What are stocks and shares?

Shares can be a valuable part of your investment portfolio, with the potential for growth and income. But before you invest, it’s important to understand what they are, how they work, and the ways in which they can either build your wealth or expose you to risk.

Shares represent ownership in a company. Also known as equities, they are the basic unit of investment in these companies.

By selling shares, the company receives money from investors, who in turn become shareholders. These shareholders then own a portion of the company and may share in its success if it makes a profit or pays dividends.

Companies publicly listed on a stock exchange, such as the London Stock Exchange’s Main Market or its growth market, AIM, make their shares available to a wide range of investors, from large institutions to individual members of the public.

The terms shares, stocks, and equities are often used interchangeably, but they do have subtle differences:

• Shares typically refer to the individual units of ownership in a specific company. For example, you own 100 shares in Company A.
• Stocks is a broader term, often used to describe ownership in multiple companies. For instance, someone says they’ve invested in “tech stocks.”
• Equities is the formal term used in financial markets to describe ownership in companies.

In everyday conversation, especially in the UK, “shares” is the most used term.

There are two primary ways shareholders can benefit from their investment: dividends and capital appreciation.

Dividends are payments made by a company to its shareholders, usually from profits. Not all companies pay dividends when they make a profit, as they may choose to reinvest it to fuel growth.

Those that do pay regular dividends often pay them quarterly or annually. Therefore, dividends can provide a steady income stream, especially for long-term investors. Dividends can also be reinvested to acquire more shares, providing an opportunity to benefit from compounding returns.

Capital appreciation refers to the increase in the value of your shares over time. If you buy shares at £5 each and they rise to £8, you’ve made a capital gain of £3 per share. You’ll only enjoy this gain, however, when you sell the shares and make a profit on the original price you paid.

Another way that you could benefit from owning shares in a company is through the voting rights they give you in some company decisions, allowing you help shape the future of the company you’re a shareholder of.

If you're a UK resident, both dividend income and capital gains may be subject to tax:

• Dividend income is taxed above a certain threshold. For the 2025/26 tax year, the dividend allowance is £500. Any dividend income above this amount is taxed at a rate depending on your income tax band.
• Capital gains are taxed if your total gains exceed the annual Capital Gains Tax (CGT) allowance, currently £3,000 for individuals in the 2025/26 tax year. How much you’ll pay, will also depend on your tax rate.

Shares can be volatile. Their value can rise, or fall, based on company performance, market conditions, economic trends, and even global events.

All of these factors are out of a shareholder’s control, so you need to be comfortable with some risk and uncertainty if you invest in shares.

One way to manage this risk is through diversification – creating a balanced portfolio that includes a mix of asset types and sectors you invest in. For example, instead of investing only in a single sector of the economy, you might spread your investment across different sectors, for example technology, healthcare, and property. You could also include other asset classes in your portfolio, such as bonds or cash. Exchange Traded Funds (ETFs) offer exposure to a diversified mix of shares and other asset types through a single investment product.

Diversification doesn’t eliminate risk, but it can help reduce the impact of underperformance in any one area. A well-balanced portfolio is often better equipped to weather market fluctuations and deliver more stable returns over time.