Investing in the stock market often has the stigma of being risky and overly complicated. And while that’s partially true, buying and selling shares is one of the best wealth-building strategies available, even for individuals without much starting capital.
Each share represents a small piece of an underlying business. And that entitles shareholders to a slice of the profits. In other words, you can build long-term wealth by doing nothing more than owning some stocks. And in this guide, we’ll explain how to do exactly that.
Let’s start by looking at a brief overview of the seven steps to buying shares in the UK:
Now, let’s break it down.
How to buy shares online
Now we are getting to the nitty-gritty of how to buy shares in a company. Believe it or not, the whole process can take less than a minute once you’ve opened a share dealing account and have decided which company you want to invest in.
1. Open a share dealing account
To buy shares in a business, you need to open a brokerage account. Fortunately, there are plenty to choose from these days.
Finding the right account is ultimately a personal choice. Each broker offers services and charges different brokerage fees to suit different individuals. That means the cheapest broker for you might not be the same for someone else. The optimal choice depends on the size of your portfolio, the sort of investments you want to make, how often you plan on trading, and any additional services you might require.
Generally, they will charge a flat rate fee when buying UK shares, typically between £8 and £12. And many offer discounts if you trade more each month.
Investing overseas is also usually supported. However, it’s important to be aware this comes with the extra cost and risk of fluctuating currency exchange rates.
Generally speaking, fixed fee trading accounts often end up being the cheaper option for investors with larger portfolios, while percentage-based fees are more suitable for those with a smaller amount of capital.
An additional cost to consider is stamp duty. This is a 0.5% tax applied when buying shares, but not when selling them. As a side note, stamp duty does not apply when buying smaller AIM-listed UK shares.
There are a few different types of trading accounts available for investors.
|Standard Trading Account||Allows individuals to buy and sell shares of any public company on the markets supported by the broker.|
|Stocks and Shares ISA||Same features as a Standard Trading Account. However, all capital gains and dividends are tax-free. Only £20,000 can be added to a Stocks and Shares ISA each tax year.|
|Self-Invested Personal Pension (SIPP)||Much like a Stocks and Shares ISA, all dividends and capital gains are tax-free. What’s more, up to £40,000 can be contributed each year, with each contribution being tax-deductible. However, withdrawals cannot commence until the age of 55. Once withdrawals commence, the same tax rules apply as a standard pension.|
It can seem like a bit of a minefield at first, but don’t panic. If you make a few basic assumptions about how much you have in your portfolio now (and that you might have in a few years) and how often you might want to buy stock, then coming up with a shortlist shouldn’t be too tricky.
You can find a list of our top-rated share-dealing accounts to help you get started.
- Pros & Cons
- Fees & Charges
- Good value share dealing for regular investors
- Huge choice of funds
- Easy for beginners
- Expensive to hold large portfolios of equities, compared to peers
- Barclays current account required if you want to use the Barclays app to manage your investments
Monthly subscription fee: minimum £4, maximum £125
– based on a 0.2% per annum management charge for funds, plus a 0.1% per annum custody charge for other investments
Shares custody charge: 0.1% per annum
Fund custody charge: 0.2% per annum
UK shares & ETFs: £6 (£1 for automated regular investments)
US shares: £6
European shares: £9
Fund trades: £3 (£1 for automated regular investments)
Spot + FX fees: tapered from 1% to 0.1% (depends on trade value)
Telephone dealing charge: £25
2. Check the price
Now that you have a brokerage account all set up, it’s time to do some shopping. Picking which stocks to buy can be a bit daunting for first-time investors. Luckily for you, we’ve written a guide on how to find the best companies to invest in.
With a company selected, your broker will show you two prices:
- Bid – the higher price that will be paid when buying shares.
- Offer – the lower price that will be received when selling shares. This is also known as the ask price.
The difference between these two prices is called the bid-offer spread. And it’s an important concept to know about when leading how to buy and sell shares.
The bid-offer spread (also known as the bid-ask spread) enables firms called market makers to make a small profit for doing the legwork behind each transaction. They provide the shares when you want to buy. They also take shares when you want to sell. Your broker or investment platform acts as the middleman between you and a market maker.
For large companies – meaning those valued at a few billion pounds or more – bid-offer spreads tend to be very small, typically a small fraction of one percent.
However, for smaller companies valued, say, at £100m or less, bid-offer spreads can get very large, perhaps even 10% or more. In order to make a profit overall, the share price will need to rise by at least the amount of the bid-offer spread plus any trading charges you incur.
3. Decide how many shares you want to buy
If you’re happy with the quoted prices provided by your broker, the next step is to decide how many shares you want to buy. In most cases, brokers will allow you to enter a pound value and calculate how many shares you can afford. But if not, all you need to do is divide your available capital by the share price of the company you want to buy to find a share count number.
But how do you choose how much to invest in each business? This is quite a tricky question that even some professionals struggle with. The answer varies depending on the individual, both in terms of risk tolerance and financial goals.
Here at The Motley Fool, we recommend owning around 15-25 businesses in a portfolio to maximise the benefits of diversification. And keeping a decent chunk of cash on the side is also important to take advantage of buying opportunities when they appear. As such, investing around 2%-4% of your total portfolio value as a starting position in a new company is a common ballpark figure we like to use in our Premium services like Share Advisor and Hidden Winners.
4. Select the order type
With the number of shares selected, the next step in learning how to buy and sell UK shares is to specify the type of buy order to place.
There are a few to choose from:
|At Best||The broker will execute the trade immediately at the best price they can find. These transactions are fast, but the exact price at which they will be executed is unknown.|
|Buy-Limit||The broker will only execute a buy trade if the share price falls below a specified price. This type of transaction guarantees the exact price a trade will be executed at. However, these orders typically have a higher trading fee as well as an expiration date. If the share price does not reach the specified price, the trade will not be executed.|
|Sell-Limit||The broker will only execute a sell trade if the share price rises above a specified price.
It is similar to a Buy-Limit order and has the same advantages and disadvantages.
|Stop-Loss||The broker will execute a sell order if the share price falls below a specific price. This type of transaction is designed to help prevent losses from escalating. However, these can create big opportunity costs. Suppose a stock falls below the specified price due to stock market volatility. In that case, the sell order will be executed, even if the stock later surges upward.|
5. Preview your order
After all the order details have been filled out, your broker will show you a breakdown of the transaction. This will usually include:
- The selected stock to invest in
- The amount to invest
- Commission expenses
- Stamp duty
- Currency exchange fees (if trading internationally)
- Additional trading expenses (if not executing an At Best transaction).
Review these details to ensure there are no nasty surprises and verify you have selected the right company and the correct number of shares to invest. The last thing you want is to make a ‘fat finger error’, where you fill out the wrong details.
6. Place your order
This is the last step in learning how to buy and sell shares. After verifying all your details, you can now place your order.
At this stage, your broker will show you a final quote that will only be valid for 15 seconds. This quote is the price per share that you will pay for this At Best trade. It’s worth noting that this might be slightly different from the preview since stock prices are constantly moving.
Having a clock counting down can be a bit nerve-racking when you first start investing. But there is no need to panic. If the timer runs out, the trade won’t be executed. So, take your time to make sure you are happy with the quoted price.
If everything looks good, then just hit the accept button, and you’re done!
The cash is typically deducted immediately from your account. However, with international shares, it can sometimes take a bit of time. If you are ever uncertain about whether a trade has been placed, your broker will have a section of their platform dedicated to completed and pending transactions that you can check.
7. Congratulations, you’re an investor!
That’s it. You now know the basics of how to buy shares on the stock market. And you can begin putting together a robust wealth-generating portfolio following an investment strategy that works best for you.
Be sure to keep records of all your dealings. If you’re not using a tax-efficient account like an ISA or SIPP, you’ll need these when filing your annual tax return or self-assessment.