As I’ve remarked before, I bought my first shares aged 19, on arrival at university.
Back then — and we’re talking almost fifty years ago — it was a very different world. Real-time trading, it very definitely wasn’t: I placed my buying order at my local bank, with the only clue as to the current share price being that morning’s newspaper. A week or so later, the share certificate turned up.
Today, it’s all very, very different. Real-time share prices, online buying platforms, huge amounts of online information — much of it free, with ISA and SIPP accounts to make shareholding tax-efficient, and most things paperless.
Yet despite all this, the process of buying and holding shares remains opaque to many people — even in the case of people who actually hold a few shares, in my experience.
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We’ve never had it so good
In a way, though, this isn’t surprising.
For decades, buying shares was something that very few ‘ordinary’ people actually did. I was fortunate enough to come from a family where share ownership was a more familiar concept.
You had to have a stockbroker, for instance — although, for most people, their High Street bank would also have executed the trades. Unfortunately, lots of people didn’t know that.
It wasn’t cheap, either. My father’s stockbroker, for instance, charged £31 commission when my father bought £1000 worth of Marks & Spencer shares in the early 1990s. I shudder to think what that would be in today’s money. What I do know is that commissions these days are around a tenner — or even less at the cheaper, no-frills end of the market.
And — even today — the process of buying, selling, and owning shares has something of its own language. Those new to it all can easily find it all a bit off-putting.
A barrier to wealth-building
There’s a downside to all this — especially the language aspect of it all, and the still-prevalent sense that it’s somehow unusual for ‘ordinary’ people to own shares.
And the downside is this: as a result, people don’t engage with the notion of share ownership, and feel awkward about asking questions about it.
Consequently, you might be surprised — very surprised — to learn how large are the gaps in some people’s understanding. And it’s equally unsurprising that those gaps certainly won’t be helping to build a sense of comfort regarding the idea of building wealth through share ownership.
So here we go: ten things that my experience suggests that lots of people don’t know — and I promise you, I’ve come across plenty of real-life examples of people not understanding these things. Often quite recent examples, too.
I’m asking for a friend, you understand…
- When you buy shares, they aren’t ‘created’ especially for you. When you buy shares, you’re buying shares that other investors have sold. For every trade, there’s a buyer, and a seller.
- Dividends aren’t like interest: they aren’t defined as some percentage of the share price. Instead, they’re a proportion of the company’s profits, with the exact proportion being decided by the company’s board of directors.
- ‘Yield’ is simply a company’s dividend (in pence), over its share price (also in pence). So if a company’s share price halves, its yield doubles. The reverse is true, too.
- The London Stock Exchange isn’t some government institution — it’s just another company, owned by investors like you.
- Some companies are listed on the Stock Exchange twice, under two separate ‘tickers’. Royal Dutch Shell, for example, has a sterling-denominated listing (RDSB), and a euro-denominated one (RDSA). Make sure that you buy the right one: the tax treatments are very different.
- Shares held in a ISA or SIPP are held free from income tax and capital gains tax. When the new social care levy bites, they’ll be free from that, too.
- The FTSE 100 is the Stock Exchange’s largest one hundred companies. The FTSE 250 is the next 250 companies. That’s why you’ll hear talk of the FTSE 350.
- Investment Trusts are companies that invest in other listed companies. Investing in them is therefore a great way to quickly build a diversified portfolio.
- REITs (Real Estate Investment Trusts) do the same thing, but with property: offices, shops, student accommodation, warehouses, retail parks, and so on. They also possess some handy tax advantages.
- A company’s price-earnings ratio (often written as ‘P/E’ ratio) is a useful rough-and-ready measure of how expensive (or cheap) a share is. Especially for income investors, a handy search stratagem is to look for shares with a lower-than-average P/E ratio, and a higher-than-average yield.
So, I hope you learned something! Well done if you did, but also well done if you didn’t — you’re obviously a reasonably well-versed investor: keep up the good work!