Shares

The share price is simply the price at which you can buy and sell shares in a company, usually on a stock market. The price is determined by what other investors are prepared to pay for the share. If there's more buyers than sellers then buyers will have to pay more to encourage more sellers, pushing up the share price. If there's more sellers than buyers then sellers will have to cut their asking price to encourage more buyers, causing a fall in the share price.

Dividends are the slice of annual profits that a company pays out to shareholders. A company may choose to retain some, or all, of its profits to re-invest in the business, or could even make a loss, so a dividend is not guaranteed. Companies tend to pay a dividend twice a year, after their 'interim' and 'final' results.

Mr A owns 1000 shares in company X, valued at £2 each. Company X pays a total annual dividend of 6p per share, meaning Mr A receives £60 (1,000 x 6p). The dividend yield is therefore 3% (£60 / £2,000).

The dividend yield, useful for comparing dividend levels between companies, is calculated by dividing the current share price by the most recent full year dividend.

Companies that pay dividends tend to increase them over time. Rising profits will mean more cash is available to pay out and the Board might, in any case, want to raise dividends to prevent shareholders from becoming unhappy and voting to sack them! Of course, falling profits can hit dividends, but they nonetheless tend to a be a good long term source of income.

These are the most common type of share. Ownership gives you a share of a company's dividend (after preference shareholders have been paid), the right to attend the company's Annual General Meeting and the right to vote on issues affecting the company. You also own a share of the company's assets, but you'll be bottom of the pile in terms of getting getting any money back if the company goes bankrupt.

The big potential advantage of ordinary shares is that they benefit from rises in company profits, whereas preference shares do not. Of course, this means you could also suffer if profits fall.

Preference shares are quite different from ordinary shares as they simply pay a fixed dividend (much like a bond) rather than participate in a company's profitability.

Preference shareholders must receive dividends before they're paid to ordinary shareholders and they also rank higher in the event the company goes bankrupt (but not as high as debt, e.g. corporate bonds). However, preference shares don't usually carry voting rights and if the company is successful returns over time are likely to be lower than ordinary shares.

In the case of 'cumulative' preference shares, if a dividend is not paid in full then the balance due is added to the following dividend.

These are preference shares that give the option to convert into ordinary shares at a future date.

The potential advantage is that you benefit from the relative security of a preference share, but might also benefit from a rising ordinary share price by converting in future.

You need to check how many ordinary shares you'll receive for every convertible share, known as the 'conversion ratio'. If the ratio is five (i.e. you'll receive five ordinary shares for every convertible on conversion) and the convertible costs you 100p, then you'll benefit if the ordinary share price is over 20p (100p / 5) at conversion.

You can save between £5 - £250 a month into a SAYE scheme for three or five years (seven years may also be available but is five years of contributions left for another two years). You receive a tax-free bonus (equivalent to a fixed rate of interest) at maturity and have the option to buy shares in your employer with it.

The price of the shares is set when you start the scheme and can be up to 20% less than your employer's share price at that time. If you take the money out before maturity the bonus becomes taxable.

SAYE schemes can be a good idea if you believe in your employer's prospects. Even if their share price falls you'll still get back your money plus some tax-free interest at maturity.

Under a SIP you can get shares in your employer and provided they're held in the SIP for five years you'll pay no income tax or national insurance on their value when you acquire them, nor will you have to pay capital gains tax when you sell them (provided they're still held within the SIP).

There are four types of SIP:

• Free shares - your employer can give you up to £3,000 of free shares each tax year.
• Partnership shares - you can buy shares out of your income before any tax is deducted, limited to the lower of 10% of your salary and £1,500.
• Matching shares - your employer can give you up to two free shares for each partnership share you buy.
• Dividend shares - if you receive dividends on your shares your employer may allow you to use the dividends to buy more shares, subject to a £1,500 limit each tax year.

Your employer might give you the option to buy shares in the company at a fixed price in future. If you expect their share price to be higher than your fixed price when you exercise the option then this can be a profitable exercise.

Provided the option scheme is approved by HMRC and you stick to the rules then you won't normally have to pay any income tax or national insurance on your option when you get the shares, although any capital gains will be taxable.

However, there's no guarantee you'll make money. If your employer's share price is lower than than your fixed price when the option is due to be exercised, then it's worthless.