Direct shares

Owning individual companies — the concentration risk, and the specific trap of holding your employer's shares.

Buying shares in individual companies means owning a small piece of that business directly. It's how investing is usually portrayed, and it's how a minority of sensible portfolios are actually built.

What you own

A share is part-ownership. You're entitled to a share of profits distributed as dividends, you can vote at general meetings, and you benefit if the company becomes more valuable.

You also carry the full risk of that single business. Companies fail, and when they do, shareholders are last in the queue and usually receive nothing.

The concentration problem

The mathematics of individual shares is less forgiving than it appears.

Studies of long-run stock market returns consistently find that most of the total return comes from a small minority of companies, while a large proportion of individual shares underperform cash over their lifetime. The index rises because a handful of enormous winners more than compensate for a great many losers.

Which means holding a small number of shares gives you a meaningful chance of missing the winners entirely. The average outcome across all shares is good; the median outcome for any one share is considerably worse. A diversified fund captures the average. A portfolio of eight companies takes a genuine chance on the distribution.

The specific trap: your employer's shares

This deserves its own warning, because it catches sensible people.

Employee share schemes are common at large employers, and the North East has several sizeable listed companies whose staff accumulate shares over years — through Save As You Earn schemes, Share Incentive Plans and similar arrangements.

These schemes are often genuinely good value. SAYE lets you buy at a discount to the price when you started saving, with the option to take your cash back instead if the shares have fallen. Share Incentive Plans can offer free or matching shares with favourable tax treatment if held long enough. Taking part is frequently the right call.

The problem is what happens afterwards. Someone who leaves every allocation in place for fifteen years can end up with a large proportion of their wealth in one company — the same company that also pays their salary and, if it's a defined benefit scheme, backs their pension.

That's the same risk three times. If the company gets into difficulty, your job, your pension security and a large chunk of your savings are all affected simultaneously. It's the concentration risk everyone warns about, arriving through a side door because each individual decision looked reasonable.

The answer isn't to avoid the schemes. It's to sell down periodically and reinvest elsewhere, treating the shares as compensation to be diversified rather than a holding to accumulate. Selling within the scheme's tax-favoured windows, and transferring shares directly into an ISA where the rules allow, can do this efficiently.

When individual shares make sense

As a satellite, not the core. A diversified base of funds, with a modest allocation to individual companies you've actually researched.

When you genuinely enjoy it. Some people find company analysis interesting and will do the work. That's a legitimate reason, provided the money at stake is money you could lose.

For income, carefully. Some investors build dividend portfolios directly. It requires more holdings than people expect to be adequately diversified, and dividend cuts cluster in downturns.

Not for money you need. Never for a house deposit, an emergency fund, or the part of your retirement you're relying on.

The practical points

Dividends and gains are taxable outside a wrapper, above the £500 dividend allowance and the £3,000 capital gains exemption respectively. Inside an ISA or pension, neither applies.

Dealing costs matter more with individual shares, since building a diversified holding means many separate purchases.

Stamp duty of 0.5% applies to most UK share purchases.

How many is enough? Genuine diversification within equities takes more holdings than most private investors have — commonly cited figures start around fifteen to twenty across different sectors, and that's before geographic diversification. Below that, you're taking company-specific risk you aren't being paid for.

This article is for general education only and isn't personal advice or a recommendation of any share or scheme.