The Golden Rules When Buying Shares

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What you need to know

  1. Buying shares essentially means that you become a part-owner of a company and get share in their profits but also in their losses. The most important factor for buying shares are expected profits
  2. In order to buy and sell shares you need to set up an account, where you enter your bank details. Shares can be bought online or through the phone
  3. Shareholders should be fairly happy with taking risks with their money. Even though some investments might be safer than others, there is always a risk that you may lose some or even all the money that you invest, something you should never forget
  4. Certain market fluctuations, political decisions or natural disasters that originally only affect one company can easily spill over to an entire sector and have wider repercussions for the whole stock market
  5. To keep track of expected profits of your companies, shareholders should sign up for newsletters, read annual reports and prognoses and follow domestic and international political and economic developments
  6. Stockholders are commonly characterised as either investors or traders. While investors buy and keep stocks for a longer amount of time to accumulate profits, traders frequently buy and sell shares for quick profits
  7. Even the best traders have lost. Although trading with shares depends a great deal on experience, the ability to predict future developments and a thorough understanding of market dynamics, shareholders should never underestimate the influences of chance. 

All you need to know about buying shares

The reasons why individuals choose to buy shares can be manifold. For instance, some are seeking regular returns from their shares, others are more concerned with building up future capital or enjoying the excitements of the game.

However before entering the market, there are a range of important facts to take into account. Buying shares essential means that you become the partial owner of a company. Usually this means that companies invite their shareholders to take part in company decisions and visit annual meetings.  As a consequence of being a part-owner, however small this part may be, the value of your investment increases or decreases along with the value of your company on the market. Hence the most important factor to look for when choosing shares is expected profit. So, buying stocks is always future-oriented and closely tied to the economic and political climate.

Usually shares are bought through a stock broker, a bank or financial services firm. These firms are commonly controlled and regulated by the Financial Conduct Authority. In some cases, when a company is just entering the market, it can be possible to directly buy shares through the company. The most common ways of buying or selling stocks are through the phone or by filling out an online form. Usually there are platforms that allow you to set up accounts to buy and sell shares, which also provide you with additional information and research tools. In many cases, you will be able to practice with imaginary money first to give you a taste of investing.

In order to buy shares, you select a stock name and you are given a price quote. You can then choose the amount of money you want to spend, will be provided with a real-time quote and have approximately 15 seconds to finalise the deal. Once you have done so, the amount of money indicated in the quote will be withdrawn from the account you are using.

The golden rules for buying shares

Now having a good understanding of the basics of trading shares, here are some golden investment rules to follow:

  • Understand the market and its complexities: Before you can start trading shares, it is worthwhile to get an overview of the market to see which shares you want to invest in. You moreover need to set up a broker account; if you are not entirely sure yet how things work, you might consider trying a practice trading account first. You moreover need to familiarise yourself with the basic terminology of shares, such as dividends or bid/ask prices, the general rules of the stock market and some potential risks involved. Dividends are essentially the payments that a company makes to their share-holders based on their profits. These differ among companies and even profitable companies may choose to lower their dividends for the sake of future investment. Those are commonly paid twice a year and share-holders can either keep the money or use it to reinvest.
    In order to stay on top of things, consider signing up for a news site like the Financial Times  and follow domestic and international political developments regularly. You could even sign up for a course to learn the basic rules of trading and increase the confidence of your decisions.
  • Evaluate your attitude to risk: Before you start investing and buying shares, you should always take into account that you may lose the money. Hence you should only invest amounts that you can potentially afford to lose and refrain to use money set aside for other purposes, such as repaying debt or loans. Based on your personal risk evaluation, you should also decide whether you want to invest in larger, more stable companies or smaller ones, who maybe offer more interesting business plans but might be riskier to invest in overall. Larger companies often have more experience and strong finances and are less likely to go bankrupt than less experienced companies with smaller budgets. The less risk you can informed, the better informed you should be about the companies you invest in as well as potential changes on the stock market. Read annual reports and prognoses or seek professional broker advice and also take a look at charting software to see the developments of your shares.
  • Think about your personal profile as a shareholder: Shareholders are commonly divided into two groups, investors and traders. Investors commonly look for a fairly safe investment method and thus keep shares as a long-term investment. This means that investors keep shares over five years or longer and frequently use their dividends to reinvest in new shares to increase their profits in the long run. If you choose to invest rather than trade on the stock market, make sure that you do not need to access your money before the end of your planned investment. The second category of shareholders are traders, who stay on top of the market and sell or buy stocks with every opportunity that arises. Hence traders are looking for the quick profits and are frequently well-informed on upcoming market changes.
  • Do not waste time and money by waiting: The stock market is fast and many important changes can happen overnight. Do not keep your shares endlessly once you have made a fair profit because you are waiting for further improvements to sell them at the top of the market. You might end up getting stuck with your shares or even lose out. Always stay on top of things and follow the most recent developments when making your decision.
  • Consider top-slicing: Even for investors with a long-term investment plan, it might be worthwhile to sell some of their stock if it has made significant progress. This way you make sure that you will not lose your profits at a later point, should the situation of the company or external circumstances change. You could also choose to set price targets and sell some of your shares once the target is hit.
  • Consider additional costs and charges: When looking for shares, you will find price ranges from 1p to £50 and more. Always keep in mind that a low price often does not mean better value, there are a couple of different factors you need to take into account. In terms of charges for buying and selling shares, these often vary in regard to the services you are using. The cheapest way is to set up an online account, using your bank details and debit accounts. Generally charges depend on the type of brokerage account that you are choosing, with some charging a deposit or asking for inactivity fees or transactions. This can range from £2.50 to £15 for simple transactions online to proper fees if you choose to employ a broker, who sets up a portfolio for you and provides you with regular support and advice. Trading online is commonly cheaper than making transactions through the phone.

Another charge you have to take into account when trading with shares is the tax you need to pay. You will be charged a 0.5% stamp duty reserve tax on all share purchases. The profits you gain from your shares are taxable as well.

How to choose the best deals:

Again, there's no such thing as a guaranteed profit when it comes to stocks and shares. However, there are a few steps you can take to protect yourself from risk and give yourself the biggest chance of making a profit from the market. For instance, you should:

  • Always thoroughly research the companies that you are interested in and keep in mind the economic and political situation. The stock market is very sensitive to changes in the political climate and one incident in a specific sector can have a significant influence on the profit of other companies.
  • Bear in mind that routine and expertise comes with experience. If you feel insecure at first, maybe try a practice account to become more self-confident before setting up a proper account and trading with real money.
  • Always keep in mind the bigger picture. Do not panic when share prices suddenly fall or rise; this is how the market works. While in some situations intuitive action will help you to make short-time gains, you should always be prepare for some investments to fluctuate but potentially reward you in the long run if you stay patient. 

Further Reading

  • Having a good knowledge of the markets and keeping on top of all the latest news is massively important, especially if you want to make a profit. Reuters is one of the world's biggest financial news providers. Follow the latest market news with them and make savvy investments
  • The London Stock Exchange carries out a massive amount of trades every day. The official LSE website is a great place to find out all the latest news about how companies are performing
  • There are hundreds of different terms associated with the stock market; if you get confused by these, we’ve written a guide detailing some of the more common ones.
 

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