Trading in shares can be a good way to make a return on your money. But it can be less rewarding if dealing costs are through the roof as these alone can snack a sizeable chunk off your investment returns.
This article will discuss everything about shares, how to buy, hold and sell shares, risks and rewards, and lastly tips on when to do those three.
What are shares?
A stock is a share in the ownership of a company. Once you buy a company’s stock, you become one of its shareholders. That means you own a share of its assets and are entitled to vote at its annual meeting.
Importantly, it also entitles you to a share of the profits. This is typically paid in the form of dividends, which are payments made to shareholders every quarter or twice a year. Also, if the share price rises, so does the value of your stocks.
For example, if a company is worth £100 million, and there are 50 million shares. Then, each share is worth £2 (usually listed as 200p). Those shares can and do go up and down in value for various reasons.
Companies issue shares to raise money and investors (that’s you) buy shares in businesses because they believe the company will do well and they want to ‘share’ in its success.
How to buy shares?
If you’ve had your eye on shares of some certain big companies, plans to invest in those but not sure where to start, the good news is that buying shares is not complicated.
The easiest and cheapest way to buy shares is online from what’s called a ‘share dealing platform’. These platforms allow you to buy shares from any company listed on the stock exchange and various overseas exchanges.
Companies get listed on the stock exchange after they have completed an initial public offering (IPO). IPO is a process which basically takes the company from being private to public. That means allowing others to eventually buy shares in it.
You’ll always be able to buy and sell shares trading on the stock market. However, the price is determined by the supply and demand from prospective buyers and sellers at any particular time. High demand will drive up the cost while low demand will do the opposite.
Even if you know the exact share you want to buy, you’ll still have to set up a trading account. You’ll also have to make sure there is enough money in it before you can buy the share.
Once you’ve done this, you can log into your account and search for the share you want to buy. You can either choose to buy a quantity of shares, or a value. Whichever you choose, you need to have enough money in your dealing account to cover both this and any dealing charges.
How to hold shares?
If you decide to trade your shares online, then the easiest thing to do is open a ‘nominee account’. This allows you to own shares without becoming involved in any of the paperwork.
A platform will set up the nominee account and hold the shares on your behalf. You’re still the legal owner of the shares, but your name will not appear on the company’s share register. You can also hold your shares in stocks & shares ISA or self-invested personal pension (SIPP) wrapper.
While you’re holding your shares, it’s important that you don’t forget about them. When you’re new to investing, the excitement of it all may mean that you keep an avid eye on how your shares are performing.
However, as you build your portfolio up and invest in more shares it’s easy to let things slide. Thus, make sure you keep a track of everything you’ve got by reviewing your portfolio regularly.
How to sell shares?
Selling shares is just as easy as buying them. Each platform’s website will work slightly differently, but the principle is the same for each.
If you have set up a nominee account (as explained above), as you don’t hold the share certificates, you have to sell the shares through the platform you bought them from.
When you sell shares, you’ll have to two options. You can either sell your shares by number; or sell your shares by their value. However, if you want to see the full holding, you’ll have to select number of shares.
Once you place the deal, you will be shown a quoted price for the sale of the shares. You normally have a limited time period to decide. The price quoted also won’t necessarily be as high as the price you bought them for. If you accept, then any money you have made from the sale will show in the account.
What are the risks?
The obvious risk is that you buy a company and its share price crashes, or it goes out of business.
Or there could be a stock market crash, and all the shares you hold fall at the same time. For example, the FTSE 100 almost split in value in a matter of weeks during the autumn of ‘08. If that happens, you won’t get any compensation. You have to take it on the chin.
There are things you can do to minimize these risks, but you can’t obliterate them altogether. Don’t put all your eggs in one basket. Instead you need to build a portfolio of different stocks, to minimize the damage if one fails.
Think twice before diving into some small technology start-up you’ve read about. This is a high-risk activity. You’re far more likely to lose your money than invest in the next Amazon or Google.
What are the rewards?
Many beginners start off hoping to make fast money from some hot stock market tip. Calm down. It won’t happen. If you do strike it lucky once, chances are you won’t do it again.
If you flitter from stock to stock, quickly buying and selling in the hope of banking a quick profit, you will rack up a load of dealing charges, which could wipe out any profit you make.
To make money from stocks and shares, you have to be patient. You should invest over a minimum five-year term, preferably much longer, to allow you to overcome any short-term volatility.
Tips for when to buy, sell or hold
Is the company growing its sales, and if so, is the sales growth real, or related to one-time events?
This means you’ll have to read the entire press release to both take in what management said about the quarter. Also, you’ll have to look at the numbers. Did the company experience internal growth? Or did it sell an asset or experience some other windfall that makes it seem like it’s growing?
Generally, it’s a good idea to look at smaller companies that are growing in excess of 10% annually. When looking at larger companies, their sales should be growing by at least 3% to be of interest.
Lastly, compare a company’s growth in sales not only from last year, but from last quarter. If quarterly sales have exhibited an upward trend, it’s usually another good sign.
The sales line is improving. Is its cost of goods sold line item? Or its selling, general and administrative expense line on its income statement going up at a faster rate?
If so, it could be because the company is just entering into a new business or launching a new product. Also, it is experiencing some growing pains or paying for some start-up costs.
However, this could also mean that the company is doing a poor job of managing its expenses. Management’s discussion of the quarterly results will help you collect that information.
Many companies offer Wall Street some sort of guidance on future earnings. Has the company recently increased or decreased its future (earnings) guidance? Are the numbers the company is expecting better or worse than what Wall Street analysts are expecting? This information will give you an idea of whether the company has the potential to “wow” the Street.
Exploring a bit deeper into the psychology behind earnings guidance, if a company ups its guidance for the current quarter. But downplays expectations beyond that, its stock will probably sell off. Conversely, if a company reduces its estimates for the current quarter, but raises its full year estimate, the common stock will probably take off.
Stock Buyback Programs
Is the company repurchasing stock in the open market? Companies buy back their stock rather than use the cash to make acquisitions or pay dividends. In turn, it’s usually a good sign that management feels the stock is undervalued. Repurchase programs will probably be mentioned in the press release.
That said, in some cases management may have ulterior motives behind buying back shares. Some management teams reduce total share count in the public domain, in order to improve financial ratios or boost earnings. Thus, it makes the company more attractive to the analyst community. Other buyback programs are instituted as a public relations ploy to get investors to think the stock is worth more.
In a short period of time, it’s almost impossible to determine whether a product will be a winner or not. However, it could be a big mistake to overlook these stocks. That’s because new products will often garner a lot of attention from both consumers and
investors. This often helps move the share price higher in the near term. In addition, the company has probably already spent a huge amount of money on R&D. Also, it has probably spent on initial promotions as it positions itself to take in a whole lot of money with fewer (namely R&D) expenses.
Of course, new products don’t always turn out to be cash cows for the companies that produce them. But if you get in on a good one early, there can be a dramatic potential for profit.
HQBroker is here to give you a daily news roundup about the forex, commodities, technologies, automobiles, and economies. You can open an account now and make yourself updated with essential news in the market. Share your thoughts and experiences with us by commenting your HQBroker reviews.