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Company shares or stocks are the most popular security in the United Kingdom. According to a Statista report, almost a third of UK investors have company shares. Shares ranked second in popularity in the report. But this is not something new. Since the late 1400s, first in Antwerp or modern-day Belgium, people have been trading stocks to net them a profit. You, too, can do it. So, it’s no surprise that you want to learn how to buy shares. Today, we tell you how to join millions of others in trading shares.
In This Guide
What is Share Trading?
Before we define share trading, what’s a share in trading?
As it means in English, a share is a part or portion of something.
It is a security sold on the stock exchange, giving you a stake in the company.
We usually use the terms “shares” and “stocks” interchangeably, but they don’t always mean the same thing. A “share” represents an ownership unit in a single company, while “stock” refers to shares collectively and can include one or more companies. So, owning 100 shares means you have 100 shares of a specific company, but owning 100 stocks means you have shares of 100 different companies.
Once you buy a share, you become a partial owner (shareholder). You are entitled to benefit from the company’s growth. You could vote on company decisions and receive dividend payments.
But, there are different types of shares, including ordinary and preferential. Ordinary shares are the most common and standard type, with neither special rights nor restrictions. Preferential shares get first treatment in dividend payments but are not entitled to vote.
And with that, we can now define share trading.
It is the buying and selling of company shares, anticipating the price to rise or fall to make a profit.
Read about the Technology and Innovation in Trading in our other article.
How does Share Trading Work?
The overall objective of engaging in share trading is to make money. So, you buy low and sell high. The activities happen in the share market, also called the stock market or stock exchange.
But what’s a stock exchange? It’s where buyers meet sellers willing to trade their assets. The exchange market lists publicly traded companies together with other financial securities.
Companies raise capital to fund expansion or new projects through the exchange by selling shares of their company to interested parties. Private firms wishing to join the stock market go public through an initial public offering (IPO). Already-listed firms can often raise more capital through secondary offerings.
Before listing, the private company works with underwriters or a book-runner to decide the IPO price. The underwriters consider the following in determining the IPO price:
- The company’s own valuation
- The investors’ interest
- The market the company operates
Once a company becomes public, its share price is driven by supply and demand. However, the company’s performance dictates the demand for its stock. More people want a piece of the company if it’s performing well and its earnings grow.
Other factors that determine the share price include:
- Company news
- Industry performance
- Investor sentiment
- Economic factors
Today, the share trading market could be physical or digital. But whether at the brick-and-mortar or digital venue, the exchange happens electronically.
You cannot engage in the market directly, so you need the help of a licensed broker to trade. Your work is to pick the share you intend to buy and submit your order. You do this through traditional brokerage firms like banks and financial institutions. But today, the best and most popular way of buying shares is through an online broker or trading platform. In fact, the UK’s financial regulator, the Financial Conduct Authority, says that almost 10% of UK adults use these platforms.
The online trading platforms offer direct-to-consumer, or ‘DIY’, services where you do most things yourself. However, picking a regulated broker with minimal fees is advisable. Our innovative broker finder helps you with that. It compares the best UK brokers feature by feature and even suggests the best option.
As a shareholder, you’ll earn capital gains if you sell the shares higher than you bought them. You can also buy more shares of the company. But there’s trouble if the company is not performing well; you could sell the shares lower than you bought them.
When you trade online, your broker allows you to use different trading tools to execute your trades. The most common tools are orders, which include:
Limit Order
You decide the price at which you’ll sell or buy the stock. The order helps you take advantage of market trends. If the price of a stock is falling, you set the lowest price you’ll buy the stock. And if its price is rising, you’ll decide how much to sell it. It also helps you limit loss or protect your accumulated gains.
Stop-loss Order
This order is specific to preventing losses. You predetermine the price to sell the stock when its price is falling.
Since you now have the basics of shares and trading, let’s look at the step-by-step guide on how to buy or sell shares in the UK.
How to Trade Shares UK: Step-by-step Guide
Step 1: Open a trading account
Step 2: Fund the account
Step 3: Begin trading
Step 4: Manage your trades
Step 5: Withdrawing funds
At this point, we assume you have used our broker finder to pick the best stock broker in the UK. Opening your account is easy, quick and convenient. All you must do is fill out the online registration form requiring personal data. You’ll also provide National Insurance and your bank account details. Afterward, you may need to give more support documents to verify your identity.
Adding funds to your account requires you to choose a payment option you are comfortable to use. It could be an electronic wallet like Skrill or a debit card. You need enough money to buy at least a share. But some stocks are costly. Therefore, some brokers offer fractional stakes that allow you to buy less than one share. Please note that brokers and even payment methods have minimum deposit requirements. But you can deposit as little as £50.
Once you deposit your funds, you can pick your trading. To start, research and identify the shares you want to buy. Companies are listed in the stock on the London Stock Exchange using their tickers. But you can find them with their names as well. The market opens from 8 am to 4.30 pm on weekdays. But online trading allows you to trade even the stocks listed on other exchanges, like the US’s NASDAQ and New York Stock Exchange (NYSE).
When the market opens, you get live quotes and can accept or let them lapse. You always decide the number of shares to buy or the value of the investment.
Once that broker has executed your trades, the app allows you to review their performance. The app lets you see, monitor and review your stocks’ performance in real time. In case you have also held some stocks, any fund funds you receive as dividends reflect as cash in your portfolio. You can create an order to automatically reinvest them or use them to buy shares of other companies.
As you create your portfolio, ensure it is well-diversified, which is the key to mitigating risk. A diversified portfolio means you have spread your portfolio across different industries. You could balance your portfolio in the following lines:
- Share earnings: These are shares of companies with growth potential. They provide your portfolio with growth potential and better-than-normal returns.
- Share appreciation: To get the best value for share trading, go for undervalued stocks. These are stocks whose value is below what they are actually worth, as the market has yet to realise their potential.
- Regular earnings: Some companies always pay dividends to shareholders. Dividends are a great option for enhancing earnings.
- Stability: Stocks of blue-chip companies are much safer, though expensive. These are big companies with big, well-established markets. They can withstand market shocks and ensure the stability of your investment.
When you spread your portfolio across different sectors and asset classes, you protect your investment against risks. If one company or sector performs poorly, the others may offset the losses.
You can add more funds, buy more shares, or sell those you have and other companies. Just as you get live quotes when buying, so do you when selling. But you can always let it lapse or accept it. After the sale, the broker credits the proceeds, minus the fees, into your trading account.
As we stated earlier, your primary goal is to profit from trading. You can either reinvest the profits or bank them. But that’s only possible if you withdraw them. You’ll go to your broker cashier section to withdraw funds and choose your withdrawal method. Some brokers insist you use the same method you funded your account. But since credit cards are not linked to your bank account, you can’t use them as a withdrawal option. Some available withdrawal options in the UK include Skrill, Neteller, Bank Wire, and Debit Cards.
If you wish to continue trading, the procedure is the same: deposit funds, pick your trades, manage your portfolio, and draw or reinvest your profits.
Share Trading Risks in the UK
Investing in the stock market is suitable for beginners but comes with risks. However, risk and investment are inseparable. The decision is only whether the risk is worth it or not. The problem is how beginners deal with it and how to identify low and high risk.
The stock market is highly volatile, and its stability is influenced by numerous factors. Share prices can plummet or crash, leading to substantial losses within minutes. A thorough understanding of share trading and the stock market mechanics can help you develop strategies to handle different market situations.
In trading shares, share prices should reflect the underlying prospects of the businesses they represent. You don’t buy shares because others are buying them, for political reasons, or due to speculation driven by social media. Your decision should be based on the fundamentals of the company. You might not always get it right, but you could minimise the risk.
Where Can You Buy and Sell Shares?
As stated earlier, you buy shares in the stock exchange but can’t buy or trade directly. Individuals don’t have such direct access; only brokerage firms place orders and execute deals.
So, you need a stockbroker to buy shares. It’s not only for online trading; even if you choose to go over the counter, you still need an account with a registered stockbroker.
Stockbrokers use high-performing technologies for online trades, enabling traders and investors exposure to various stocks at a fee. Often, you can invest with as little as £5.
Pros & Cons of Buying Shares
Pros:
- High-income potential: Buying shares, whether to hold or sell, has the potential for substantial returns through dividends or quick returns through share appreciation.
- Liquidity: You can quickly buy and offload shares on the exchange platform. You can buy shares at relatively small amounts, and it’s easy if you want to free up some cash, rebalance your portfolio or simply realise a profit.
- Flexibility and control: It is easy to buy shares as you can start small and learn as you earn. There’s no conveyancing; you can do everything online if you wish. The brokerage fees are much lower than alternative investments.
Cons:
- Capital loss risk: There are no guarantees that a company’s share price will appreciate or that the company will pay out dividends. It could also suffer a loss, causing you a possible capital loss.
- Market volatility: Share prices may rise or fall rapidly, and you must accept that the value of shares may fluctuate depending on the sector’s performance and market conditions.
FAQs
How to learn trading in the UK?
You can learn trading in the UK by taking online courses, reading books on trading, following the financial news, and practising with a demo account. What’s more, you can read blocks and trading and investing websites.
Is it a good idea to trade shares?
Yes, but it involves risks, and your success requires the commitment to learning and developing trading strategies and risk management tactics.
Is it legal to trade shares in the UK?
Yes, trading shares is legal in the UK, and the Financial Conduct Authority regulates it.
What taxes apply to shares trading in the UK?
You pay Capital Gains Tax (CGT) and Stamp Duty Reserve Tax (SDRT) on purchases over £1,000. It’s advisable to consult a tax consultant for more specific and personalised details.
How much money do I need to start trading shares?
You can start with as little as £100, but a larger amount can provide more flexibility and opportunities.
Conclusion
Buying shares in the UK and anywhere else in the world is quick and easy. In fact, share trading is now a common practice worldwide. However, the share market has a degree of risk, so beginners must carefully consider the range of risks any stock presents. If you learn and understand the market, avoid rushing decisions, and have proper timing, you can benefit from the market and achieve your financial goals. So, are you ready to buy shares in the UK? Use one of our expertly reviewed listed brokers and get started.
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