How to invest in shares: From building a winning portfolio to avoiding the traps

If you had bought shares in British engineering powerhouse Rolls-Royce five years ago, you would now be up 1,354 per cent.

Figures like those explain why buying individual company shares remains a highly popular way to invest.

But as the warnings state, investments can go down as well as up, and stock-picking can also deliver some expensive mistakes.

If you had bought shares in Ocado five years ago, you would have now lost 89 per cent of your investment.

With hindsight it’s easy to see why Rolls-Royce shares prospered while Ocado lost its shine, but in summer 2021 aerospace specialist Rolls-Royce was in the Covid pandemic doldrums, whereas grocery tech star Ocado was riding the wave of a boom in business.

Would you have correctly predicted that the troubled engineer passed over as one of the UK stock market’s old-guard would beat the technology pioneer?

It’s hard to make the right call, which is why you shouldn’t invest in only one company’s shares. The key to successful share investing is time, effort and diversification, which means spreading your risk across a number of companies.

Picking shares

As a share investor, you must be willing to take the time to research companies carefully and keep track of their performance.

To be consistently successful, you also need to be willing to make the effort to understand balance sheets, results and trading statements.

When you buy a share you take direct ownership of a small slice of a company. If it does well, then the share price should rise and your stake will go up in value.

Many companies also choose to pay out dividends to shareholders. These are regular payments that reward them for holding the firm’s shares.

Over the long-term reinvesting and compounding dividends has proven to be a major source of stock market returns.

The long-running Barclays Equity Gilt Study shows that if you had invested £100 in the UK stock market in 1945, by the end of 2024 it would have risen to £11,570 thanks to rising share prices.

But if you had reinvested dividends to buy more shares, you would have a pot worth £326,231.

When you are weighing up a company’s shares, look at the fundamentals – as its key financial metrics are known. Read the latest trading statements, results and annual report, and also look at what it says about itself and its prospects – and what others think.

Consider how that company is positioned in terms of financial strength, management, its prospects for growth, ability to pay dividends, and how all this might change in the future.

Can it capitalise if things go its way and is it robust enough to survive if things go against it?

> How to create rules for picking winning shares before they take off 

Spreading risk

The classic mistake made by many who hold shares is to buy too few different companies.

There is no magic number of how many to hold. However, investment research suggests that at least 20 companies, spread across different sectors is desirable.

It has become substantially easier and cheaper in recent years for British investors to invest in shares listed on overseas stock markets, for example, Apple or Nvidia in the US. 

The popularity of doing so has soared thanks to the runaway success of US tech giant shares.

Avoiding home bias and investing beyond home turf is considered an important part of diversification. 

You can do this by buying foreign shares, or alternatively you may choose to use funds or index-tracking Exchange Traded Funds, known as ETFs, to easily do this with part of your portfolio and focus your efforts on UK stocks with the rest.

This type of mix-and-match approach, sometimes dubbed core and satellite, is one often recommended by investment experts for those who want to dabble in individual company shares.

By holding the bulk of your investments in broadly spread global funds, you can diversify in a cheap and simple way, while also allocating some of your pot to picking individual company shares.

> How to tell if a share is good value 

How to buy and sell shares

The cost of buying individual shares has tumbled in recent years, largely thanks to pressure from challenger DIY investing apps, some of which offer commission free dealing.

Until a recent shake-up DIY investing giant Hargreaves Lansdown charged £11.95 to buy and sell shares. It now charges £6.95 for share dealing, while rival Interactive Investor charges £3.99, AJ Bell charges £5 and Fidelity charges £7.50. These services also come with account fees.

In contrast, investment app Trading 212 offers free share dealing and has no account fee or charge for holding investments.

Freetrade and IG also offer free share dealing and have fee-free account options.

If you plan to buy and sell shares regularly then it pays to consider investment fees carefully and make sure a platform is right for you. If you want to buy overseas shares then watch out for foreign exchange fees, which can vary substantially. For example, Hargreaves Lansdown and Freetrade’s standard charge is 0.99 per cent, whereas Trading 212 charges 0.15 per cent.

> Read our guide to the best investing platforms and all their charges

Investing platform reviews