The Motley Fool

How To Buy Shares

If you’re new to investing, then one of your first questions will doubtless be “What is a share?” Well, let us begin with a brief history lesson.

It all started back in the early days of the empire, when there were great profits to be made if you could get together the cash for a ship and crew, and send it off to far-flung places to hopefully come back laden with tea, spices, silks or all manner of other luxury goods that the wealthy back home would pay large sums for.

Only the really well heeled could afford such an undertaking on their own, and even then it was such a risk that many didn’t want to shoulder the whole burden. So merchants would get together, in coffee shops or other public venues, and pool their resources. The cost of an expedition would be split a number of ways, and each partner would take a share in the enterprise according to how much they could afford and were willing to risk.

They’d write out their documents of ownership, so when they ship eventually returned with its bounty, they’d be able to share out the rewards appropriately.

That expanded into sharing the costs of investing in all sorts of businesses, and people soon realised that their ownership documents, which were the equivalents of more modern share certificates, had values of their own without waiting for the ships to come home (or whatever other enterprise to dish out its profits). If they wanted to sell their share in a venture, all they had to do was agree a price with a buyer and hand over the certificate.

How it’s all changed

And today, apart from the technology, you could argue that little has actually changed. A coffee shop known as Jonathan’s in London is thought to have been the first to start posting lists of prices for available shares (and commodities), and is considered the first stock exchange.

Today, when you invest some of your money in, say, Tesco, you’re harking back to the days of those early partners who shared the risks of those expeditions, except now you’re one of many thousands of investors who own a share in the venture.

Share certificates have now mostly disappeared, but it’s only quite recently that we still used them regularly.

Today, share ownership is mostly recorded electronically and, instead of a paper certificate, you have an entry on a computer in what is known as a nominee account. Your broker is listed as the official shareholder with each company, and holds the shares on behalf of its clients. That way, you can check prices and buy and sell online at the touch of a mouse. The commissions are much lower now, and you can buy shares online for as little as £10 per transaction, even if you’re investing thousands of pounds.

And, of course, news of our companies is much easier to come by these days. If your ship sank off the coast of Zanzibar, it could be months before you found out. But if Tesco’s sales falter, you’ll get to know pretty much immediately — as quickly as anyone else, at least.

What brokers do

If you want to buy into a business, it’s no good knocking on their head office door and trying to hand over your investment cash. No, you need to buy the shares on the stock market, and for that you will need the services of one of the UK’s stockbrokers.

A broker acts as your go-between with the market, which is typically the London Stock Exchange. Your broker pools and matches the orders from whoever is wanting to buy and sell at the same time, helping keep costs down.

Today’s technological world means you can carry out your share dealing online, and these online stock brokers also serve to hold our shares for us, in what is known as a nominee account, doing away with the need for us to keep track of paper share certificates.

(You can find a list of the best share dealing accounts)

What it will cost

For this, a broker will charge a fee, naturally. These vary between brokers, but £10-£12 is fairly standard these days.

But there are two other costs that need to be covered. One is the market’s own profit, and that is found in the buy/sell “spread” when you look at a share’s price. For example, if you look at a share price on a website you may see two prices quoted. One is the price at which you can buy (sometimes called the ‘ask’ or ‘offer’ price), and a slightly lower price at which you can sell (aka the ‘bid’ price).

For large companies in the FTSE 100, the difference between these two prices is usually very small, typically a fraction of one per cent. But for smaller companies, valued at, say, £250m or less, it’s usually a lot bigger. Sometimes it can be several per cent, or even more than ten per cent. This means that if you buy a share in a smaller company, its price may need to rise by a significant amount just for you to break even.

The final cost is stamp duty, of 0.5%, payable when you buy shares (but not when you sell). Many people, including me, think that this tax is unjust, and that people should not be taxed for wanting to invest for their own futures. But we’re stuck with it, and at least it’s not very high.

Buying a share

You can start your share dealing account with an initial cash deposit if you wish (but you may not need to — you can transfer cash later). And you need to tell the service what to do with dividends you receive — you can have them automatically reinvested, left in your account to add to your share-buying pot, or paid out to your nominated bank account.

Then it’s just your personal details, your bank account and debit card details, and then wait for a temporary password to be sent to you via the post. Once you’ve got that, you’re away — you can transfer money in and out online and, of course, buy and sell shares.

When you look up share quotes on websites, they’re usually delayed 15 or 20 minutes. But that’s no good for buying and selling shares, obviously. So when you wish to make a trade, you tell the broker what you want, and you’ll get a live quote that’s valid for a short time — typically 15 seconds. You’ll see a countdown, and if you click to confirm, that’s the price you should get.

You’ll see that each company has what is known as a company, ticker or EPIC code. For Vodafone it’s VOD — for most UK companies this code is three or four letters long, although a handful are just two. This same code should be recognised by all investing websites.

It’s also worth noting that some larger companies may have listings on more than one market, and have different codes on each. For example, Unilever is ULVR on the London Stock Exchange, but UL on the New York Stock Exchange. Make sure you’re buying the code for the London listing (denoted by LSE in this instance, which is shorthand for the London Stock Exchange).


Selling and Settlement

Selling is similar, with the proceeds being added to your account. But there is one restriction you need to know about. Share transactions actually take two days to settle (known as T+2), though most brokers will allow you to sell and then buy something right away with the proceeds — they can do that easily enough, as in effect they’re pooling everyone’s buy and sell orders.

But if you want to withdraw cash from your broker’s account into your nominated bank account, and at least some of the total is from a share sale that has not yet settled, you may need to wait up to three working days to take your money out.

And that’s how you go about buying a share.

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