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www.InvestmentGuide.co.uk SHARES
Lump sum invested in a special type of share in a company quoted on the stock market at a fixed rate of interest. There is no fixed life for the shares which may be bought and sold at any time for the market price through a stockbroker. You may make or lose money when you sell. If the company you invest in goes bust, you will probably lose all your money. They are more like a Stock or Bond than a Share but the tax postion is less favourable. There are also Convertible Preference Shares which in addition carry the right to be converted into Ordinary Shares at a fixed price and date in the future although often these conversion rights often turn out to be worthless.
Who can invest Anyone aged 18 or over.
How worthwhile Basic taxpayers may find Preference Shares with a higher yield than Corporate Bonds as at present they are an unfashionable sector because tax changes have made them unattractive to institutions such as pension funds. However there are relatively few shares available and investors run the risk of losing money if the company concerned gets into difficulties. Non-taxpayers can no longer reclaim the tax credit and should consider selling any preference shares they have and re-invest in Stock Corporate Bond or Stock Government Fixed-lnterest on which they can reclaim any tax deducted. Unsuitable for higher rate taxpayers except for Investment Trust Zero Dividend Preference Shares which are a different sort of investment with a similar name.
Minimum £14,000 because of minimum commission and the need to hold a portfolio of shares in different companies to avoid risk of failure.
Maximum None but some shares are in short supply and a £10,000 maximum in any one share would be sensible because when you come to sell there may be few buyers around.
Suitable Lump sums.
Money back 5 working days. You get the market price at the time you sell.
Interest High and fixed. Variable through unit trusts. Called dividend. If a company runs short of money, interest can be reduced or stopped. Cumulative preference shares must have their arrears paid later (but interest is not paid on arrears); non-cumulative ones need not. The yield of the shares varies according to the market price of the shares.
Interest paid Half-yearly by cheque to you or direct to a bank account. About 5 weeks before the dividend is paid, the shares go ex-dividend when the seller gets the next dividend, not the buyer.
Tax 10% tax (the tax credit) is deducted from the dividend. Non-taxpayers cannot reclaim the tax credit. Higher rate tax-payers have to pay 22½% extra; basic taxpayers don't. Gains on preference shares are liable to capital gains tax unlike gains on Corporate Bonds which are not.
Fees to pay Through a unit trust or OEIC: 3% to 5¼% initial, ¾% to 1¼% yearly. If you buy the shares direct: Stockbrokers commission varies: 1% to 1.9%; stamp duty ½%. Commission only when you sell.
Passbook Share certificate from the company you invest in or statement of ownership from your stockbroker if your shares are held by your stockbroker as nominee . Nominee holdings will increasingly become difficult to avoid under Crest.
Children Under 18 shares or trusts are registered in an adult's name but can be designated with a child's initials or name.
Risk The company whose preference shares you own can stop paying interest or go bust so it is safer to invest in a Unit Trust which specialises in them. Possible capital loss if interest rates rise and the price of your shares or units falls.
How to invest Get advice from a stockbroker (your bank or accountant will introduce you to one or use an on-line one). Unit trusts and OEICS have reduced their exposure to preference shares and most specialist funds now invest in corporate bonds instead.
Where from A stockbroker.
Last updated 17
December 2007.