Stock market investment

We have received many queries from readers who are thinking about investing part of their SSIA windfall or savings in stock market shares. The vast majority of people who invest in the stock market do so through unit-linked funds and indirectly through their pension fund. However, some people choose to buy shares directly and build up their own portfolio of stocks.

The process is relatively simple. Decide what shares you want to buy and how much you wish to invest and select a stockbroker to carry out the transaction. After that you just transfer the money to the broker and give them the order to buy – they will look after the rest.

This form of relationship with a stockbroker is known as "execute only". In other words they only carry out trades on the client's specific instructions. People with large amounts to invest may give the broker discretion to make trades on their behalf without specific instructions – but this sort of relationship attracts high fees and really is only for the very large investor.

After you buy shares you can keep track of their performance through the markets pages in the newspapers or your broker's website. You can choose to act on this information by selling shares which are falling or increasing a holding if you think a company's prospects are particularly good. However, the general advice for equity investments is to stay in for the long-term and don't trade too frequently.

Shares offer two forms of return on your investment. The first is the hoped for appreciation in their value and the second is dividend payments. Publicly quoted companies usually pay out part of their profits to shareholders twice a year in the form of a dividend. The dividend is expressed in terms of cents per share. So if the dividend is set at 10 cent per share and you have 1,000 shares, the company will pay you a dividend of €100. This is subject to withholding tax at a rate of 20%, so the amount you receive will be €80.

For example, you can get a €1,000 loan from one of the leading banks at a rate of around 9% APR. This will work out of monthly repayments of just €25.41 over four years, or a total repayment of €1,219.68. An awful lot cheaper than the retailer alternatives.

Dividends are taxed as normal income. So, when you are filling out your tax return you will declare the €80 received and the €20 already deducted. If you are subject to tax at the marginal 42% rate, you will have to pay a further €22 (22%) tax on the income.

You can choose whether to have your shares held by the stockbroker or to hold onto the share certificates yourself. In the former case, the dividends are paid to the broker who forwards them to you, while in the latter case you receive them directly. If you want to have a more handson role in the management of your portfolio and have time to keep track of the different stocks and the dividend payouts, then the share certificate option is probably best. On the other hand, if you do not have time for this and are dealing with a reputable broker it might be best to have the broker look after this. Furthermore, some brokers do not give the option of receiving share certificates so check this out before selecting one.

Stockbrokers typically charge a 1.5% commission on buying shares with a minimum commission of €25 per deal. On top of that you will have to pay 1% stamp duty. These costs should always be taken into account when trading. Many brokers also charge annual maintenance fees for accounts. If you intend to hold onto shares for the long term they are fairly negligible, but if you are an active trader regularly switching between stocks, they can mount up and erode and gains to be made.

Indeed, in many cases the cost of the commission and the annual fee can be greater than the dividend income received. On the other hand, fees do vary and there are a number of backs and other operators who offer fairly low cost services specifically aimed at smaller investors, so it is worth shopping around before making a choice – it can save a lot in the long run.

Furthermore, many investors are now buying and selling shares on the internet. For frequent traders this has the advantage of being quicker than going through a broker in the offline world. For small investors there may be real cost advantages to buying shares online, so it is worth checking this option out.

For those that have the time and the resources direct investment in shares can be a fun and rewarding experience.

But it must always be remembered that such investments are risky by nature, should be part of a balanced portfolio and never invest more than you think you can afford to lose.

Free Life Cover - (St. Patrick's Credit Union (ESB Staff) Ltd.)

Being a member of St. Patrick's Credit Union means that you are automatically in receipt of free Share and Loan Insurance (Life Cover), which are fantastic benefits unequalled by any other financial institution.

Share Insurance
Your shares are covered up to a maximum amount of €7,700 in the event of your death.