10 things that lots of people don’t ‘get’ about shares

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.

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…

1. 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.
2. 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.
3. ‘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.
4. The London Stock Exchange isn’t some government institution — it’s just another company, owned by investors like you.
5. 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.
6. 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.
7. 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.
8. Investment Trusts are companies that invest in other listed companies. Investing in them is therefore a great way to quickly build a diversified portfolio.
9. 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.
10. 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!

Malcolm holds shares in Marks & Spencer and Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.