Risk & Reward: Shares

Thursday, 11th October 2012 19:03 - by Resident IFA

Most of us have come across Shares at one time or another.

For example, if you have a Personal Pension, it is likely to be invested in Funds that hold Shares (and other assets).

Shares are often perceived as being risky…and that might well be the case if you invest your money in just one or two.  Most people mitigate the risk by holding a broader portfolio of Shares and other assets; whether themselves or by entrusting them to an Investment Manager.

If you purchase a Share, you are effectively buying a part of a company.  This entitles you to participate in the potential good and bad of that company’s future performance.

Tackling the bad first, it could be that the Share Price drops, meaning that your invested capital decreases.  On the positive side, the opposite can happen.

Another positive is the chance to receive Dividends.  Dividends are the share of profits a company chooses to distribute amongst its Shareholders.  This payment is expressed as a percentage; known as the ‘Dividend Yield’ - think of it like an interest rate.  Some companies actively try to provide a healthy Dividend i.e. Aviva’s has recently been in the region of 8%.

In normal circumstances, Shares are taxable on both Dividends (Income Tax) and on profits made (Capital Gains Tax - ‘CGT’).  Fortunately, the CGT allowance is quite healthy (£11,200 for the 2012-13 tax year) and you are allowed to shield £11,280 from tax by buying Shares within an Individual Savings Account (ISA) in the 2012-13 tax year.

In summary, Shares provide a riskier alternative to deposit accounts, yet the rewards can be greater…hence the article title.

Of course, the warnings always apply: The value of Investments can go down as well as up, and past performance is no guarantee of future performance.