.jpg){kind=small}
Buying shares is one of the most convenient and popular ways to start investing. With the commercialisation of stock trading platforms across the UK and beyond, it's now easier than ever.
Step 1: Find a trading platform and open a share dealing account. When selecting a broker, pay attention to trading fees, minimum deposit requirements, and withdrawal fees.
Step 2: Check the price of the share you wish to buy. Shares may be priced differently, we explain this in detail below.
Step 3: Fund your account. You can deposit money using bank transfer or debit or credit cards. Note that card payments may incur additional charges.
Step 4: Select the order type. You can arrange how much you’d like to pay for a share by choosing different orders, scroll down to learn more.
Step 5: Review your order. Make sure every detail is correct before you hit the button.
Step 6: Place your order and monitor your trades. And that’s it – you are a shareowner. Make sure to regularly check your investments.
What Is a Share?
Shares, also known as stocks or equity, represent ownership in a company. When a company decides to raise capital to fund its operations, expansion, or other initiatives, it can issue shares to the public through an initial public offering (IPO) or sell them privately.
Issuing shares to the public, or “going public”, also helps improve access to future capital, boosts a company’s credibility and visibility, and can provide an exit strategy for early investors and founders.
Shares are essentially divided portions of a company’s ownership. Once you buy a share, you become a shareholder or a stockholder. This means you have a claim on the company’s assets and earnings proportional to the number of shares you own.
While it depends on the company, types and amount of shares you own, becoming a shareholder might give you the right to participate in important corporate decisions. These can include electing board members or approving major transactions. You can also gain access to private company information, get dividends if the company distributes profits, and more.
The Price of a Share, and How the Stock Market Works
The stock market is a marketplace where buyers and sellers come together to trade shares of publicly listed companies. The major marketplaces include the London Stock Exchange, New York Stock Exchange, and Nasdaq.
There are many factors that can influence the price of a share on the stock market. Some of these are:
A company’s financial performance – This is perhaps the main factor, influenced by all others. The price of a company’s shares is directed by its revenue growth, profitability, earnings, and expected future performance. The better it performs, the higher the share price.
Broader economic conditions – These include factors such as inflation, GDP growth, unemployment rates, and the general geopolitical stability and strength of a region.
Investor sentiment – This term refers to the emotions and perceptions of market participants. If the sentiment is positive, i.e. market participants are optimistic about a company and are confident in its future, prices and buying activity will increase.
Supply and demand – Simply put, if there’s a high demand and limited supply, the price of a stock will increase.
Industry and sector trends and news – This relates to how well a sector is developing and performing. Regulatory changes, technological advancements, competitive dynamics, and consumer behaviour, can all influence the price of a share.
How do you earn from investing in shares?
While there are several approaches towards maximizing your earnings from investing in shares, there are two primary ways you can earn money: dividends and capital appreciation.
Dividends
Some companies distribute a portion of their profits to shareholders in the form of dividends. Dividends are cash payments made on a regular basis, often quarterly or annually, to reward shareholders for their investments.
As far as how much you can expect, the actual dividend yield varies significantly from sector to sector, and from company to company. For example, the basic materials sector has an average dividend yield of 4.92%, while basic material stocks in the S&P 500 are at 2.5%.
Note that you should be wary of “chasing dividends”. Companies with dividend yields higher than 8.5% can be risky, either because of something problematic happening within the company, or if its stock prices have dropped.
Not all companies pay dividends. The reason they do so is either because of various tax considerations or because the company wants to focus on reinvesting as much money as possible into growth and development.
Capital Appreciation
Shareholders can potentially earn returns through capital appreciation. If a company's share price increases over time, investors can sell their shares at a higher price than what they paid, realizing a profit.
Capital appreciation depends on various factors, such as the company's performance, market conditions, and investor sentiment. As with dividends, the average return varies on the stock, time period, company, industry, sector, etc…
For example, the average annual S&P 500 return was 7.51% between 2018 and 2022. If we were to observe 2013 to 2022, it's 10.41%. However, looking at the last three decades, it's still at 7.52%.
Ways of Investing in Shares
Below are some of the approaches to investing in shares.
Buying Individual Shares
This is the most direct route, where you purchase shares of specific companies directly through a brokerage account. In doing so, you have direct ownership within your chosen company.
- Highest potential for returns
- Flexibility when building your portfolio
- Greatest amount of control when choosing and buying your stock
- Requires the highest amount of research
- Higher risk due to concentration in a limited number of stocks
- Requires regular monitoring of your stock, the companies you invest in, and everything that might influence the price of your stock
Investing in Index Funds
Index funds are investment funds that aim to replicate the performance of a specific market index, such as the S&P 500. These funds hold a diversified portfolio of shares that mirror the index's composition.
- Instant and easy diversification
- Great for long-term investing
- Broad market exposure
- Relatively lower expense ratios compared to actively managed funds
- Lack of control over individual stock selection
- Lack of flexibility when it comes to tailoring the portfolio to your wishes and wants
- Returns are tied to the performance of the tracked index, which limits outperformance
Investing in ETFs
Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges, similar to individual shares. ETFs can track various indexes, sectors, commodities, or asset classes.
- Flexibility achieved through day trading
- Great diversification
- Exposure to various sectors, regions, and companies
- ETF prices may deviate from their net asset value (NAV) due to market demand and supply
- ETFs carry market risk, subject to underlying securities
- Brokerage commissions
What Are The Risks of Buying Shares?
Investing always carries a certain amount of risk. In order to maximize your investment, you need to be aware of the following:
Market volatility – Stock prices can be highly volatile, fluctuating daily or even within minutes.
Systematic risk – Risks that affect the entire stock market, such as economic recession, geopolitical tensions, and inflation.
Company-specific risks – Any changes in management, regulation, financial difficulty, and essentially anything that hinders a company’s performance has a direct influence on its stock.
Currency risk – When investing in stock in foreign currency, said stock can be affected by fluctuations in exchange rates.
Information risk – As an investor, you need to be mindful of rumours, misinformation, and poor research.
Concentration risk – Investing heavily into only a few stocks severely puts your portfolio at risk. For this reason, diversification is always heavily advised.
How to Buy and Sell Shares
Follow the step-by-step guide to buy your very first share.
Open a share dealing account
The first step on your journey to stock trading is to open a dealing account with a reputable trading platform or broker.
When searching for one, you need to consider:
Fees and costs – Commissions vary between brokers and platforms and also depend on the value of the trades you are performing and the number of funds within your account and portfolio. Broker fees can vary between 0.25% and 2% annually, while platform fees—if charged—can go up to 2%. Some brokers and platforms have minimum and maximum monthly or yearly limits on their fees.
Usability and features – Some platforms offer easier portfolio tracking.
Added benefits – Such as extra financial education or signup bonuses.
Licenses – To operate as a regulated financial institution in the UK, they need to be regulated by the FCA.
Check the price
Besides being mindful of your finances, you need to check (and understand) the following points to make the most out of your investment:
Bid – The selling price, or the highest price a buyer in the market is willing to pay for a stock.
Offer (ask) – The lowest price a seller is willing to sell a stock.
Bid-offer spread – The difference between the bid and the offer.
The bid-offer spread varies based on the company whose shares you’re interested in, and the market itself. Highly liquid and popular shares tend to have narrower spreads, which means more competitive pricing.
Fund your account
Before you do so, consider the following:
Your finances – How much you can afford to invest in the stock market.
Your risk tolerance – How much market and portfolio fluctuation you’re willing to endure.
Your goals – Consider the length of time you intend to stay invested in the stock market. Longer time horizons allow for more potential growth.
You also need to keep in mind that there are different ways of funding a brokerage account. Some of these are:
Through a bank transfer;
Electronic funds transfer;
Check or money order;
Wire transfer.
Each of these ways comes with different costs, which can vary to a significant degree; i.e. some platforms and brokers don’t charge any extra fees, while others don’t allow certain types of transfers.
Select the order type
The most common ones are:
Market order – It instructs the broker to buy or sell shares at the best available market price. These orders are executed immediately, and the trade is executed at the prevailing market price. They’re great for highly liquid markets, and quick entries and exits.
Limit order - It allows you to specify the maximum price you are willing to pay when buying or the minimum price you want to receive when selling. The order will only be executed if the market reaches your specified limit price or better.
Stop order (stop-loss order) – Designed to limit potential losses or protect profits, a stop-loss order is placed below the current market price when selling shares and triggers a market order if the stock price falls to or below the specified stop price.
Stop-limit order – It’s a combination of a limit order and a stop order. When the stop price is reached, the order is triggered, and a limit order is activated. The trade will only be executed at the limit price or better. These orders provide the greatest amount of control.
Review your order
Here’s a quick checklist of what you need to do before you finalize your order:
Verify you’ve selected the right stock.
Make sure you’re investing the right amount of money that you can afford.
Verify the amount of all costs and fees, including taxes and currency exchange fees.
Place your order and monitor your trades
Once you’ve placed your order, all that’s left is to monitor your trades. You can do so by actively and regularly reviewing any information you receive from your broker or platform. You will also need to track the companies you have invested in, as well as any events and news that might impact their performance.
Keep in mind that there is always a limit (besides your finances) when it comes to trading. Constantly buying and selling stock can be counterproductive, due to all the excessive fees and costs that add up.
Furthermore, you need to keep in mind that investing is a long-term practice. The general rule of thumb is that you should think in five-year intervals. Of course, regular day trading is also an option, but it needs to be done in accordance with proper research and planning.
Selling Shares
The process of selling stocks is rather similar to buying them and has the following steps:
Access your account and your portfolio
Choose the shares you want to sell
Be mindful of any associated costs
Review your sell order
Place the order
Often, the broker or financial institution you’re using will include relevant taxes and fees either as part of their charges or within your transactions. It’s also important to note that you’re taxed on the price you pay for the shares, regardless of their actual market value.
When buying shares, you need to be aware that:
If you buy them electronically, you will pay Stamp Duty Reserve Tax (SDRT), which amounts to 0.5% of the transaction;
If you obtain them through a stock transfer form, you will pay Stamp Duty on transactions over £1,000;
Buying foreign shares outside the UK doesn’t require you to pay SDRT, but it might be subject to a foreign income tax.
You will not be paying tax if you:
Have been given shares as a gift;
Bought shares in an open-ended investment company from a fund manager;
Bought units in a unit trust, from a fund manager;
Subscribe to a new issue of shares in a company.
When it comes to selling shares, you will need to pay Capital Gains Tax on any profit you make. The actual percentage you will need to pay depends on your Capital Gains Tax allowance.
Common Costs of Buying Shares
Besides their starting price, there are certain charges that accompany buying shares. These heavily depend on your broker, or the investing platform you are using to trade stock.
The most common ones are:
Trading fees – Many brokers charge a fee or commission for each trade you make, whether it's buying or selling shares. This fee can be a fixed amount or a percentage of the trade value.
Currency conversion costs – If you’re buying shares listed in a currency different from your account currency, brokers often charge a fee or apply a spread.
Withdrawal fees – Fees charged when you withdraw funds vary depending on the ways in which you’re withdrawing them, e.g. bank transfers, debit cards, checks, etc.
Inactivity fees – Varying between platforms and the amount of time accounts have been inactive.
Account fees – Some platforms or brokers charge specific subscription fees or maintenance fees. These can vary from providing you with basic services, to advanced services, benefits, and even lower trading fees.
Cheapest Platforms to Buy Shares
Below, you can find the most cost-efficient platforms for buying shares.
Trading fee | Currency conversion fees | Withdrawal fee | Inactivity fee | Monthly Fee | |
|---|---|---|---|---|---|
eToro | ❌ | Between 50-150 pips | £5 | £8/month after 1 year | ❌ |
Hargreaves Lansdown | Between £11.95 and £5.95 | Between 1% and 0.5% | ❌ | ❌ | ❌ |
Interactive Investor | £5.99 for Investor and Pension Builder, £3.99 for Super Investor | 1.5% for trades under £25,000 | ❌ | ❌ | £9.99 – Investor plan, £12.99 – Pension Builder, £19.99 – Super Investor |
AJ Bell | Between £9.95 and £4.95 | Between 0.75% and 0.5% | ❌ | ❌ | ❌ |
Investing in Shares Tax-Free
Besides a general investment account, many investment platforms in the UK also offer an Individual Savings Account (ISA) or a Self-Invested Personal Pension system (SIPP) – both of which help maximise your investment yield.
Stocks and Shares ISAs
ISAs are tax-advantaged accounts that allow individuals to invest in a wide range of financial products, including shares, without incurring income tax or capital gains tax on any returns earned.
Here are the things you need to keep in mind when using an ISA:
Contribution limit – There is a limit to how much you can pay into your ISA account per year. For the 2023/2024 tax year, this limit is £20,000.
Tax benefits – Any income you earn within your ISA, like dividends, interest, or capital gains, is completely tax-free.
ISA types and limitations – For example, taking money out of a non-flexible ISA will cause that money to lose its ISA status. There are also types that are better for a certain type of investment, like stocks and shares ISAs and cash ISAs.
Self-Invested Personal Pensions (SIPPs)
SIPPs are personal pension schemes that allow you to make your own investments to boost your pension pot. For contributions made into a SIPP, the government returns 20% to 45% of the income taxes paid as pension contributions.
Here are the things you need to keep in mind when using a SIPP:
Contribution limit – You can contribute up to 100% of your earnings into a SIPP, and the higher the tax rate bracket you’re in, the higher the tax relief rate.
Withdrawal limit – Unless you’re 55 years old or older, you will not be able to withdraw money from your SIPP. Once eligible, you can withdraw 25% of your SIPP as a tax-free lump sum. Anything beyond that is subject to income tax.
The Bottom Line – Should I Buy Shares?
The final decision always rests on the investor, and no one can give you an answer on whether you should or shouldn’t invest in stock. With that in mind, consider the following before you make a decision:
Your risk tolerance – Be aware of how much money and time you are willing to risk. Consider how comfortable you are with market volatility, and consider your ability and willingness to endure fluctuations in the value of your investments.
Your investment time horizon – How long you’re willing to hold onto your investments before you sell. This is necessary if you’re to ride out any short-term market fluctuations. Think in terms of at least five years in the future.
Regular investments and diversifications – When making regular investments over a fixed amount of time, you diversify your portfolio and help it iron out fluctuations in the market.
Financial readiness – Make sure that you’re financially prepared to invest. Having an emergency fund to cover unexpected expenses lets you focus on your investments, letting them grow, instead of selling them too early.
.jpg)