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A Complete Guide to Shares: Part 1

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For new business owners, the concept of company shares may take on a fresh, unfamiliar significance.

On the one hand, paltry current account rates may trigger a search for smarter ways to make your personal and business capital work for you, However, at the same time, you’ve got your own business structure to think about. Could issuing your own shares help your company reach the next level?

With personal and business finance often entwined it’s not uncommon for entrepreneurs to don different hats at the same time. Here, we take a closer look at shares from the perspective of both investor and company owner.

Shares as an investment option: what are we talking about?

A ‘share’ is a divided up unit of the value of a company. From an investor’s perspective ‘shares’ tend to be discussed in the context of shares that are traded on the stock market. Shares have the potential to generate income for shareholders in the form of company profit-related payments (dividends). They can also result in capital growth if they have increased in value in the time between being bought and sold.

You can invest directly in the shares of single companies through a stockbroker, which these days very often takes the form of an online share-dealing account. More commonly, you can invest in shares indirectly. If you have a private pension, for instance, it is likely that a big chunk of this has been spread across different shares. Other commonly encountered indirect ways of investing in shares include the following:

  • Actively managed funds such as a unit trust or open-ended investment company, which are typically made up of shares from between 50 and 100 different companies. These companies are often themed according to risk profile, sector or region and the fund manager makes the specific investment decisions.
  • Exchange traded funds designed to track an index. These are devised in such a way that their performance mirrors that of a specified index, such as the FTSE 100.

Investing in shares: what are the general considerations?

  • As a rule of thumb, share prices can appear volatile in the short term, but share-based investments can very often outperform other forms of investment over the longer term. As a quick illustration of this, take a look at the performance of the FTSE 100 index, which lists the share price of the largest 100 companies on the London Stock Exchange. Compare the monthly chart to the 5-year and 10-year results.
  • You may be tempted to trade individual shares. Especially if you have a keen interest in the markets. Remember that staying on top of your transactions requires a certain degree of time and effort, as well as knowledge. With your current commitments do you have this to spare?
  • With managed funds, performance is dependent largely on the skill of the fund manager. Research is key (rather than relying on glossy brochures). Remember that past performance is not necessarily an indicator of future performance. Pay close attention to fees.
  • Avoid putting all your eggs in one basket and take a portfolio approach instead, which generally means investing in expert financial advice. This means you will need to look at your assets, your tax position (and that of your business), your goals and how much you are willing to risk when building an investment portfolio that’s right for you.

What should entrepreneurs think about before investing in shares?

Don’t leave your business short of funds

Your business balance is healthy and you’ve just heard about a share-based investment opportunity that sounds too good to miss. Should you go for it?

Liquidity

All investors need to take liquidity into account. This is especially relevant where business running costs need to be covered. Don’t underestimate the amount you require to keep your business ticking over. This means working out cash flow projections, which itself involves sales pipeline forecasting (i.e. looking at what new clients are on the horizon and when, realistically, they are going to pay you).

Some more complex share-based funds can be less ‘liquid’ than others. Bear in mind that with some funds it can be difficult to redeem your investment at short notice and that early redemption can have a big impact on the profitability of the investment.

Consider your wider income strategy

Rather than making any sudden decisions on taking money out of your business and putting it into a certain fund, or perhaps ‘taking a punt’ on specific shares, think about your wider income strategy. Firstly the ‘income’ part of this: you didn’t go into business for your hard-earned money to sit around in your company account. You want to enjoy it and that means assessing how much cash you need to do exactly that.

Next comes the ‘strategy’

How are you going to achieve your aims in the most efficient way possible? There are different ways of taking money out of your company. This is done most commonly through salary, share dividends, directors’ loans and pension contributions. A big part of the strategy involves getting the right mix and reviewing it at least once every tax year.

Then comes the question of how to make that cash help you achieve your goals. Will share-based investment vehicles be a part of this? There’s a strong likelihood they will be in the mix. However, beware of hasty decisions and always seek independent financial advice to get a more learned, expert opinion.

Want to know how to issue and allot shares in your own company? Find out more in Part 2 of this guide.

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