Legal Requirements for Buying Shares in a Company

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Buying shares can be a great investment, with big returns and a piece of the company. But first you need to understand the legal bits to comply and protect your investment. Here’s a rundown of the legal requirements for buying and selling shares in a company, the steps, the key things to consider and FAQs.

Understanding Share Buying

What does it mean to buy shares?

Buying shares means you’re buying a piece of the company, you get ownership. Shareholders may get dividends and voting rights on company matters, depending on the type of shares they hold.

Types of Shares

There are two main types of shares: common shares and preferred shares. Common shares have voting rights and dividends, preferred shares have fixed dividends and priority over common shareholders in liquidation.

Legal Requirements for Buying Shares

Do Your Due Diligence

Before you buy shares you need to do your due diligence. This means:

·       Review Financial Statements: Look at the company’s financial health by checking its balance sheet, income statement and cash flow statement.

·       Assess Market Position: Look at the company’s market position, its competitors and growth potential.

·       Understand Risks: Identify the risks of the company, regulatory issues or market volatility.

Comply with Regulatory Requirements

Investors must comply with regulatory requirements set by the financial authorities. In the UK the Financial Conduct Authority (FCA) is the regulator. Here are the key requirements:

·       Disclosure: Public companies must disclose material information to investors, transparency is key.

·       Prospectus: For IPOs companies must produce a prospectus that outlines the investment risks, financial position and business plan.

·       Insider Trading: Investors must comply with insider trading laws which prohibit trading on non-public material information.

Legal Documents

Buying shares involves several legal documents:

·       Share Purchase Agreement (SPA): This is the contract that outlines the terms and conditions of the share purchase, price, number of shares and any warranties or representations.

·       Stock Transfer Form: This is the form that records the transfer of shares from the seller to the buyer and must be sent to the company’s registrar.

·       Shareholder Agreement: This is the agreement that outlines the rights and obligations of shareholders, voting rights, dividend policy and exit strategy.

Tax Implications

Understanding the tax implications of buying shares is important. In the UK you may be liable for:

·       Stamp Duty: A tax on the transfer of shares, 0.5% of the purchase price.

·       Capital Gains Tax (CGT): Tax on the profit made from selling shares, various exemptions and allowances.

·       Dividend Tax: Tax on dividend income, different rates depending on your income band.

Financial Advice and Legal Guidance

Seek professional advice. Financial advisors can give you an opinion on the investment and legal counsel can ensure you comply with all the legal requirements and navigate the complex transaction.

Things to Consider When Buying Shares

Investment Strategy

What’s your investment strategy, long-term growth, dividend income or short-term trading. Your strategy will determine the type of shares you buy and the companies you invest in.

Risk Tolerance

Before you invest assess your risk tolerance. Shares can be volatile and knowing your risk tolerance will help you make informed decisions and manage your portfolio.

Company Research

Research the company you want to invest in. Look at the management team, business model, market potential and historical performance.


How do I buy shares in a company?

Conduct due diligence, comply with regulatory requirements, understand the legal documents, consider tax implications and seek professional advice.

What legal documents are involved in buying shares?

SPA, stock transfer form and shareholder agreement. These documents outline the terms and conditions of the purchase and the rights and obligations of shareholders.

Are there tax implications?

Yes, you may be liable for stamp duty, capital gains tax (CGT) and dividend tax depending on the circumstances of the share purchase and sale.

How do insider trading laws affect buying shares?

Insider trading laws prohibit trading on non-public material information. You must comply with these laws to avoid legal penalties.

Do I need to seek professional advice before buying shares?

Yes, seek financial advice and legal guidance to ensure you comply with the legal requirements and make informed decisions.


Buying shares in a company requires you to comply with the legal requirements to protect your investment. By doing due diligence, complying with the regulatory requirements, understanding the legal documents, considering tax implications and seeking professional advice you can navigate the share buying process. This guide is meant to give you the information to make informed and legal decisions. For specific legal and financial advice always seek professional advice.

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