Share dealing is no longer the preserve of City men in striped suits. Everyone is at it these days, from a day trader hunched over a computer to the woman in the street who likes the look of Royal Mail shares.
The rise in the popularity of share trading is partly because it has become more accessible. You can now buy shares through the post, over the phone, online or even with a mobile app. So how do you get started?
First, you need to understand the risks. Yes, share prices can rocket, but they can also plummet – and there are no guarantees either way. For example, you might buy 50 shares in Company A at 500p a share. The shares could climb to 600p in the first few months, but then drop to 400p after some poor trading results.
Your original £250 stake would now be worth £200, a loss of £50.
It could recover again – or it could fall even further.
This risk element means you should only ever invest money in shares that you can afford to lose. In other words, make sure you can pay your mortgage and any other essential bills before you start dabbling in the stock market.
Do your homework
There’s lots of information available about the companies listed on the stock market – and it pays to do some research. Find out about the company’s recent performance and consider its chances of success in its own sector and in the wider economy.
Remember, too, that some firms are inherently more risky than others. A FTSE 100 company, for example, is probably a safer bet than a small start-up business, though if you can stomach the greater risk, you might be in line for a greater reward.
Some people don’t hold onto shares for long, cashing in on small fluctuations in the price on a regular basis. But such ‘day trading’, as it is sometimes called, is only for the more experienced investor. Most people are advised to keep their shares for at least five years, if not longer, so riding out the inevitable ups and downs of the market.
Choice of stockbroker
If you want to buy shares, you have to trade through a stockbroker – and there is an extensive choice. You can stick with an established City name, or you can opt for the stock-broking division of one of the big banks or building societies. Alternatively, some of the larger firms of financial advisers offer stock-broking services, as do a growing number of online companies.
There are three different types of stock-broking service. If you are comfortable making your own decisions and want to take control of your share trades, then you can probably opt for a DIY stockbroker, often referred to as ‘execution only’. You then decide what shares to buy and when.
People who are not so confident might prefer to take advice from the stockbroker. If you choose an advisory service, the firm will offer investment guidance, in line with your goals and attitude to risk as you set them out. The final decision, though, is up to you.
You can start trading as soon as you put money into your account
Alternatively, a discretionary service allows you to hand over complete control of your portfolio to the stockbroker. The firm will then make all the investment decisions, though it should take account of your aims and risk profile.
Some brokers only offer an execution only service - and it is the simplest and usually the cheapest. However, cheapest is not always best and you should pick the right service for your circumstances.
You also have to choose an account before you start share dealing and these days most people use what’s known as a nominee account. Your shares are then held in the stockbroker’s name and the firm administers your investments electronically on your behalf. However, you are still the ultimate owner, though you should check that you will receive all shareholder information as well as any shareholder perks such as, for example, discounts associated with the companies whose share you buy.
Nominee accounts are popular because they are convenient – and fast. But if you prefer to hold paper share certificates in your own name, then you need to select a certificated account. Bear in mind, though, that the trading process could take a lot longer.
Most stockbrokers publish information and research about company shares and prices to help with your investment decisions. If you are new to buying shares, you can also usually practice with a virtual or fantasy portfolio to help you gain confidence.
Cost of buying shares
You can start trading as soon as you put money into your account, which must often be with a cheque or debit card. But it’s important to fully understand the costs involved with buying shares. The stockbroker will charge a commission for each deal, which can be a flat rate or a percentage. The rate of commission will depend on a number of factors, including the type, size and frequency of the transaction.
For example, a basic online trade might cost £12, but if you buy your shares over the phone, the commission could jump to £25. Larger transactions are generally cheaper than smaller trades and people who deal regularly usually pay less than infrequent traders. It’s also usually more expensive to purchase foreign shares as the broker will levy some sort of exchange fee. Most stockbrokers offer a choice of accounts, so you should select the one that suits your trading habits.
Watch out for inactivity fees. If you don’t use your account for a certain amount of time, there could be a charge. Many firms also charge if you want to transfer your portfolio to another stockbroker. In addition, some brokers levy account fees, which could be charged monthly, quarterly or annually. Account fees are particularly common if you buy shares within a ‘self select’ Individual Savings Account or Self-invested Personal Pension (Sipp).
When you buy shares, you must pay stamp duty to the government – and the current rate for UK shares is 0.5%. Some other countries also levy stamp duty and the rates could be higher. The Panel of Takeovers & Mergers also takes £1 on all UK share deals above £10,000.
Low rate of interest
You normally earn interest on any cash sitting in your trading account, but the rate is often quite low. So it’s probably best to avoid keeping a lot of money stashed with your stockbroker.
Stockbrokers in the UK must be regulated by the Financial Conduct Authority, which means they are also members of the Financial Services Compensation Scheme (FSCS). If the company went into default, you could therefore get compensation up to £50,000 for any investments you lose. Assets held in a nominee account should also be ring-fenced. The FSCS limit for savings is £85,000 per individual, per institution.
Boiler room scams
If a firm cold calls out of the blue to try to persuade you to buy shares, you should be extremely wary. It could be a so-called boiler room scam, where the shares are worthless. It’s probably best to hang up on a cold caller, however persuasive or knowledgeable they sound.