Financial Products Series: Shares

The financial products series, to briefly explain and evaluate a wide variety of financial products. This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the first in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:

1. Shares
2. Structured Products
3. Cash
4. Current Accounts
5. Savings Accounts
6. Annuities
7. Certificate of deposit
8. Options
9. Treasury Bills
10. Bonds
11. Tracker funds
12. Credit

If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Shares

Picture from freedigitalphotos.net

A share is a claim on a single unit of ownership of a company. When buying shares you are essentially buying a part of a business, albeit a very small part.

People buy shares for two reasons. One, they buy shares in companies that they predict will grow, and/ or become popular with other investors. They hope that the popularity of the share will raise its price and thus they can sell for a profit. Two, they may invest to gain a source of income from the dividends (0% up to as high as 13% - the most I've ever seen but it could be higher) paid by many (not all) companies.

Fact: A dividend is a share in the companies profits that goes to it's shareholders usually paid twice yearly.

For a more detailed analysis of how to invest using shares why not check out my article on Value Investing, or else on some of the investing greats such as Warren Buffett or Benjamin Graham.

Advantages

• Potential for large capital gains
• Scope for clever tax planning and utilizing your annual £10,600 capital gains tax allowance
• Possible income from dividends
• Exciting and fun

Disadvantages

• Potential for big loses
• The potential for the company to go into liquidation in which case you would lose all your capital
• Potential for fraud
• Pay extra income tax as a result of dividends unless you utilize your tax free ISAs
• Requires a huge amount of research
• Potentially large transaction and/ or broker fees

Overall conclusion

Score: 7

If you know what you're doing, invest for the very long term, commit to large amounts of research, then there is huge scope for making some large gains. However, I feel that I must warn that those who don't know what they're doing could be in for large losses. I think that more people should be utilizing shares in their overall portfolio, if only to test out the markets with a bit of spare cash that won't be missed if all goes wrong. Obviously, even if you're an experienced investor you still don't want to be putting your entire wealth into stocks and shares.

Readers, what's your opinion on shares?

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