Investing in equities How to make money in equities

Investment return coins

Shareholders can profit from both capital growth and dividend income

The return from shares comes in two forms: dividends and capital growth.

• Dividends

Dividend payments are the distribution of the profits that the company has made, usually paid out twice a year.

You're more likely to receive dividends from larger, long-established companies – the more profitable it is, the larger the dividend payout could be. 

Smaller companies are less likely to pay out a dividend as they reinvest their profits to grow their business. However, if a smaller company succeeds, the value of your shares could increase.

• Capital growth

You can make a profit if you sell your shares for a higher price than you paid for them. This provides you with capital (the money you invested to begin with) growth.

Find out more: Use our handy tool to help create a well-balanced investment portfolio based on your ideal level of risk

What factors affect share prices?

The price of your shares is affected by both internal and external factors.

Companies publish their financial results at least once a year, as well as publishing trading updates and announcements of dividend distributions for the future. If the company is performing well and is expected to do so in the future, this should have a positive effect on the share price. Conversely, if the prospects aren't looking good, the share price can fall.

The wider economy is also influential on the share prices. If economic conditions are good and investors have confidence in companies' ability to grow, the demand for shares increases. This market sentiment and investor demand for shares can increase the price. The greater that demand outweighs supply, the higher the share price can go.

Of course, if the economic climate is not good, investors may not be so confident in the prospects of a company. Therefore, the share price can fall, even if the company is performing well.

Tax on shares

Dividend income

In his July 2015 Budget, the Chancellor announced reform to how dividends are taxed. Starting at the beginning of the 2016/17 tax year, investors will receive a £5,000 allowance, meaning the first £5,000 of dividend income will be tax free.

After this, dividends will be taxed at 7.5% if you are a basic rate taxpayer; 32.5% if you are a higher rate taxpayer; and 38.1% if you are an additional rate taxpayer.

Taxation on selling your shares

When you sell your shares, you might be liable to pay capital gains tax on any gains you make over £11,100 in the 2015-16 tax year.

Find out more: Read our comprehensive guide on how much tax you can expect to pay on investments

More on this...

Last updated:

February 2016

Updated by:

Michael Trudeau

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.