Trading in shares is one of the best ways to make money quickly, but the risks accompanying investing shares are not to be scoffed at. When you buy shares, it involves a nominal tax depending where you transfer shares. One must consult with an accounting expert for understanding the taxes involves in trading. Other than the obvious risks of share values going down, the cost of dealing shares is often through the roof, and this alone causes huge parts of any returns you might have made on your shares to seep through.
The one thing to remember when investing in the stock market is that there is no guarantee of your investment. Share values can go up and down just as fast. It is impossible to predict with any real assurance that the shares you have invested in are 100% secure.
Given below is a detailed guide to investing in shares which will help to answer most of your questions.
What is a share?
A share is a divided up unit of value of the company. A company uses shares to get investors and raise money. A company divides its value into numerous shares which are then put up for sale on the stock market.
Eg. A company worth £20 Million may divide its value into 10 Million shares of £2 each. Usually, instead of Pounds, they are expressed as 200p. The value of these shares can increase or decrease according to thecondition of the market.
Investors buy shares as they think that the company may do well, and want to reap the benefits along with them.
What are the two methods of buying shares?
When buying shares, you can go about it in one of two ways. You can either:
1.Buy the shares yourself and be the sole owner.
2.Pool money together with a group of individuals in an investment called a fund, to share the profits together.
What are the things you should keep in mind while buying shares?
There are other people out there who are looking to make quick and easy money, but not all of them may go for the same honest methods that you employ. Cold calls which offer you shares of any company (be it small business or a large limited company) are almost always scamming about non-existent or uselessshares which are a sinkhole of money for the investors, also known as boiler room scams. In the world of business, one phrase should be remembered. "If it is too good to be true, it is not true."
First of all, what is an ISA? It is an Individual Savings Account. How are a stocks and shares ISA different from the Cash one you have with your bank?
A stock and shares ISA lets you decide how to invest your money, and thereby gives you more control over what sort of returns you receive on your investment, by saving a regular monthly amount. There is a limit on ISA’s of £20,000 because along with the investment, you gain a lot of tax advantages with this investment. This is a safe way to gain more returns while at the same time having to pay less tax.
3.Spreading out your investment:
Have you heard the phrase, “Don’t put all your eggs in one basket.”? It applies most definitely when investing in companies. The reason for this is extremely obvious when you think about it. When you invest in just one company, your fate hinges completely on the fate of the company. The company may experience problems or bad luck as either is common in business. If they get hurt in anyway, their stock market values are extremely likely to take a huge plunge. This will result in you losing all or at least a large portion of your own hard-earned money. The best way to invest therefore is to spread out your investment over a number of companies, as this prevents you from suffering any huge loss.
Investing in shares is not a short-term activity. The best way to invest is to invest for at least a minimum of five years. This gives you time to ride out any bumps in the market and not suffer losses.
There are of course exceptions to this rule, and there may need to abandon companies if their values are in free fall.
5.Higher Returns come with Higher Risks:
If you want to earn more from your investments, you have to take more risks in where you invest your money. A stock market never has any guarantee, but if there is one thing that is sure, no one ever made it big by playing it safe. The only thing that needs to be remembered is that it is better to take risks when you are young so you have time to make back the money you may lose with time.
Don’t just make investments and sit back and relax. Making the investment is only half the job. Continuously evaluate the investments you have made and sell the ones you deem are duds or are sinkholes. Just because a share appears secure, does not mean you abandon it to its fate. Monitor it to see if any patterns form.
7.Don’t Follow the Herd:
The stock market has a mind of its own. The prices often go up or down every day. Make your own decisions and make sure they are informed ones before you either purchase or sell shares instead of following the trend in the market.
How do you buy the shares?
There are various alternatives available to you in the current day and age if you want to trade in shares. The easiest and the cheapest way to buy sharesisto simply opt for an online share dealing platform. If you decide to use these platforms to conduct your business, you will be able to purchase shares listed on the Recognized Stock Exchange as well as many overseas exchanges.
The main stock exchange is the London Stock Exchange, where the main and largest companies have their shares listed. There is another investment market, known as the Alternative Investment Market (AIM) which lists the smaller companies, which are developing and promising, you may or may not have even heard of.
The moment a company makes an Initial Public Offering (IPO) they become listed on the Stock Exchange, basically making the transition from Private to Public.
The concept of buying share, therefore, is that you can buy any share legally that has been listed on an exchange.
To buy any shares, you have to follow these steps:
a) Make a trading account.
b) Make sure the account has enough money in it to buy the shares that you want.
c) Search for the share that you want from your account.
d) Choose the number of shares you want to buy.
e) Add enough money to your dealing account to cover the cost of these shares + any additional dealing cost that may arise.
f) Make the Purchase.
g) The shares will show up in your portfolio.
Another small thing to keep in mind is to kill the ‘paper’ trail.
Paper Share Certificates are a thing of the past. Everything relating to shares has now moved online. This means if you still purchase shares and make paper share certificates you will have to pay an extra cost to the broker for taking up his time. The best thing to do in this situation is to convert your paper shares into their online counterparts. This just involves filling a form, and most platforms do this at no cost in just a few days.
How do you become an expert and gain confidence in trading?
Let’s face the truth, buying and selling shares seems extremely intimidating even at the best of times. Being inexperienced or foolishly buying shares is the same as gambling. The best thing to do is to get in a bit of practice before you dive into the actual buying. The way to do this?
Set up a Dummy Portfolio. What this is, is simply a portfolio trading account by which you can purchase or sell shares the same way you will in reality. This is much safer though as you are not exchanging any money, as this is more like a test drive for you, as you get to see how the market works as you buy and sell shares without making actual profit or loss.
Dummy portfolios can only be set up when you have already invested in some companies at least.
What are the perks of holding shares?
Holding shares are a risk, but are there any perks associated with it as well? Yes, there are a number of perks you can get hold of if you let the broker know, as different platforms offer deals and you will be able to get deals and discounts you can make from the purchases you make.
What should you be aware of while buying shares?
Charges can be your worst enemy when you buy shares as they can eat away and consume any of the profit you make by trading. The Accounting Fees, Stamp Duty, Inactivity Fee, and the Buying/Selling Fee all need to be kept track of as they can just make your profit vanish.
These charges differ and finding a platform and purchase or sale with low prices help to lower the costs that you will face.
How do you go about holding shares?
While trading online if you don’t want your name to appear on the company registry of shares, the easiest thing to do is to open a ‘Nominee Account.’ You can also keep your shares in a Stocks and Shares ISA.
A Nominee Account is anaccount with the name of the person or firm to whom the shares are registered while making the customer the actual owner of the share without having their names registered. A stockbroker often holds shares in nominee accounts on behalf of customers to facilitate thetrading of the shares.
Another big thing to keep in mind iskeeping track of the shares that you have. When you start investing, you have few shares, and in the excitement, it is natural to keep track of all the shares that you have bought. This does not hold true forever, as after the initial excitement and with the purchase of more shares it is extremely likely that your enthusiasm to check the shares regularly will decline. This is a trap as if you don’t keep track of the shares that you have you will not be able to say which to keep and which to sell if they start losing money.
How do you sell your shares?
The process of selling shares is really similar to buying them. If you have your account, then well and good, otherwise with a nominee account the sale needs to be made to that particular account
When selling shares, you are confronted with two alternatives:
- Sell shares by value:
- Sell shares by number:
If you want to sell all your shares of a particular company though, you will have to select sell shares by number.
Once you post the shares for sale and bids are made, you will be shown the bid for a limited period (15-30 seconds) in which time you have to make your decision. The quoted price is hardly the same price you bought the shares at and are lower most of the time, and this is to be expected. After the sale has been made you will be shown what money (if any) you made from the trade.
What are the best trading platforms?
Trading platforms differ, and different share platforms are there for different specialties.
- For 10+ trades in a month: AJ Bell
- For expert trading: X-O
- For starting out and beginners: Hargreaves Lansdown
- For moving more funds: Interactive Investor