The Motley Fool

How To Buy Shares

Many people think buying and selling shares in a company is risky, complicated, and only for the very rich.

We’d say that none of these are true. In this guide, we’ll show you how to buy shares with the minimum of fuss.

What is a share?

Simply put, buying a share gives you part-ownership of a company.

You’re entitled to any dividends it pays out and you can vote on certain matters. You can hold it for as long as you want and you decide when to sell. If a company is wound up, then you’re entitled to part of what’s left after all its bills are settled.

Crucially, under the UK legal concept known as limited liability, as a shareholder you are not responsible for a company’s debts.

And if a share is traded on a public market, like the London Stock Exchange – such as companies like Tesco, HSBC and BP – then you can buy and sell its shares very easily and cheaply, hopefully making a handsome profit!

Things to know before you buy shares

Share dealing need-to-knows              

Ownership of a share was traditionally signified by a paper share certificate. It would tell you how many shares you owned and you would need to present it to your broker when you decided to sell. Additional share certificates would be issued if you bought more shares.

It was all a bit clunky, to say the least.

These days, how you buy UK shares tends to be a little different and a whole lot easier. They’re most likely held electronically through investment platforms, such as Hargreaves Lansdown or Interactive Investor, in what are called nominee accounts. This means your shares are pooled together with everyone else who uses the same broker and who owns that particular share.

It’s much quicker and a whole lot cheaper.

Buying and selling shares online via a nominee account does have some disadvantages, as your name won’t appear on the shareholder register and you’re relying on your broker to send your notifications about voting, copies of annual accounts, and so on.

For most investors, though, we’d say that the advantages far outweigh the disadvantages.

Some brokers still allow you to trade using paper certificates or via a personal CREST account (essentially share certificates in electronic form) but you’ll probably be charged more for such a service.

What’s the bid-offer spread?

One important concept you need to be aware of when learning how to buy and sell shares is what is known as a bid-offer spread.

The bid price is the price at which you can sell. The offer price, which is slightly higher, is the price at which you can buy.

The difference between the two prices allows for 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 off when you want to sell. Your broker or investment platform acts as the middleman between you and a market maker.

For large companies – i.e. 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.

What’s the cheapest way to buy shares in the UK?  

When it comes to buying stocks, there are plenty of brokers to choose from these days.

They tend to have different fee structures so which one is cheapest for you will depend on a number of factors such as the size of your portfolio, what sort of accounts you want, how often you trade, and what additional services you might need. To compare costs of different brokers, check out our broker cost calculator.

Many brokers charge a flat fee for buying and selling UK shares, typically between £8 and £12. Some will offer discounts if you trade more than a certain number of times a month and others provide free trades on basic trading accounts, but you have to pay extra for tax-sheltered accounts such as ISAs.

Some brokers will charge extra for dealing in overseas-listed shares and for converting money to and from sterling.

Most brokers will levy a regular administration charge. This will either be a fixed amount per month, or it will be based on a certain percentage of your portfolio. Occasionally, a broker may throw in some free trades as part of its basic administration fee. It may also have some educational features that can teach you more about how to buy shares.

Fixed fees normally work out cheapest for those with larger portfolios while percentage-based fees are often best for those just starting.

Accounts like Self-Invested Personal Pensions (SIPPs) often come with additional fees, especially when you want to withdraw your money to live off once you retire.

Then there is a raft of fees for things like providing paper statements and sometimes exit fees if you decide you want to move your portfolio to another broker.

When you buy UK shares, you also need to pay a tax called stamp duty when you buy them. This is charged at 0.5% of the value of your purchase and your broker will add this automatically when you place a buy order. Stamp duty doesn’t get charged on share sales.

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.

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 have decided which company you want to buy and in what amount.

1. Log into your share dealing account

Use the search function to find the right company. You can usually use either the company name or, if you know it, its ticker code (like TSCO for Tesco). Click the buy button so that you can enter your full order details.

2. Look at the current buy price

You should then be shown the current share price in the market. There will be two prices – the lower price is for selling, the higher price is for buying. This is called the bid-offer spread.

3. Specify how many shares you want to buy

Some brokers allow you to specify an amount in pounds and then they work out the number of shares for you automatically.

4. Decide if you want to deal “At Best” or use a limit order

At Best means your broker will find the best price they can while a limit order allows you to specify a maximum price you would like to pay for your buy order. If your broker can’t get the price you want then your limit order will expire.

5. Preview your buy order

This will tell you the total amount you are likely to pay including costs like commission and stamp duty.

6. Place your buy order

This is when you are presented with an actual deal that you can accept. The price may differ slightly from the order preview as share prices are always moving. You only have 15 seconds to accept a live quote so make sure you are happy with the share price being offered. This countdown can be a little nerve-racking when you first start investing, but you’ll soon get used to it.

7. Congratulations, you’ve bought your shares!

That’s it. You now know the basics of how to buy shares. The cash should be deducted from your brokerage account and you should be given an option to download your contract note – keep this for your tax records.

How to sell shares online

Selling has a lot in common with how to buy shares in a company.

1. Log into your share dealing account

You can only sell shares that you already own so the easiest way to get started is to look at the page listing your portfolio and click trade next to the share you want to sell. It’s normally on the right-hand side of the page.

2. Check the current sell price

You should then be shown the current price in the share market. Again, there should be two prices – the lower price is for selling, the higher price is for buying.

3. Specify how many shares you want to sell

Some brokers allow you to specify an amount in pounds and then they work out the number of shares for you automatically. Or you can sell a certain number or your entire holding.

4. Decide if you want to deal “At Best” or use a limit order

At Best means your broker will find the best price they can while a limit order allows you to specify a minimum price you would like to receive for your sell order. If your broker can’t get the share price you want, then your limit order will expire.

5. Preview your sell order

This will tell you the total amount you are likely to receive after deducting any trading commission.

6. Place your sell order

This is when you are presented with an actual deal that you can accept. The price may differ slightly from the order preview as share prices are always moving. As with buy orders, you only have 15 seconds to accept a live quote so make sure you are happy with the share price being offered.

7. Congratulations, you’ve sold your shares!

The cash should be added from your brokerage account and you should be given an option to download your contract note – keep this for your tax records.


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FAQ

How do I start buying shares?

The first thing to do is to open a share-dealing account with a broker. You’ll have to provide some personal information, so they can perform the required identity checks. You’ll also need to fund it with cash so you can buy the shares you want.

Can I buy 1 share?

Yes, you can just buy one share although this may not be the most cost-effective way to invest, depending on which broker you use. Many brokers offer schemes that make buying smaller amounts more practical, for example by buying on a set day of the month.

How can I buy shares in the UK?

Open a share dealing account with a broker and fund it with some cash. You’ll need to provide some personal information like your bank details and your National Insurance number. Then you should be all set to buy and sell shares.