Are Shares the Best Way Of Making Money?

Investing in the top 100 shares in the UK over the past 12 months, made a little over 12% in total returns. The FTSE All Share Total Return Index has risen by almost 14% in the past year. At a time when even the best bank accounts are paying around 4%, that means the stock market is making investors 300% more than cash based accounts.

Total Returns:A total return index computes the index value based on capital gains plus cash payments such as dividends and interest. A total return index, in contrast to a price index, better reflects the actual returns that an investor holding the index components would receive. The total return will tend to exceed the nominal return that only accounts for price increases in the assets held.

However share investments can also swing wildly - and over any set period you might lose large sums of money which doesn't happen obviously with bank accounts.

How Much Money Do I Need To Start Investing?

It’s possible to invest with as little as £100. However, an investment’s trading costs need to be considered.

For example, if you were to invest £100 and the trading commission is £5, your investment would need to rise by at least 5%, just to makjeyour money back. So I really think the sums of money should be £1,000 or more and you need to make sure you can afford to lock that money away for a while in the investment and can afford to lose it.

When first investing in stocks, you may feel more comfortable depositing a small amount to start with. Many share dealing accounts take this into account and allow you to trade with only a small opening deposit, according to research by Motley Fool:

Several investing accounts allow you to trade with low minimum deposits, including:

• Fineco – no minimum, £2.95 fee for each trade

• Hargreaves Lansdown – £1 minimum, £11.95 fee for each trade, offers discounts for frequent traders

• Interactive Investor – no minimum, £5.99 fee for each trade (under the ‘Investor’ pricing plan)

• Freetrade – £2 minimum, no fee for each trade

Buying Shares

To buy shares you generally need to open a brokerage account. Generally, they will charge a flat rate fee when buying UK shares, typically between £8 and £12. And many offer discounts if you trade more each month.

An additional cost is stamp duty. This is a 0.5% tax applied when buying shares, but not when selling them. Stamp duty does not currently apply when buying smaller AIM-listed UK shares.

Time Not Timing

Investing is generally a long-term option – you should invest for at least five years. That gives you enough time to ride out any bumps in the market. Time not timing is often a way to think of share investing.

Buying Shares Through A Platform

An investment platform, sometimes called a fund supermarket, allows you to buy and crucially also continue to store a range of investments in one place online, and sometimes with a phone app, which can make it very easy.

Some platforms also offer what can be useful investment news updates and analysis tools.

While they can be useful investment platforms can also be expensive. They charge a fee for their services: fixed fees and percentage fees (although some platforms charge neither).

Percentage Fees: The platforms take a fee as a percentage of the value of the investments you hold. So, you might be charged 0.5% on the first £100,000, which then drops as the portfolio value rises.

Fixed fees: Some brokers levy fixed annual or monthly fees in pounds and pence. Fixed fees are usually better suited to investors with larger porfolios, as they can be cheaper overall.

Transaction fees: You might also or alternatively be charged each time you buy and sell a share.

Spreading The Risk

Investment funds are investment schemes, which pool your money with that of other investors to give you a stake in a much wider range of shares than you could normally achieve with a limited investment fund. It does this by spreading your money across hundreds of different shares and other assets across the world.

Types of Funds

Typically funds tend to focus on either companies in a particular country, look at an industry such as technology or embody an investment strategy or risk profile. That way, although you don't pick the individual share, you do pick the investment approach.

Tracker Funds

These are a relatively cheap way of investing in the stock market and can also be one of the most effective things to do.

Tracker funds track an 'index', such as the FTSE 100. The fund spreads itself across all the shares in the index. There is no highly paid find manager trying to guess which share will do best, they just invest in whichever shares are in the index the fund tracks.

The upside is that:

• It is easy to see what is happening to your investments - just see what the index did today/this week/month/year

• Management charges are lower than in other funds

• When the index rises, your investment rises

Most importantly of all... most tracker funds to beat the performance of the so-called professional investors. Over the last 15 years less than 50% of actively managed funds have beaten their passively managed equivalents, according to Morningstar in 2022.

The problem of course is that when the general market falls, so does you investment and there is no fancy footwork that can be done to avoid the general decline from which the market is suffering.

Why Buy Through An ISA

During the 2024-25 tax year you can place up to £20,000 into an Isa. This is the same Isa allowance as the 2023-24 tax year.

Unlike a cash Isa, you'll usually pay a fee to hold a stocks and shares ISA.

The tax advantages of stocks and shares Isas can be significant, especially if you're a higher or additional-rate taxpayer.

Keeping investments in a stocks and shares Isa means you don't have to pay the following taxes:

Dividend Tax

In the 2023-24 tax year, you can earn £1,000 in dividends before paying tax and in 2024-25 it will halve again to £500. Any investments kept in a shares ISA will avoid tax on dividends.

Capital Gains Tax

You are allowed to make a profit or capital gains of £6,000 per year for the 2023-24 tax year is £6,000. It will fall to £3,000 in 2024-25. Above this you'll pay 10% on asset gains as a basic-rate taxpayer, and 20% as a higher or additional-rate taxpayer. Assets in a shares ISA aren't subject to CGT, so are tax free.