Shares

Want to know how to buy shares?

Happily buying shares has now become accessible to everyone with the emergence of online share dealing platforms. These online platforms list the shares of companies that are listed on a stock exchange. The main exchange in the UK is called the London Stock Exchange, and here you will find shares in all the major companies and household names. There is also the Alternative Investment Market or AIM, where shares can be found from small developing countries. Remember, in order to buy shares in any company, they must first be listed on a stock exchange.

Selecting which shares to buy is a more complex process and requires some in-depth knowledge of the companies you are considering and their current financials. Many share dealing platforms offer access to research on the companies they have listed to help you make informed decisions. Always remember that past performance is no guarantee of future results.

Share dealing platforms are the cheapest way to buy shares, however, there are still associated costs with buying and selling shares and you should be aware of these before you proceed. More often than not, there is a trading fee which you are charged each time you make a transaction, however, there are a few platforms that offer commission-free trading so you can buy and sell shares for free.

This is the process by which a company first offers to sell its shares to the general public and institutional investors.

At this point the company has yet to list its shares on the stock market, however, they can be purchased through certain providers and will often be available at a discounted price. The hope for investors is that shares purchased during an IPO will increase in value on their first day of trading, however, this is a very risky strategy and the value of shares can in fact decrease once listed.

During the IPO you will be purchasing shares directly from the company in question before retail investors have the opportunity to buy and sell shares among themselves. Once the IPO is completed, the company’s shares will be listed on the stock market and will be available to buy and sell.

Find out more about how to trade IPOs in our Guide to Trading IPOs in the UK.

• Owning the share as an individual
• Combining your investment money with other individuals in order to invest as a group and therefore reduce the associated risks of the investment. This is known as a fund.

This is because should the company you are invested in get into any sort of difficulty, you could end up losing all your capital. Conversely, owning shares in lots of companies will ensure that should one company lose ground, the other companies can help soften the blow to your portfolio. Investing in a fund also offers the following advantages:

Professional Portfolio Management

A fund will usually come with an annual management fee which you will need to factor into your costs. This management fee covers the cost for a professional manager to buy and sell shares on your behalf and continuously make adjustments in line with fluctuations in the marketplace.

Reinvesting Dividends

Any dividends earned by the funds can be used by your fund manager to purchase additional shares in order to help the fund grow.

Mitigating Risk

Your fund manager will ensure that you are properly diversified in order to ensure your risk is as mitigated as possible whilst also ensuring the best possible returns. Many funds will own in the region of 1,000 or more individual stocks across a varying range of securities.

However, once you have sold a share that is falling in value, you have essentially locked in that loss. The main thing to remember about shares is that they will fluctuate in value, going up and down over short periods of time. However, over the long run, shares will usually go up. Therefore a trader should seek to avoid market sentiment and refrain from selling all their shares as soon as they drop in price.

Holding investments over the long term is by far the best way to mitigate risk and gives you time to ride out any bumps in the marketplace. Therefore, professionals will always recommend that you plan to hold your investments for at least five years before you attempt to sell them. This also provides scope for your investments to compound and grow, earning you better returns.

If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.

Warren Buffett

I have already covered the importance of diversifying your portfolio in order to mitigate your risk. Diversifying your portfolio is done by buying different stocks, from different sectors and different geographies, so a crash in one area of the stock market needn’t be a catastrophe for your entire portfolio.

Reliable blue-chip companies will present much less risk to your portfolio and therefore you won’t need as many shares as you would if you were buying much riskier start-up shares.

It is of course possible to over-diversify, at which point it can become impossible to keep track of all your shares and you will risk spreading yourself too thin. Always remember that you will need to keep abreast of all news on any company that you own shares in order to anticipate changes to the market.

Stocks and Shares ISAs are offered by a majority of investment platforms, however, there are usually associated costs and it’s worth taking the time to identify the best Stocks and Shares ISA for your unique circumstances.

For more information on Stocks and Shares ISA as well as our best-in-class recommendations, please refer to our Best Stocks and Shares ISA guide.

The annual limit for depositing into a stocks and shares ISA is currently £20,000, so anything over and beyond that will need to go into a General Investment Account or GIA, otherwise known as a share dealing account.

Most online trading platforms will also provide a GIA for this reason, and it stands to reason that you would be best served having both accounts with the same provider.

Once you have sold that share, you have locked in your profit.

The other way to make money from shares is when buying the best stocks paying dividends. Dividends occur when a company makes a profit and pays some of that profit to its shareholders. Some pay dividends on a regular basis and other companies will make one-off payments.

The good news for dividends is that the first £2,000 you receive comes under your dividends annual allowance and is completely tax-free. Anything beyond that will be charged tax which is calculated according to your tax bracket – 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.

The costs to check are as follows:

Platform fee: This can be charged at a monthly, quarterly or annual rate. Some platforms will waive this fee entirely

Cost per trade: This is the fee you will pay every time you buy or sell shares. This can be as high as £11.95 for some platforms whilst other platforms will offer zero-commission trading.

Frequent trader: This is a reduced fee for traders who make over a certain number of trades in a given time frame.

Annual custody fee: This is the charge for managing your investments and can either be a flat fee (great for large investment pots) or a percentage of your total investments (which is a better option for small investment pots). Again, it is worth looking for providers who have waived the custody fee entirely.

Phone dealing fee: This is only relevant if you intend to place trades over the phone. If you are comfortable with trading online then you can completely eliminate this fee. Not all platforms will accept trades over the phone so this is also something to check if relevant to your style of trading.

Exchange-Traded Funds fee: ETFs or Exchange Traded Funds come with a fee to cover the cost of managing the fund. This is usually expressed as a percentage of your investment or a flat fee, however, some platforms will waive this fee entirely so again it is worth checking.

Investment trusts fee: Investment trusts also require careful management and therefore often attract a fee. Again, this can be expressed as a percentage of your investment, a flat fee, or zero fees.

Stamp Duty: Stamp duty is charged at a rate of 0.5% when you buy shares online and you can expect to pay an additional £1 on any transactions above £10,000.