Owning shares: a step-by-step guide

Owning shares: a step-by-step guide

Royal Mail achieved an important milestone when it floated on the London Stock Exchange in 2013. Many of you will have received shares in Royal Mail through the Free Shares Offer. You will have also recently read about Royal Mail s Save As You Earn (SAYE) scheme. In this guide, we set out some of the key facts about owning shares. Owning shares is not for everyone. The share price can go down as well as up. If you have any questions about how owning shares will affect your financial position, you should get independent financial advice. Royal Mail and Equiniti cannot provide this. 2

What is a share? Imagine dividing a business up into thousands of equally sized pieces, then selling or giving the pieces away. That s really all shares are units of ownership. If you buy or receive shares, you become a shareholder. This means you own a piece of the business and may be entitled to a share of any profits it makes. The profits a company can distribute to shareholders may be paid to you as dividends (see page 8 for more details). Shares: Shares are units of ownership. If you buy or receive shares, you become a shareholder. 3

Why do share prices go down as well as up? Share prices can be influenced by lots of things. The two main factors are the performance of the company (internal factors) and the wider market or economy (external factors). 1. Internal factors Share prices tend to reflect what people think will happen in the future based on the company s performance. So, if a company is performing well and this is expected to continue, the share price may rise. But, it may fall if the company s future is not so promising. 2. External factors If economic conditions are good and are expected to continue, investors tend to feel confident. When investor confidence is high, demand for buying shares tends to rise and share prices may increase. However, if the economic climate is gloomy, investors may feel nervous about a company s ability to make a profit. This tends to reduce demand for buying shares and means its share price may fall. In tough times, robust companies can see their share price fall, even if they are doing well. On the other hand, companies can benefit from good economic conditions and may see their share price go up, even if the actual business isn t performing well. 4

What is the London Stock Exchange? Shares in many UK listed companies are bought and sold on the London Stock Exchange. What is a company worth? Companies included in the FTSE 100 and FTSE 250 are ordered by size based on what is called their market capitalisation. This can be worked out by multiplying the number of shares in a company by the current share price. The market capitalisation of a company will change as its share price goes up and down. You may have seen the media talk about the largest companies being included in the FTSE 100 or FTSE 250. The companies included in the FTSE 100 and FTSE 250 are updated every three months. If the overall value of a company s shares goes below a certain level, it may move out of the FTSE 100 and into the FTSE 250. It will then be replaced by another company whose market capitalisation is bigger. Market capitalisation: This can be worked out by multiplying the number of shares in a company by the current share price. 5

What are the benefits of owning shares? If you hold even a small number of shares in a business, you actually own a small piece of the value of that business. Like other shareholders you may be entitled to: A share of the profit the company makes, usually through a dividend payment. The right to vote on different shareholder issues. Some extra money if you decide to sell shares and can do this at a higher price than the price you paid for them. 6

But aren t there risks? There is always an element of risk to owning shares. The level of risk and the money you make on your investment depends on the company you re investing in. In addition: If the business you invest in does poorly in the future, then the value and the price at which its shares are traded may go down. If you buy shares in a business that doesn t make a profit, then you may not be paid a dividend. Even if a company does make a profit, it may not pay a dividend. You may have to pay certain taxes when you buy or sell shares. Buying shares in a business you hope will do better in the future is also a risk because if it doesn t do as well as you expect, you may not get your money back. Remember: There is always an element of risk to owning shares. The price of shares can go down as well as up. The value of Royal Mail shares will depend on a number of factors including market demand, the performance of the business and sentiment what people believe or expect will happen in the future. 7

What is a dividend? A dividend is a portion of a company s profits that it pays to its shareholders. Dividends are usually paid twice a year, although this may vary between different companies. A company s Board decides when and how often dividends are paid and how much these will be. Certain types of dividend have to be approved by shareholders. The amount of dividend a company pays depends on many things, including a company s performance and future investment plans. It can also choose not to pay a dividend at all. What is the overall return? In simple terms, this is the money you receive over time for example, through dividends and/or share price increases against the money you originally invested when you bought or were given shares. The overall return shareholders make on their investment will vary depending on the type of company they are investing in. If a company is believed to be a less risky investment, a shareholder might expect to receive a lower return on their shares. However, if they put their money into something more risky, they may expect to receive a higher return when things go well, to recognise the risk they are taking. Your choice: Ultimately, investing in shares is always up to you. You should never invest money in shares that you can t afford to lose. 8

Who owns Royal Mail shares? 1. Retail investors Retail investors are individuals who invest their own money in shares. 2. Institutional investors Institutional investors typically do the majority of buying and selling (or trading) of shares. They include a range of companies and organisations such as insurance companies, pension funds and fund managers. They may also invest on behalf of individuals. 3. Employees Eligible employees of Royal Mail Group Limited were given 10% of the company s issued shares when the company was sold. This was known as the Free Shares Offer. Employees could also apply to buy shares through the Employee Priority Offer. 4. Government Following privatisation, the Government holds just under 30% of Royal Mail s shares. 9

What are the benefits of Free Shares? Any money you may make from selling your Free Shares will be profit for you, as you haven t had to pay for them. Owning Free Shares also means: You share in your business future success at no personal cost. You receive any dividends the company may pay while you hold them. You have a say in the future of the business. You may feel more involved and motivated in a business you not only work for but also own part of, together with other shareholding colleagues. You could receive cash if you sell your shares (potentially tax free) at a later stage. If you keep your Free Shares in the Share Incentive Plan for five years from the date you were given them, you won t have to pay any income tax or National Insurance on their value if/when you sell them. Free Shares: Any money you may make from selling your Free Shares will be profit for you, as you haven t had to pay for them. 10

What are the benefits of SAYE? You will have recently read about Royal Mail s Save As You Earn (SAYE) scheme. The benefits include: If, at the end of the savings term, you choose to use your savings to buy shares, you can keep hold of them. This means you will benefit from any future dividends the company may pay and any potential future growth in the share price. If, at the end of the savings term, you choose to use your savings to buy shares, you can also sell them straightaway (subject to any relevant dealing restrictions) and could possibly make a profit. If, at the end of the savings term, you do not want to use your savings to buy shares, you can choose to have your savings repaid in full. Finally, you can close your SAYE account, stop saving, and get all your money back at any point during the savings term. Your guide to Royal Mail s Save As You Earn scheme 2014 Remember: The share price can go down as well as up. If you choose to buy shares, the value of your shareholding would be determined by the share price if/when you sell your shares. 11

Where can you see Royal Mail s share price? You can see the share price every day the stock market is open. Royal Mail s share price is shown on www.myroyalmail.com and www.royalmailgroup.com, on business screens in the workplace and in some newspapers. On the Group s websites, the share price will update every 15 minutes when the stock market is open and will show the closing price of the previous trading day when the stock market is closed. Next steps? More information is always available on shares. Find out more by visiting www.myroyalmail.com/your-shares The Courier newspaper also regularly features the City Column. Finally, The Apprentice s Nick Hewer has presented some special RMTV programmes about shares and Royal Mail s SAYE scheme. These are available on Content on Demand now.