Investing in the stock market is a good way grow your wealth long-term, but for newcomers, buying and selling shares may seem daunting.
So here is our guide to getting started in the stock market and becoming a smarter investor even if you already buy and hold shares.
Why are shares different?
When you buy shares you become a partial owner of the company. While this may seem obvious, it does make share buying fundamentally different from savings accounts or even buying bonds.
Shareholders are not lending the company money and nor are they customers of the company – they ARE the company.
Crucially, this means the value of your investment rises as the value of the company rises on the market. It also brings a share in any profits that might be distributed through dividends. Often forgotten is that being a shareholder also brings some power and responsibilities.
As a shareholder you have a right to vote on key decisions, including directors’ pay, at the annual meeting or on particular issues like takeovers when they arise.
The power of dividends
Dividends are payments made to shareholders from a company’s profits, but even profitable businesses do not have to pay dividends. The directors may decide to keep some cash in the firm for expansion.
British company dividends are generally paid twice a year and shareholders can either take the cash or choose to use the money to buy more shares in the company.
Some investors buy shares in companies that typically pay high dividends in order to create an income, even if they do not expect the shares to rise rapidly in value.
Reinvesting dividends in shares can dramatically increase returns over the longer term. Just so long as the shares go up.
The Barclays Equity Gilt Study, which looks at long-term results from investing, shows that over a ten-year period the average annual investment return from shares adjusted for inflation is 5 per cent.
One of the big winners for those investing over the long-term is reinvested dividends, which allows you to benefit from compounding.
The Barclays study, which uses data stretching back to the nineteenth century, highlights the importance of reinvesting income. ‘One hundred pounds invested in equities at the end of 1899 would be worth just £191 in real terms without the reinvestment of dividend income, but with reinvestment the portfolio would have grown to £28,386,’ it says.
What makes shares go up or down?
Over the long term, the single most important factor is rising profits, or the expectation of them.
Several other factors influence price, though.
If the overall stock market is rising, many shares will be dragged up in its wake and if stockbrokers are optimistic about a particular sector – property for example – then shares in companies in the property sector will benefit.
Remember that the market looks at the future, not the past, so brokers and big investors are far more interested in how a company is expected to do in the years ahead than how it performed last year.
Sentiment is a key driver when it comes to share prices. If the market doesn’t like a company for whatever reason, its share price can remain depressed even as it continues to grow profits.
In contrast, the market may have decided that it loves a company – these are often called story stocks – and rate it more highly than you would expect.
These anomalies in valuation can provide opportunities for investors.
How do I buy and sell shares?
When a company first floats on the stock market, such as Royal Mail did, it is sometimes possible to apply for shares directly from that firm. This is known as an Initial Public Offering (IPO).
Generally, however, shares are bought through a stockbroker or a financial services firm.
Many of these firms allow investors to buy and sell shares online simply by filling out an online form. Investors can also buy and sell shares over the phone by ringing a stockbroker or a financial adviser.
The best bet for a DIY investor is one of the many investing platforms available, ranging from those that offer funds only, to those that allow you to invest across shares, funds, investment trusts, bonds and more.
These will allow you to set up an account online and then pay in a lump sum to invest how you choose, or sign up for regular direct debit monthly payments into a selection of investments – or do both.
Most platforms are very simple to use and easy to get used to. They will offer varying degrees of tips, analysis, tools and service.
This is Money’s best DIY investing platforms round-up, highlights some of our favoured platforms and explains how their charging works.
How much does it cost to buy and sell shares?
Costs vary according to the service you need. If you are just buying or selling online – known as execution-only trading – flat fees can cost as little as £2.50 or up to about £15.
The more trades you do, the cheaper each one is. Stamp duty of 0.5 per cent is charged on purchases of shares outside the junior AIM market.
Some investors like to seek help from their brokers. Many offer ‘discretionary’ services, where they run a share portfolio on your behalf, as well as ‘advisory’ services, where they offer advice but leave it to you to decide what to buy and sell and when. The more advice you take, the more it costs.
How long should I hold shares?
Shareholders can be divided into traders and investors.
Traders buy and sell shares frequently, hoping to make quick profits. Investors hold on to their shares for at least five years and generally a lot longer.
Long-term investment in shares should prove rewarding, particularly when investors reinvest their dividends to acquire more shares.
Sometimes, however, if a share has risen significantly, investors might choose to sell some of their stock. This is known as top-slicing.
What should I consider before buying?
The first point to consider is whether you can afford to lose the money. Shares are not risk-free investments, so if you need the cash to pay the mortgage or school fees, tread very carefully.
It is also useful to do your own research.
Read a company’s latest annual report, look at its website and seek advice from your broker. Think about your investment aims and your time horizon, too.
This will influence the type of shares that you want to buy. Big, stable companies with decent dividends tend to deliver long-term rewards. Smaller, riskier companies can offer short-term excitement.
Finally, if you do fancy trading, rather than investing, it can be helpful to set price targets so that you sell at least some of your shares once you have made a profit.