This guide explains the basic details of how you can invest in shares and some handy general hints and tips to help you achieve your investment goals and objectives.
More than 12 million people now own shares in British companies* and the stock market is a popular and 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 1869, shares have produced an average annual return of 6.2 per cent, which is more than three times the 1.8 per cent produced by investment in Government securities or 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.
There are two main types of share dealing account which vary in terms of costs and service. As with most things in life, the more service you want the more it will cost:
Execution-only online dealing, where you conduct trades yourself through an internet share dealing site like HoodlessBrennan.com. You deal immediately at the price you see on your screen. Internet broking sites offer much cheaper charges and are simple to use, making trading through the internet increasingly popular and now the largest type of dealing in the UK.**
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.
Choosing a method of share dealing
Relying on your own skills versus how much you’re willing to pay for advice if you have less time to research possible investments yourself.
Choosing an execution-only online account doesn’t mean you won’t have any support though, as trading websites are now packed with helpful features. Many trading sites also have advanced options when you place a trade to help you monitor your investments and set your own trading strategies.
These sites will watch price movements for you and automatically execute your orders. Most sites have helpful demonstrations and glossaries to help you pick up the ropes and learn to trade quickly and cheaply. Free research about quoted companies is also available on Hoodless Brennan’s site.
Internet accounts that offer a “stop loss” facility, such as Hoodless Brennan’s online service can also help you to limit your losses from investments that drop in value. A stop loss order can be set up on each holding and will automatically sell if the share drops below a price that you select.
However advisory dealing is good for people who want the benefit of an experienced broker’s market knowledge. With an advisory account you have a personally allocated stockbroker who gets to understand your investment objectives and helps you create a portfolio designed to fulfil your goals.
These advisory brokers have experience when it comes to understanding the markets and can often help you spot a trend and pick shares that could do well in the short term.
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 online 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 compare different brokers use independent review sites such as http://www.moneysupermarket.com/ which compares the true costs, including all the hidden charges and are quick and simple to use. This will give you a good overview of what it will really cost you to trade as you can put in how many trades a year you expect to conduct. You could also check out the weekend press’ ‘Best Buy’ pages, though these are often less comprehensive.
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 Londonstockexchange.com 23rd February 2007
** According to Compeer survey Qtr 4 2006
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