How To Buy Shares
Some would-be investors are put off by the fact that they (mistakenly!) think buying shares is too complicated or time-consuming. Nothing could be further from the truth! Buying shares, or stocks as they are sometimes called, can be quick and easy, and whilst some research and knowledge is required, we genuinely believe the stock market is for everyone.
What are Stocks and Shares?
Basically, a ‘share’ means a small part of the ownership of a company. So if I have 1 share in a company, and there are in total 100 shares available for this company, then I own 1% of the company. This means that I am entitled to certain things.
For example, when the company makes profits, it will pay out some of these profits to shareholders. These payouts are called dividends, and a stock that has a good track record of paying dividends is therefore usually an attractive option for investors.
Secondly, as a part-owner of the company, I will get to vote on certain matters affecting how the company is run. Finally, if the company goes bankrupt, I will be entitled to a share of whatever is left over after debts have been paid. A key point is that you, as a shareholder, do not have to pay these debts for the company.
You have what is termed ‘limited liability’, which means you can only ever lose what you have put in. In the above made-up example, if the 1 share I own was bought for £5, but then the company collapsed if will have lost my £5, but no more than this.
So in short, buying shares means becoming the part-owner of a company, and this entitles you to some benefits when the company performs well. As such, seasoned investors often talk about ‘gaining exposure’ to a company, meaning that they buy and sell shares to benefit from the performance of specific companies.
What is a Broker?
Big companies like Barclays, Sainsbury’s and Amazon are what are called ‘publicly listed’. This means that their shares are traded every day – in fact, every second! – on stock markets around the world. As such, if you want to buy a share in these or other companies, you have to have what is called a ‘broker’.
Brokers are companies that specialize in bringing people who want to buy together with people who want to sell. The internet has totally revolutionized brokerages, and it has literally never been easier to buy or sell financial assets. The vast majority of share dealing today takes place through online brokerages like eToro. This has made share dealing cheaper, quicker, and easier to access than ever before.
A key technical term to familiarize yourself with before you set off on your trading journey is the concept of the ‘bid-offer spread’. In simple language, ‘bid’ means sell, and ‘offer’ means buy.
Accordingly, the bid price is the price someone can sell a stock at, and the offer price is what you’d have to pay if you want to buy. The offer will always be a little higher than the bid, and this difference is what allows essential firms called ‘market makers’ to make their profit.
Market makers are firms who will sell when you want to buy, or buy when you want to sell at the stated prices. Brokers are simply middlemen going between you and the market markers when you want to trade. Bid-offer spreads vary from company to company, but are generally much larger with smaller companies. This is simply because the shares are less ‘liquid’, meaning they change hands less often.
What Is the Most Cost-effective Way to Buy and Hold Shares?
You have a huge choice of online brokers these days, and this competition has made the market very efficient. Most brokers by now charge relatively low fees compared to a few years ago. However, broker fees too do vary somewhat, so it’s important to check out the specifics of what you’re paying for.
Your needs and wants will guide what type of broker is the right choice for you. Some brokers charge a fee per trade, others charge a fixed monthly fee. So if you plan to trade a lot, maybe an account with a fixed monthly fee is best for you.
Some brokers will specialize in UK shares, or US shares, for example. This means they might add extra charges for purchasing shares from other markets. Additionally, some brokers will offer tons of really useful extra services for free, while others will make you pay for what you use.
Typical other services include research papers, financial commentary, technical models, trading tutorials, etc. In short, if you know your needs and what you do and don’t want to pay for, then selecting the right broker for you should be easier. They all have strong and weak points, and it isn’t a case of right or wrong.
How Do I Actually Buy a Share?
Once you have chosen your broker and opened an account, you are ready to start buying shares and building your portfolio! You just log in to your account and search for the share you want to buy.
You can use the companies real name or its share ticker code (for example Apple is APPL). If it is a large global company, then it may be listed (this to say, for sale), on more than one stock exchange.
The major global stock exchanges are London, New York, Tokyo, but there are hundreds of stock exchanges around the world. At any time of the day or night, someone somewhere is buying or selling something! Now you need to decide how much you want to buy.
You can do this either by the number of shares you want, or the amount of money you want this to cost. Next up, you need to choose what type of order to place. ‘At best’ simple means your broker will contact various market makers, and bring you the best price it finds at that moment in time.
The alternative, which is a little more complicated, is a ‘limit order’. Here you can say a price you won’t trade above or below, and it's up to your broker to see if there is someone out there who fits this parameter. This will take longer to carry out, and there is usually a small additional charge. Don’t forget for UK shares there is a tax of 0.5%, called ‘stamp duty’, and the broker will automatically deduct this for you.
Now I’ve Bought, How Do I Hold My Shares?
Congratulations on joining the stock market with your first share purchase! You can hold your shares on your personal account with your broker. They will keep you up to date with dividend payments from your shares, as well as any other essential info.
Now that you’ve bought, you can sit back and relax – so long as you’ve selected good companies, they will rise in value of time and should pay you a steady stream of dividends in the meantime. However, if you feel you have made a mistake, or simply that you prefer some other stock, then you may want to think about selling either some or all of your holdings of a stock.
The amount of stock you hold is called a ‘position’, and a big part of being a successful investor is judging when and how to either increase or decrease your position in certain stocks.
How Do I Sell Shares?
The good news is that you already know almost everything you need to about selling shares. The process is very similar to buying shares. Start by telling your broker what shares you want to sell and how much. Just like when you bought, you will have several options for types of sell order.
As before, At Best means the broker will take the best price they can find at that time. You can also specify certain limits; such as don’t sell for less than this price, or always sell when the price hits this level, for example.
Again, these more detailed orders will probably incur slightly higher charges, but they can be very useful from time to time! It will take two days from when the transaction is executed to when it is ‘settled’, and so you will be able to withdraw your money after two days. Very often, investors leave the cash they have received in their share dealing account because they plan to use it to buy some other share.
If you hold your shares in an ISA account, then you won’t have to pay Capital Gains Tax, and this is how most investors hold their shares.
The good news is that there is no stamp duty to pay when you sell a share. The bad news is that you might have to pay capital gains tax on any profits you have made. Every time you buy or sell, your broker will send you either in the post or electronically a ‘contract note’ showing you exactly how many shares you have sold and for what price.
You are well-advised to hold onto these as you may need them for tax purposes or for your own records.
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