What is a share?
When a company is first registered a decision has to be made regarding who owns the company and if there is more than one person, what percentage each individual owns. The number of shares created, and who owns them, is recorded on the company records.
When a company grows in size they may become listed on the stock market where the shares can be bought and sold publicly. The price of the share will go up and down as the company's performance and prospects fluctuate or the economic climate changes.
If you own shares in a company you will also be entitled to any dividend paid by the company, this is normally paid every six months. A Dividend is paid out of the company's profits and is basically a reward for investing in a company and with a good regular dividend being an indicator of a strong business.
How does the stock market work?
A stock market is basically a place where you can buy and sell shares in listed companies. The price you pay for a share will be dictated by a number of factors including the financial strength of the company, market competition and the economic environment. There is always a limited number of shares available in any one company so for every buyer of a share there must be a seller. This point is worth remembering because when you go to buy shares in a company that you think is good value, someone else will have the opposite opinion as they will be selling some of the same shares.
Why would you want to buy shares?
A lot of investors, when they first think about investing in the stock market, will choose to invest in funds. Equity funds are basically a collection of individual company shares listed in a certain sector of the stock market, thereby creating a portfolio of shares in that sector. Each fund will be managed by a fund manager who will buy and sell shares to maximise the performance of the fund.
If you decide to invest in shares then you will be investing in each company individually rather than a range of companies and therefore the investment risk will be greater. However, if you carry out research and follow the stock market regularly as well as build a balanced portfolio of shares then you may enjoy better returns.
How to invest in the stock market in 5 easy steps
Investing in the stock market is a simple process just follow the steps below.
1 - Open an online account
Opening an online share dealing account is very simple. Just select the investing platform you want to use and complete the registration details required. You can hold any shares purchased within the chosen platform so you do not have to retain any share certificates personally, but still retain legal ownership. To help you choose the best investment account for your needs read the following article - The best investment platform
2 - Decide what type of investor you are
Investing can be risky but the returns can be better than holding your money in cash. However, before investing in the stock market you need to understand how much risk you are prepared to take to get a higher reward, known as your 'attitude to risk'.
3 - Choose what shares you want to buy
Most investment platforms provide tools and guides to help you choose the right shares to buy that fit your risk profile. With some investment platforms you will also be able to start a dummy investment account where you can experiment with your investing strategy without investing any money. It is worth spending some quality research time understanding the markets and companies you are considering as an investment so that are fully briefed before deciding to invest any money
4 - Decide how much you want to invest
Once you have decided where you want to invest your money, you will also need to consider how much money you are prepared to invest. Another consideration is whether you are going to invest a lump sum or make smaller, regular payments. Investing in regular monthly payments is a good option because if the share price goes down one month you will be buying more shares and will benefit when the price increases. For more information on this topic read our - The benefits of pound cost averaging and phased investing
5 - Invest and monitor
This final stage is where you start investing some money in the shares highlighted in the detailed research you carried out. Once you have made your initial investment then you will need to monitor your investment regularly to ensure it stays on track.
Remember, you are investing for the long term, so don't fall into the trap of over-monitoring your portfolio and making too many changes as you could miss the upside of your investment and the costs will mount up.
If you have not used up your annual ISA allowance then you can place your shares within an ISA and enjoy tax-free returns. Investment in an ISA is free of Capital Gains Tax on any growth or Income Tax on any dividends paid. The current ISA annual allowance is £20,000 (2020/21).
How much does it cost to buy shares?
Buying shares is cheap and easy with many online share dealing platforms to choose from with a range of different charging structures. Make sure you check out the costs involved before you make any investment, these costs must be shown within the investment documentation or on the company website.
The following table provides details of the charges for the main share platforms.
|Platform fee||Charge per trade||
Frequent trader rate
|Hargreaves Lansdown||Transfer out fee only||£11.95||
£5.95 for 20+ deals per month
|IG Share Dealing||£0 - £24 depending on trading activity||£8.00||From £3.00|
|Interactive Investor||From £9.99 per month (includes at least one free trade)||£7.99||£7.99|
|Fidelity||£45 p.a for less than £7,500, 0.35% from £7,500 up £25||£10.00||£10.00|
As well as the charges above there is also a Stamp Duty Reserve Tax (SDRT) payable at 1.5% of the transaction value.
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