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Financial > Investments > Shares
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If you buy shares you become one of the owners of the business in question, and those shares can either be bought 'brand new' or 'second hand'.
There are different types of shares which have different rights attached to them.
Some have voting rights and others do not, some receive income rights whilst others do not and another category of shares may have more or less priority in any claim upon the company assets if the business ceases trading at any time.
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The market value of a share varies from day to day on a tide of market sentiment rather than in any direct relationship to the value of the physical assets.
If you receive dividends from those shares, those payments represent your proportion of the profits made by the business that it is willing to return to investors. Some of the profit may well be retained by the business either to meet its growing need for cash as the business expands, or alternatively to invest in new products, premises, people or plant.
Those dividends are subject to Income Tax and will be accompanied by a voucher to indicate the fact that 20% Income Tax has already been paid. You must inform your accountant or Her Majesty's Revenue & Customs of the dividend payments that you receive.
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Changes in the value of your shares are not taxable until the point at which you dispose of the shares.
At that point, the difference between the purchase price and the sale price is potentially subject to Capital Gains Tax.
Every UK taxpayer is allowed to make gains of £9,200 in the 2007/2008 tax year before any Capital Gains Tax is payable - and there are discounts that can be allowed off the gain depending upon what the investment was and how long you have held it. The combination of discount and the high level of tax-free growth that is allowed make the system of Capital Gains Tax quite reasonable.
At that point, the difference between the purchase price and the sale price is potentially subject to Capital Gains Tax.
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Buying individual shares is a bit like trying to find a winner in the Grand National each year. If you are lucky enough to choose the right horse, the scope for profit is clear, but if you are less fortunate you can lose everything.
In the case of individual share purchases it is vital that you do your own research into the business in question or place your trust in a stockbroker who is performing the same task on your behalf.
You can lessen the risk that you face by investing in a wide range of businesses across many types of activity i.e. banking, petro-chemical, pharmaceutical, food and drink retail, oil or energy etcetera, and also over a wide geographical area so that you have exposure to a broad range of markets. This is particularly difficult to achieve and exceptionally expensive and so is only open to those with the greatest wealth.
A more practical solution for most people is to get access to shares through collective investment schemes such as unit trusts, investment trusts, open ended investment companies and undertakings for collective investment in transferable securities. The economies of scale provided by those collective investments bring the potential presented by shares into the reach of everyone.
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Shares have risen in value more quickly than cash deposits over the longer term for more than 100 years and the hope of any investor in shares is that this trend will continue.
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