To a new investor, a beginner’s guide to stock trading offers three essential benefits. First, it simplifies the process of stock trading. Second, it provides a variety of educational materials to encourage learning. Third, it provides access to quality market research. Through these steps, our beginner’s guide helps new investors learn about the stock market in a simple way and eases them through the process in small, easy steps.
What are shares?
In the financial markets, shares refer to equal units into which a company’s capital is divided. A share is also a unit of ownership or interest in a company, financial asset, mutual fund, or Trust fund that gives you claim to a portion of the company’s distributed profits, known as dividends.
Ideally, shares are issued by companies seeking to raise funds from the general public, and if you buy shares, you acquire part-ownership of the company. You can also participate in making critical decisions involving the company like voting for its directors, acquisition/expansion/consolidation plans, or whether the company should be sold.
Ways to buy shares online in the UK
As a beginner’s guide to stock trading, there are two primary methods of buying shares online in the UK. The most common is to buy shares from a traditional stockbroker online who presents you with an electronic share dealing certificate. These shares are similar to paper shares, and the holder may get to enjoy all the rights and privileges, including voting rights and a claim to dividends.
To acquire actual company shares, you only need to create an investment account with your broker or broker agent, fund the account, and initiate the purchase or have the broker buy the shares on your behalf.
Alternatively, you can choose to buy Shares CFDs online. The acquisition process is similar to that of acquiring actual shares, save for the fact that these shares are bought from a CFD stock brokerage. This makes CFD shares more of a bet against the broker on the price direction of the share that doesn’t entitle you to any rights or privileges.
As such, you don’t get to vote in company meetings and neither do you get to share in the company profits. The upside to buying share CFDs is that you don’t need to be an accredited investor to open an account with the CFD broker, you don’t need a significant capital deposit as most brokers allow for fractional share trading, you may get to access leverages, and you can short sell virtually any share.
How to sell shares?
It’s just as easy to sell shares online in the UK as it is to buy shares. If you have an electronic share dealing certificate, you can dispose of your investment online through an online stock broker. The process is easy and straightforward and how fast you clear the investment depends on the liquidity of your shares.
Selling shares/CFDs, on the other hand, is easier and immediate. You don’t have to notify your stock brokerage of your intention to close an open position or have to wait to be matched with a buyer. Share CFD trading gives you more control over your investment journey as you can automate the online sale of shares by setting a stop loss, take profit, and trailing stop-loss orders.
How to make money from a shares investment?
After you purchase shares from a UK broker, the overarching aim is to make a long-term profit on your investment ideas. You will be able to achieve this in two ways – capital gains and/or dividends.
Regardless of what company you buy shares in, you will want to make capital gains. In its most basic form, this means that the price of the shares goes up in value. As such, you’ll be hoping to sell your shares at a higher price than what you paid for. In order to calculate your capital gains, you will need to work out the difference between the buy and sell share price, and then multiply this by the number of shares you hold.
The second way that you can make money when you buy shares is through dividends. For those unaware, dividends allow companies to distribute some of their profits to shareholders. If the company does pay dividends, and you hold at least one share, you will have a legal right to a dividend payment.
Not all companies pay a dividend income, some well-known examples of non-dividend-paying companies include Facebook, Twitter, Alphabet, and Monster Beverage. Dividends are typically paid on a quarterly basis, meaning that you’ll receive a payment every 3 months. The exact amount is determined by the board of the company, and it can vary depending on how successful the business is at the time of the dividend announcement.
For how long should you hold on to shares?
There is no one-size-fits-all answer to this question, not least because no two investments are the same. The general rule of thumb is that you should hold on to shares for at least 5 years as this will allow you to ride out the ups and downs of the stock and share markets. However, you should never hold on to shares indefinitely with the assumption that the share prices will eventually recover. There are plenty of examples where this hasn’t been the case.
How to reduce risks when buying shares?
Regardless of what class you decide to invest in, installing a sensible risk mitigation plan is crucial. In the investment field, this is known as diversification. The importance of diversification should not be understated, as this will ensure that you are never over-exposed to a single company. If you were, and the company subsequently went out of business, you could lose your entire investment.
What is diversification?
In its most basic form, diversification simply means to hold a portfolio with multiple companies. Moreover, your portfolio should consist of companies that operate in multiple industries. In doing so, you will reduce the risks of holding too many shares in a single industry.
For example, let’s say that 80% of your portfolio consisted of tech shares, including the likes of Apple Inc, Facebook, Twitter, IBM, Netflix, and Amazon. If the tech industry went through a prolonged period of decline, 80% of your portfolio would be heavily affected.