You can engage in stock investment UK and buy shares of global companies at the click of a button. All you need is a reliable online stockbroker account. As there are hundreds of stock brokers in the UK, each competing for business, fees and commissions have never been so competitive. In fact, there are even UK share dealing platforms that allow investment without any dealing charges. However, along with learning to buy shares, it’s also very important to learn the basics of how shares actually work, the investment journey and any tax rules vs. tax benefits. By getting comfortable with the fundamentals, you can avoid potential mistakes.
What are Shares?
When a company decides to go ‘public’, this means it will be listed on a stock exchange. In turn, this allows investors to purchase ‘shares‘ in the firm. As the name suggests, you will own a ‘share’ of the company that you invest in, which is proportionate to the number of stocks you hold.
The value of the shares is determined by market forces. In other words, if there are more buyers than sellers, the share price will increase. When it does, the value of your investment will rise proportionately.
If there are more sellers than buyers, this has the opposite effect – meaning that the value of your shares will go down. As a shareholder of a company, you may receive perks.
Selling Shares
Buying shares may provide dividends and the ability to vote at Annual General Meetings (AGMs). You can sell shares at any given time during standard market hours. The amount you receive back in cash will be based on the number of shares you hold against that of the current stock price of the company.
How Do you Earn Through Shares?
Most investment decisions are based on the concept that shares generate profits. That is to say, shares give you the opportunity to grow your wealth and get returns at a faster rate than the interest which banks pay. This can be achieved in two ways – capital gains and dividends.
Capital Gains
If the value of your shares is higher than the price you originally paid, this is known as ‘capital gains’.
Dividends
You may also earn from shares in the form of dividends. In its most basic form, dividend allows large-companies to share their profits with stockholders.
If and when they do, you will be entitled to your share of the proceeds. The specific dividend income that you get will vary depending on how well the company is performing. Not all shares pay dividends, but if they do, they are typically distributed every 3 or 6 months.
The best thing about dividends is that you will receive this in addition to your capital gains. In ideal situation, you will be investing in stocks that increase in value, while at the same time receive regular dividend payments.
Investing in an ETF or mutual fund that tracks the FTSE 100 may provide dividends.
Compound Growth
Rather than simply cash out capital gains or hold out for dividends income, many investors look to reinvest an asset’s earnings to generate more earnings over time. This is known as compounding. By holding a stock for a long time and reinvesting capital gains, you can achieve a compounding effect which means you earn gains on your gains.
The reason your investment grows is that because you earn on the gains you reinvest as well as your original investment. This means, each year you earn more interest on both your initial investment and your compounding gains.
Compound growth requires patience as the initial gains are small, but it can be lucrative over the long run. Of course, you have to factor in share fluctuations, inflation and fees, but if done in the right way, compound interest can be one of the best ways to grow your wealth through shares.
What to Consider Before You Buy Shares in a Company
Although the stock markets have historically performed well – this isn’t the case with all companies. On the contrary, many firms – both in the UK and overseas, are now worth just a fraction of their prior all-time highs. This is especially the case with the UK high street banking space – which never truly recovered from the financial crisis of 2008.
Tips to mitigate your risks when investing in the stocks and shares space for the first time:
Diversify as much as you can
In a nutshell, diversification is simply the opposite of putting all of your eggs into one basket. That is to say, instead of investing in one or two companies, a well-diversified portfolio would see you hold dozens, if not hundreds of different stocks. Not only this, but you will be investing in firms from several sectors – subsequently ensuring that you are not overexposed to a single niche.
Start off with low stakes
If you have never previously invested in the stocks and shares space, it might be worth starting off with low stakes. On the one hand, most regulated UK stockbrokers require you to meet a minimum investment amount, on the other hand, you are not required to inject the entire balance into a single trade.
Learn how to research stocks
When you learn how to buy shares, it is also important to learn how to research stocks. It is not about anything overly complicated like technical analysis or chart reading. On the contrary, just make sure that you are kept abreast of any key market developments that might impact the value of your investment. As a side-tip, it might be worth signing up for news alerts with a third-party platform.
