The Motley Fool

How To Buy Shares

Many people think buying stocks and shares 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, 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. 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 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 – as are companies like Tesco, HSBC and BP – then you can buy and sell its shares very easily and cheaply, hopefully making a handsome return.

Share dealing need-to-knows              

Buying a stock has changed a lot in the Internet age.

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 sold. Additional share certificates would be issued if you bought more shares.

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

These days, buying shares tends to be a little different. They’re most likely held electronically through investment platforms, like 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 quicker and a whole lot cheaper. 

It 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 certificates in electronic form) but you’ll probably be charged more for the privilege.

What’s the bid-offer spread?

One concept you need to be aware of when learning how to buy 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 allows for firms called market makers to make a small profit for their services. 

Market makers are the firms who 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 per cent. 

However, for smaller companies valued, say, at £100m or less, bid-offer spreads can get very large. They can be several per cent and are sometimes even greater than that. So, if you are to make a profit overall by such shares, be aware that you need their share price to rise by more than the bid-offer spread plus any other charges you incur.

The cheapest way to buy, sell and hold shares       

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

They all have different charging 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.

Many brokers charge a flat fee for trades, e.g. £10 to buy or sell. 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 (i.e. not ISAs or SIPPs).

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

Most brokers will levy a regular admin charge. This will either be a fixed amount per month/quarter or it will be based on a certain percentage of your portfolio. Occasionally, a broker may throw in some free trades as part of their basic admin fee. 

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.

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.

To help you get started, you can find a list of our top-rated share dealing accounts here.

How to buy shares 

Now we are getting to the nitty gritty of how to buy stocks. 

Believe it or not, It can take less than a minute, once you have decided which company you want to buy and how much you want to buy.

Simply log into your share dealing account and 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).

Some companies might be listed on multiple stock exchanges (e.g. both London and New York) or have more than one type of share listed, so always make sure you have selected the correct one before proceeding.

You then need to 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.

Part of learning how to begin buying shares is deciding what sort of order you want your broker to use. You will be asked if you want to deal ‘At Best’ or use a limit order. 

If you choose At Best your broker will contact a range of market makers and offer you the best price it can find. You then have 15 seconds to accept that offer before it expires. However, you can always submit another buy order if it does expire. 

You should check what the share price is trading at before getting to this stage. The clock ticking down to zero can be a little nerve-racking the first few times you see it, but you’ll soon get used to it.

Limit orders allow you to specify a maximum price you are prepared to pay. Your broker will then attempt to complete the deal although this could take some time and they may not be able to find a market maker prepared to deal at the price you’d like.

There’s usually a cost charged by your broker for each buy transaction you make. This is typically around £10 but some brokers charge less if you are a more frequent trader. 

In the case of UK shares, you also need to pay stamp duty when you buy them. This is charged at 0.5% of the value of your purchase and your broker will deduct this automatically when you buy a share.

How to hold shares 

Learning how to buy stocks is just the start of a long journey. The real money is made when you hold great shares for the long term.

Although it takes patience, the practical aspects of holding onto shares is relatively straightforward. A broker will carry on holding shares for you until you tell them that you want to sell.

Some brokers will charge you a monthly or quarterly amount for holding a portfolio, sometimes throwing in a few free trades to sweeten the deal. 

You should be sent regular statements and any dividends that are paid out. It’s a good idea to keep records of all the transactions on your share dealing account, should you need to reference them at a later date.

As an investor, you’ll need to keep an eye out for any news from the company, such as annual results, major new contracts, or acquisitions. These may affect the share price and you’ll need to decide if your thesis for investing in the company has changed materially as a result.

How to sell shares 

Selling is similar to the process of buying shares.

You tell your broker that you want to sell a certain number of shares in a company you hold in your portfolio (or a certain amount in pounds).

Like buying, you can either choose to deal ‘At Best’ in which case your broker will offer you a fixed sell price which you then have 15 seconds to accept or the offer will expire.

Or you can set a limit order, asking your broker to sell your shares for a minimum price of your choosing. If they are unable to get that price, then the limit order will expire after a certain time.

In the UK, share transactions take two days to formally complete (known as settlement or referred to as T+2). Depending on your broker, you may be able to withdraw the money straight away or wait for these two days to pass before doing so.

In most cases, people will leave the cash in their share dealing account and use it to buy a different stock.

The good news is that there is no stamp duty to pay when you sell a share. The bad news is that you might have to pay capital gains tax on any profits you have made. 

You are responsible for calculating your gains, reporting them via your tax return, and paying any tax due to HMRC, if applicable. You can sidestep all this if you hold shares with an ISA or SIPP, as any profits made are then free from capital gains tax. You also get a capital gains tax allowance, currently £12,300, and you only have to pay if your gains exceed this amount. 

You get a contract note showing you exactly how many shares you have sold and for what price. You should keep this as you may need it for tax purposes or for your own records. 

There’s usually a cost charged by your broker for each sell transaction. This is typically around £10 but some brokers charge less if you are a more frequent trader. 

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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.