If you’re looking to invest, it’s important to understand how share trading works before you take the plunge. Here’s a quick guide to get you started.
What is a share?
Put simply, a share is a unit of ownership in a company – this means if you buy one, you’ll own a tiny piece of a company. Shares, also known as stock or equities, are bought and sold on the stock markets, and when you own one, you automatically become a shareholder, which typically comes with a number of advantages. For instance, if you own what we call a ‘common’ share, you'll be able to vote on different matters, such as elections for the board of directors, corporate goals, or even structural changes - obviously, the more shares you own, the more influence you can have.
How are shares priced?
Share prices are set by the sellers and buyers in the market – that’s why they tend to fluctuate on a daily basis. If there are more sellers than buyers, then shares will go down in value, and vice versa, if the number of buyers exceed the number of sellers, then prices will go up.
Now, many things will impact investors’ decisions to buy or sell shares, whether it’s the news, or a company’s earning report. Even a series of tweets from a high-profile personality could influence the way people feel about a specific investment. The key thing to understand here is that there’s no way to predict price movements since there are millions of reasons that could push investors to buy or sell shares.
Why buy shares?
Well, the answer is simple: to make money. With shares, there are two main ways to make a profit. The first way is to buy when the price is low and sell when the price is high – the difference between the two prices is your profit. For example, if you buy a share for £30, and sell it for £60, then your profit will be £30. The second way to make money is that your shares pay you an income - or dividends – although a company has no legal obligation to pay dividends to their shareholders and may reduce or stop them altogether, even after years of distributing them.
Another reason to buy shares is that it can be a great way to make your money work harder. With interest rates at historic lows, your savings may not be growing as much as you’d like to. If you’re pursuing long-term growth, investing in shares could be an option. In fact, in the long run, holding shares could leave you with higher returns than cash. A Barclays Equity Gilt Study found that a stock kept for any 10-year period since 1899 has had a 91% chance of outperforming cash1.
Money aside, buying shares can also have a positive impact on society. It helps companies grow and innovate, which can have an impact on people’s lives – when shares of a company go up in value, then it means potential employment opportunities are created and ground-breaking innovations in key sectors, like health or telecommunications, can be researched or developed.
Buying shares is also an opportunity to make a stance and support companies that are committed to doing good. If you want to do your bit for the future, you can choose to only buy shares from ethical companies – and if enough investors take the same route, this could send a signal to other companies that it’s time to change and be more sustainable.
What are the risks of buying shares?
If you’re purchasing shares, there’s a chance for higher returns over the long-term, however, it does involve some risk. There’s no guarantee your shares will be worth more in the future and you could end up with less than you initially invested.
Although investing in shares tends to pay off over the long-term, being an investor can be stressful. Since share prices tend to fluctuate on a daily basis and can sometimes experience abrupt movements over the short-term, it’s important to accept that you’ll see the value of your investments go down from time to time – we understand, it’s not pleasant but it’s part and parcel of being an investor, and as long as you don’t panic sell, it’s only a number on your dashboard that could go back up at any time.
How many shares should you buy?
You can buy as many shares as you want – there’s no rules, it’s up to you. However, buying one or two shares can be quite risky. With a very small number of shares, the likelihood of losing money could be quite high – but again, it’s your decision, and who knows, you could find some winners? If you want to mitigate risk and limit potential losses, then you may want to invest in shares from different companies and even consider buying other investments such as bonds and property, that way, poorly performing investments would be balanced by others doing well – this strategy is known as diversification and it’s widely used by investors to spread risk.
When is a good time to buy shares?
There’s no right or wrong time to buy shares – you should do it whenever you’re financially ready. Like many things in life, the hardest part is to take the plunge. Obviously, if you’re struggling with money, then investing may not be the right option right now. However, if your finances are in good shape and you want to give your money a chance to grow, then why not give it a try?
Once you’re in, it’s important to try and keep your nerve, especially if the value of your investments starts going down. In this situation, it’s very tempting to sell everything, hoping it will limit your losses. But if you think about it, selling your shares when their value is down will only make your losses real.
Markets are like roller coasters, they have ups and downs, and chances are they may go back up in future. Historically, they’ve almost always bounced back from crashes, and although past performance is not a reliable indicator of future results, it can give useful insights and show the importance of thinking about the long-term. In fact, being patient and remaining invested over a number of years could pay off. For example, anyone who invested in the FTSE 100, one of the UK main stock markets, between 1984 and 2020 and remained invested for any 10-year period had an 89% chance of making a profit2.
How to buy shares
There are many ways to buy shares. You could either do it yourself or get the experts to do it for you. The DIY route requires some financial knowledge, a lot of time, and a bit of work, as you’ll need to research companies and analyse market data. If you’re too busy or don’t feel confident enough to do the investing yourself, there are many online services, like Wealthify, that will do the hard work for you. Starting from as little as £1, our investment team will pick the right mix of investments based on your attitude to risk and they’ll manage your Plan on an ongoing basis to keep it on track with your goals.
References:
1: https://moneyweek.com/505257/stocks-beat-cash-and-bonds-over-the-long-term
2: Data from Bloomberg
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
