This guide provides a summary of all you need to know about how you can invest in shares, plus some handy general hints and tips to help you achieve your investment goals.
In the UK, over 600,000 trades a day are executed on the London Stock Exchange, totally an average of £16 billion.* Share trading is a versatile way of building personal investments.
Why invest in shares?
The financial rewards of long term investment in shares have historically proven to be very good. Since 1918, shares have produced an average annual return of 7.3 per cent, which is more than three times the 2.3 per cent produced by investment in Government bonds and over four times the 1.6% from cash.**
Shares can of course go up and down and they are higher risk than keeping your money in bank accounts; however, shares are popular because the potential returns can be high and your investment could grow quicker than less risky investments such as bank account deposits.
The London Stock Exchange recommends that if you are saving for more than five years it is well worth investing part of your portfolio in the stock market. Most financial planners agree that first of all you should have arranged your mortgage, pension, cleared any debt you have and have a rainy day bank account before investing in the stock market.
You can invest in the stock market either direct yourself, where you make your decisions, or invest via a manager, such as a Unit Trust or insurance company, who make the decisions about what your money will be invested in for you.
If you want control of your investments and the costs, you need to opt for the former and trade yourself.
How to buy shares yourself
To buy and sell shares yourself, generally you have to set up an account with a stockbroker or use a high street bank.
Advisory dealing by phone, where you listen to the stockbroker’s advice and you then decide what you want to do. This traditional way of share dealing gives you the benefits of a personal service and someone knowledgeable to talk through your goals, but it is more expensive than trading without advice. Whenever we place orders in the market, we deal either as “Agent” or as “Principal.” When dealing as agent we act on your behalf to buy or sell shares in the market. Dealing as Principal, on the other hand, means that we buy a block of shares using our own funds and offer to sell them to you from our own account. Because of our strength and expertise in the AIM and PLUS Markets markets, we are frequently presented with and identify companies that we consider to offer interesting investment opportunities. Provided that these companies meet our investment criteria, we will then endeavour to buy blocks of stock for resale to those clients who have expressed an interest in the higher risk sector and for whom the particular shares meet the clients’ suitability criteria.
How much does share trading cost?
There are three areas of cost to understand when you start share dealing: stockbroker commission, charges and government taxes/levies.
Commission costs vary from broker to broker and costs will depend on whether it is an advisory transaction or an execution only transaction.
But commission rates are only one half of the costs you need to consider from the stockbroker. Some stockbrokers charge you for other things such as not dealing, paying money in and out of your account and other administration charges which may over time add extra costs to you. To see a full list of charges relating to the HB Markets advisory broking service, please click here.
Lastly, taxes and levies are also usually payable. On purchases you must pay 0.5 per cent stamp duty tax to the government of the value of your purchase. The stockbroker will include this for you automatically in your deal costs so you do not have to fret about how to pay this tax.
If your trades are over £10,000 each time you will also pay a £1 levy to the Panel of Takeover and Mergers, which is an independent body that protects shareholder rights when companies seek to take each other over.
How do you learn to trade?
Trading is not an exact science and different people have their own individual tactics. The internet has lots of sites to help you learn from other investors’ experiences and the investment magazines are a good source of knowledge as well. However there are some basic rules of thumb to help you find and follow your own strategy:
Hints and tips
Watch stocks for a while before buying. Try and identify the average bottom and top that the share trades between and then buy at the bottom of that range. You can use this as a short term way of investing in shares. Or even if you think you might keep the share for a long time, by buying in at the bottom price you obviously get a better deal.
Build fantasy portfolios. Fantasy trading websites are a great way of learning how to trade and build a portfolio of shares without risking a penny until you are happy with your abilities.
Collect dividends. You can buy into large companies and re-invest dividends as extra shares. If you do this in an equity ISA, there is no capital gains tax on growth and your investment will start to benefit from compounded growth – a bit like a snowball rolling down a hill. This is a good longer term strategy for investing for growth in your investments if you do not need the income from the shares that you buy.
Create a strategy that fits your profile. Think about what you want your investments to achieve; the level of returns you’re looking for and over what time period. Also think about how much risk you’re prepared to take on. Invest in a portfolio of shares designed to fit your profile. An advisory broker can help you with this. Or if you’d rather invest online through en execution-only account but are unsure if investing in equities is suitable for you, speak to an Independent Financial Advisor (IFA).
Only invest what you can afford to lose. Shares go down as well as up and you should only invest what you can safely afford to lose.
Balance investment in shares. Investment in shares is often best seen as a complement to other investments, such as property and cash. Speak to an IFA for help with balancing your investments.
Trade rationally, never emotionally. It’s easy to become fond of an investment when it’s done well for you in the past, but you must make decisions based on rational logic and if it’s time to sell, don’t let emotions get in the way. Equally you should not allow media hype or a market panic to control your decisions. Look at the facts and use your own judgement.
It’s not wrong to take a profit. When share prices continue rising, some people refuse to bank the profit they have made. Experience shows that at some time the price will drop and yet instead of being disciplined and taking the profit, many people hold to see if it will come back again. Shares do go up and down and the old quote ‘It’s not wrong to take a profit’ still applies. Besides if a stock subsequently drops back, you may be able to buy in at the bottom again…
Don’t be discouraged. Even the best trader makes mistakes and the most important thing is to learn from them and move on. Learn to be disciplined, take profits and cut your losses if a stock drops on you.
* According to www.londonstockexchange.com, 31st July 2008
** According to CSFB, 4th March 2008