I began to invest regularly in stocks and shares last year after planning to do so for a while. Like many people I was on a work and save mission, but had not really got to the point of putting my money to work. Having heard stories of people losing vast amounts of money, I wanted to educate myself some more before taking the leap.
With what I now know and the benefit of 20:20 hindsight, I want to share with you some of the lessons I’ve learned on the journey so far. Hopefully this will help you make the leap sooner rather than later, allowing you to make the most of your returns. So here we go…
Lesson 1 -You can make money two ways
This is like a 2 for 1 deal! Many shares pay dividends at certain intervals during the year. In other words, they distribute a proportion of their profits to people and institutions who own their shares. In addition to this you can also benefit from increases in the share price.
I have to note here that share prices can go down as well as up and past performance isn’t an indicator of future returns. For this reason shares are more risky than holding cash, but the returns potential is higher, particularly in this period of historically low interest rates.
Lesson 2 – It isn’t difficult to get involved
There are a number of ways you can start investing such as through:
- a stocks and shares ISA
- a broker
- your pension
- a share dealer account
Tax implications differ depending on how you hold your investments (see tax section below).
Lesson 3 – Decide whether you are going to be an Active or Passive Investor
When I started my investing journey I hadn’t made this distinction and it cost me somewhat. I had bought a number of shares in individual companies with a short term approach in mind without the time to put in the required effort.
Active investors are highly involved in trading; purchasing investments and continuously monitoring them in order to exploit opportunities to make a profit in the short term. This requires time to research companies, get an understanding of their business, opportunities /challenges and financial statements. You will need to stay up to date with company and industry news as these can affect the share price and longer term potential.
Passive investors aim to maximise returns over the long run. The idea is to minimise fees incurred and make regular contributions that will benefit from compounding over time. Such an investor will normally invest in Funds that comprise of multiple investments.
Lesson 4 – Consider Tax Implications
UK dividends remain tax-free if generated by shares held in an ISA or pension – yes that’s right NO TAX!!
If you own shares outside of an ISA or Pension (e.g. shares in your own company, shares within a share dealing account) and those shares pay a dividend – the tax is as follows:
- First £5,000 received is covered by the Dividend allowance, new for this tax year (2016/2017) – no tax to be paid
- Dividends received over this £5,000 threshold are subject to tax at the following rates dependent on your income tax band:
The government’s dividend allowance fact sheet provides examples of how the new allowance and dividend taxes should be applied.
Profits made on selling shares
When you sell shares and other investments Capital Gains Tax may be due. Again, such investments held in an ISA or pension are exempt.
So what does this all mean? In order to avoid tax charges eating into returns, shares should be held in a stocks & shares ISA or pension whenever possible.
Lesson 5 – Do your research!
Do not rely solely on others recommendations. In the beginning I only looked at analysts’ recommendations and chose to invest in a number of those companies. Some have paid off whilst one remains in a loss position – the truth is I didn’t fully understand the company or the challenges its industry was facing. Lesson learned; only invest in companies you understand!
Use sources such Annual Reports, Industry Publications and business media to help further your understanding around the investments you are thinking of making. There are also numerous blogs and sites dedicated to help people make better investment decisions. Remember, this should complement not replace your own research!
Always keep in mind your investing goals and the time horizon you are working to. This is key to avoid drifting off course.
These are just five of the lessons I’ve learned so far. I continue to learn lessons on this investing journey and will be sure to post more on this in future. If you’ve been unsure how to make that step into stocks and shares, check out Money Saving Expert’s round up of this year’s ISA offerings .
Now, some questions for you:
- What have been your lessons in investing?
- Are you making the most of your ISA allowance?
- Do you hold your current stocks and shares in the most tax-efficient way?
- Are you an active or passive investor?
- What do you do when researching investments?
Have a great week!
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