Ten Minute Tip - Buying Shares
Many of us love the idea of dabbling in the stock market, but are put off by the mystique and endless jargon. Buying and selling shares, however, is remarkably simple. A better return on your investment can await those that take a long-term view, but getting involved in stocks and shares isn’t without its risks…
What is a share?
By buying and selling shares, also known as ‘equities’, you are buying and selling part-ownership in a company. To use the Dragon’s Den analogy, companies sell shares to raise money, while people buy shares because they think the company will be more successful, thus making their ‘share’ more valuable.
Companies who have decided to sell shares are generally (though not always) listed on stock exchanges. The UK’s main exchange is the London Stock Exchange.
Why Buy Them
In the long-term, studies have shown that shares have consistently outperformed other types of investments like property, government bonds or interest rates on bank accounts.
However, investing in shares isn’t without its risks. Dramatic losses on the stock market in 2009 and 2008 severely affected many people’s investment. This is why many advise speculators to invest in shares for a period of at least five years.
As well as make money by the share price (hopefully) going up, some companies also pay dividends. This is a yearly or twice yearly payment - or ‘reward’ - to shareholders when a company is profitable and has some extra cash in the bank to distribute.
How do you buy a share?
Share trading is usually done by a stock broker, who works as an intermediary between the buyer/seller and the stock exchange.
There are two main types of stock broker. The first is an ‘advisory broker’ who will help you put a portfolio of shares together by advising you on when to buy and sell certain stocks. The second is an ‘execution only’ broker who buys and sells according to your commands.
Fees for both vary considerably, with the ‘advisory broker’ likely to cost more with possible monthly/quarterly management fees. Both will charge a fee to complete the trade. Currently, on-line execution services are the cheapest, with some charging between £8-£15 per trade. When you buy shares, you will also be subject to a stamp duty charge of 0.5% of the value of the transaction.
How To Pick Shares
Many investors use different criteria to pick stocks. Some pore over a company’s reports and accounts (‘fundamental analysis’), others use ‘technical analysis’, which focusses on a share price’s history to predict future share movements.
The internet, of course, is invaluable. As well as company websites and news, there are plenty of free financial tools to help you find your first few shares. Papers like the Financial Times will also give you a good idea of which areas and companies are performing well.
Further Reading