The Basics
As the name suggests, equities, or shares, give you a share in the ownership of a company. Shares are good investments for savers looking to make gains over the longer term. Returns on shares have been historically higher than other assets such as bonds or cash deposit accounts, but their price and rise and fall sharply in the short-term.
Many investors ignore dividends, preferring to concentrate on the prospect of capital gains. Research clearly shows that dividends are a crucial part of investment returns. If you re-invest them in the company’s shares – and many of the larger ones offer such a service – the long-term gain will be many times that of investors who just bank the dividend cheque.
How to Buy Shares
Buying shares is as easy as picking up the telephone or logging on to the internet. Share dealing services will usually charge a commission of around 1 per cent of the value of what you are buying or selling, although it pays to shop around to seek out different commission rates and/or minimum charges. Some larger companies offer low-cost share dealing service to small shareholders.
On top of the commission, 0.5 per cent stamp duty has to be paid on all share purchases.
Tax Treatment
Profits on selling shares are subject to capital gains tax. Everyone has an annual CGT allowance - £8,800 in the year 2006/07 – of tax-free gains. Dividends are paid with basic income tax already deducted. Non taxpayers cannot reclaim this deduction while those on the higher rate have to pay extra.