies have a greater impact on the value of the index.

Index Values:

  • Index movements are recorded in points.
  • A rise in an index indicates that the stock market has generally performed well on that particular day, while a fall indicates the opposite.

Types of Stock Index:

  • Not all indices are the same - they contain different numbers of stocks.
  • The markets regularly referred to consist of large companies on the specific nation's stock exchange e.g. the UK FTSE-100.
  • The UK FTSE-100 contains 100 stocks, while the Dow Jones Industrial Average contains only 30.

Choosing Indices:

  • Indices can cover whole markets, whereas others are based on stocks in certain industries.
  • Generally, the best indices cover a large number of share price movements, in a wide range of sectors.
  • A good example is the S&P 500, which uses 500 US companies. It represents the industrial, financial, utility and transportation sectors.

  • You can buy and sell shares on the stock exchange. Alternatively, when a new company starts up the company may sell shares to the public to raise money (this is though Initial Public Offering).
  • The aim for shareholders is for the value of your shares to increase over time.
  • A financial advisor will buy and sell shares for you but they will still have to do this through a stockbroker.
  • Prior to buying shares you should research the companies you are considering to invest in.
  • Beware of the charges you will incur when buying and selling shares.

Risk of Shares:

  • The value of shares can fall - worst case scenario they become worthless.
  • Share value is driven by the perceived value the stock market and investors have for a stock linked to the supply and demand for it at any particular time.
  • Company performance, both current and future, can affect the share value.
  • Shares are least stable of the four asset classes. The value of shares goes up and down more than any other type of investment.
  • The higher the risk the greater the reward tends to be - but this is not guaranteed.
  • Share dealing can be high risk particularly if you invest your money in one company. Worst case the company is unable to pay their debts then you could lose some if not all your money.

Reward of Shares:

  • The potential for high returns.
  • The potential to receive regular dividends.
  • The right to vote on certain company decisions

Shares, stocks, equities –they are all different names for the same thing.

When you buy shares in a company you are a buying a share of that company.

How much of a share of the company depends on how many shares were issued and how many of them you have bought.

For example, if there were 100 shares issued and you bought 10, you would have a 10% stake in that company.

People usually invest in shares to make money. Some shares offer good prospects for growth – that’s when the share price increases in value.

Others may have less potential for growth but have a good record for paying income, called dividends

This is attractive if you want to top up your income. There are also shares that offer the potential of a combination of both capital growth and income.

The attractiveness of shares has to be balanced with the knowledge that share prices can also fall.

And, if a company stops making profits it is unlikely that it will pay out dividends.

In a worst-case scenario, your shares could become worthless so it’s important to keep a watchful eye on them.

If you are thinking of buying shares it's a good idea to research the company and the industry it is in. Business and money sections of newspapers are a good starting point.

And remember, never invest more than you can afford to lose.

Find out more about shares in the Learning & Research section of natweststockbrokers.com


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