Share trading need-to-knows

Share dealing
What you need to know before investing in shares

Investing in shares can be a profitable way to grow your money, but it becomes less advantageous if you’re shelling out high fees for someone else to handle the trades. This guide will cover the fundamentals of what shares are and the key information you should be aware of before diving into the stock market.

Warning: there are no guarantees when you’re investing

Investing carries inherent risks, as the value of your investments can fluctuate, potentially decreasing as well as increasing. If you choose to invest, it’s advisable to commit for the long term, typically five years or more. A longer investment horizon gives you more time to navigate and recover from any market volatility.

What is a share?

A share represents a portion of a company’s total value. For instance, if a company’s valuation is £100 million and it has issued 50 million shares, each share would be valued at £2 (or 200p). The value of these shares can fluctuate due to various factors.

Companies release shares to generate capital, and investors, like you, purchase these shares with the expectation that the company will perform well, allowing them to partake in its success.

How can investing in shares make (or lose) me money?

There are two primary ways to earn money through investing. The first is by selling shares at a higher price than what you initially paid, thus making a profit. The second is by receiving dividends.

Dividends function similarly to the interest earned on a savings account. When a company generates a profit, it may opt to distribute a portion of that profit to shareholders, either regularly or as a one-time payment. The first £1,000 per year in dividends is exempt from tax. However, beyond this amount, basic-rate taxpayers are taxed at 8.75%, higher-rate taxpayers at 33.75%, and additional-rate taxpayers at 39.35%.

It’s important to note that the tax-free dividend allowance will decrease to £500 per year starting in April 2024.

Keep in mind, though, that the value of shares can also decline, and companies might choose not to issue dividends, so there are no absolute guarantees in investing.

Should I invest in shares?

This is ultimately a personal choice, as only you can determine whether you’re comfortable with the risk of investing some of your money, and if so, how much. We can’t decide for you whether investing is the right path. However, if you decide to proceed and are confident that you can handle the potential loss of the amount you invest, there are some important factors to keep in mind. (New to investing? Check out our beginners’ guide to investing for a more comprehensive overview).

• Investing is generally a long-term option – you should invest for at least five years. As a general guideline, a five-year timeframe usually provides enough cushion to weather any market fluctuations that could potentially result in a loss. If you anticipate needing access to your funds sooner, investing might not be the most suitable option for you.
• Don’t put all your eggs in one basket – holding shares in one company is high risk.  If the company encounters financial trouble, you risk losing part or all of your investment. To mitigate this, many investors opt to diversify their risk by purchasing shares across multiple companies. The rationale is that if one stock underperforms, the gains from other stocks in your portfolio can help offset the loss.

You have the option to select the individual stocks on your own, or you can combine your resources with others in a collective investment called a fund. For further details on funds, refer to our Fund need-to-knows.

• The market is unpredictable – invest on a regular basis to smooth out ups and downs. Attempting to time the market can be alluring, but it’s extremely challenging, even for seasoned investors, who often misjudge it. If you exit the market as soon as a stock declines or attempt to predict when a stock will hit its peak, you might miss out on sudden rebounds or witness the price drop once more.

Instead, many investors opt to invest smaller sums consistently over time. This approach offers the advantage of a strategy known as “pound cost averaging.” For instance, if you invest £10,000 to purchase shares priced at £10 each, you would acquire 1,000 shares. However, if you spread that investment over two months, you would buy 500 shares in the first month. If the share price drops to £9.50 in the second month, you would then be able to purchase 526 shares.

• Watch out for share scams – never buy shares from a cold caller. If you receive an unexpected call from someone encouraging you to invest in stocks, your best response is to decline. This is very likely a share scam, commonly known as a ‘boiler room’ scam. In such schemes, fraudsters will reach out to potential investors, offering shares that are either worthless, grossly overpriced, or entirely fictitious.

Although they may lure you with the promise of substantial profits, most people who fall for these schemes end up losing their money. Always keep in mind that if something seems too good to be true, it almost certainly is.

How to buy and sell shares

The positive aspect is that the process of buying and selling shares is relatively straightforward. As long as a company is listed on a stock exchange, you can trade its shares.

In the UK, the main stock exchange is the London Stock Exchange (LSE), which features a wide range of companies, including major names like Marks & Spencer. Additionally, there’s the Alternative Investment Market (AIM), which focuses on smaller, emerging companies that might not be as well-known.

How to buy shares

The most straightforward and affordable method to purchase shares is through an online ‘share dealing platform’ (check out recommended platforms). These platforms enable you to buy shares from publicly traded companies.

After setting up your account, you can search for the share you’re interested in, select the amount or value you wish to purchase, and ensure your account has sufficient funds to cover both the purchase and any associated fees. Once you accept the provided quote, the shares will appear in your account with the chosen platform, which is commonly referred to as your portfolio.

It’s important to note that share prices fluctuate frequently, sometimes even between the moment you place an order and when it’s confirmed. Be ready for minor price adjustments. Prices are influenced by the current supply and demand from buyers and sellers, with high demand pushing prices up and low demand causing them to drop.

What charges do I need to pay?

When buying, holding, and selling shares, it’s crucial to consider the associated costs. Key expenses to be aware of include:

• Platform charge: You could incur a monthly, quarterly, or annual fee for your account, which may be either a fixed amount or a percentage of your investments. However, in certain situations, this fee may be waived if you meet a minimum trading activity requirement or maintain an account balance above a specified threshold.
• Trading fees: The fee you pay each time you buy or sell shares. You’ll often find discounts for frequent traders.
• Transfer out/exit fee: Some platforms will charge if you want to transfer your investments to a different provider, usually per company you hold, or sometimes even just to close your account.
• Stamp duty: When purchasing UK shares, expect to pay 0.5% stamp duty and an extra £1 on transactions above £10,000.

Who really owns the shares?

It’s important to consider that when you use a platform to buy shares, you are essentially paying the platform to handle the purchase on your behalf rather than buying the shares directly. This approach often allows you to buy fractional shares, which might otherwise be too costly.

However, this arrangement means that the shares are typically held by the platform or a nominee company, making you a beneficiary owner rather than the direct owner. Should the platform face a collapse, you would not have direct control over your shares. Instead, your assets—such as shares or funds—would either be transferred to another broker or sold off, with the proceeds returned to you.

To protect your assets, most platforms implement a practice known as ringfencing. This ensures that your assets are kept separate from the platform’s own assets, theoretically safeguarding them even in the event of the platform’s bankruptcy.

How to sell shares

Selling shares is as straightforward as purchasing them. Although each platform’s website may operate a bit differently, the fundamental process remains consistent across the board.

When you’re ready to sell, you have the option to specify either the quantity (e.g., sell 500 shares or all available shares) or the value (e.g., sell £500 worth of shares). After initiating the transaction, you’ll receive a quoted price for the sale. Be aware that this price might differ slightly by the time the sale is executed. The proceeds from the sale will be reflected in your shares account.

When should I sell my shares?

If we had this figured out, we’d already be millionaires!

Attempting to ‘time the market’—that is, buying stocks at their lowest points and selling them at their highest—rarely proves successful. It’s a challenging strategy and generally doesn’t yield the desired results.

Instead, consider a more objective approach when evaluating whether to sell a stock. Ask yourself if you believe the company will continue to grow and maintain its dividend payments. Alternatively, you might question whether it would be wiser to sell now and reinvest in other companies that you anticipate will perform better. Reflecting on these questions can provide valuable insight for your decision-making process.

Q – I bought shares in Company X a few years ago. The value of this investment has now plummeted. Should I sell it or hold on?

A – Instead of viewing it as money lost, think of it differently. Suppose it was initially valued at £4,000 but has since dropped to £2,000. The common issue is that many people start wondering, ‘How can I recover my losses?’ However, this mindset is flawed. There’s no guarantee that what has decreased will necessarily increase again. It’s essential to move past the previous value and adopt a more analytical approach—focus on the fact that you currently hold a £2,000 investment in company X.

Set aside any previous value assessments and base your decision solely on the current situation. Essentially, you should ask yourself: would I be prepared to invest £2,000 in the stock market at this moment, and if so, would this be the investment I would select? The risk involved is the same whether you’re purchasing a new share or holding onto one you’ve had for a long time; it doesn’t affect the potential outcomes. Thus, treating it as a new investment is the most logical approach.

Share dealing platforms to try

Consider investing through a stocks & shares ISA

Before looking at share dealing platforms, it’s worth you knowing that you can invest up to £20,000 in a stocks & shares ISA. Doing so means you’re sheltered from various taxes that are often charged on investments made outside an ISA. For full details, read the Stocks & Shares ISA guide.

Investing isn’t ExEconomics area of expertise. So, we don’t tell you here what the ‘best’ sharedealing platform for you is, or give you any top picks. What we’ve done is pull out some of the cheaper platforms so you have somewhere to start your own research.

Share dealing platforms

(1) Fees based on up to 10 trades of UK shares per month, AJ Bell and Hargreaves Lansdown offer discounted rates for more frequent trades. You can trade overseas shares but expect to pay a currency exchange fee of up to 1%. (2) Min £10 deposit for deposits via bank transfer or min £1 via card. Deposits by card are fee-free up to £2,000, there’s a 0.7% fee above. (3) You can also open a Fund and Shares account, which has no platform fee.

How do I know what shares to buy?

We avoid providing specific investment advice to ensure that we don’t inadvertently lead you to make poor financial decisions. Instead, we suggest checking out these sites that offer stock recommendations, as they can be a valuable starting point for your own research:

• ADVFN – Live news, lists of gaining and losing companies, company-by-company performance charts, news and discussion forums.
• Hargreaves Lansdown* – Offers news, guides and tools – and you can download a free guide on how to select shares. You can also sign up to a free weekly share insight email.
• Interactive Investor* – Offers information, news and a discussion forum.
• Motley Fool – A wealth of company-by-company information, including news, commentary and comparisons of fund performance.
• Citywire – Features financial information on companies, and is also a news source. You can watch shares in a virtual portfolio if you sign up for an account.

Share dealing FAQs

Q – Is there a way to ‘practise’ investing before diving in?

A – If you’re apprehensive about jumping straight into investing but are determined to give it a try, starting with dummy portfolios can help you build your confidence gradually.

Many modern platforms offer ‘dummy’ or ‘virtual’ portfolios where you can practice trading. These simulations mimic real trading scenarios, but since no actual money or shares are involved, any mistakes you make won’t have real-world consequences.

To access virtual portfolios, you’ll often need to be an existing customer with some investment firms. Once you’re set up, you can experiment with virtual trading alongside your actual investments.

Check out our research section for valuable beginner information and recommendations for companies that provide virtual account setups.

Q – What happens to my shares once I’ve bought them?

A – If you choose to invest in stocks online, one of the simplest methods is to set up a ‘nominee account’. This type of account enables you to own shares without having to deal with the associated paperwork directly.

Typically, this account is referred to as a general investment account (GIA). Although you are the official owner of the shares, your name will not be listed on the company’s shareholder register.

Alternatively, you can hold your shares in a Stocks & Shares ISA or a Self-Invested Personal Pension (SIPP).

While managing your shares, it’s crucial not to neglect them. When you first start investing, the thrill may lead you to monitor your shares closely.

As your portfolio grows and you add more investments, it can become easy to overlook some details. Therefore, it’s important to regularly review your portfolio to stay on top of your holdings.

Q – I want my name on the share register, what do I do?

A – Achieving this is feasible, though it comes at a cost and not every platform provides this option. To have your name listed on the share register, you must become an individual member of CREST, the electronic settlement service. A platform can sponsor you for CREST membership.

After establishing a special nominee account within CREST, you’ll start receiving direct communications from the company. This allows you to participate in meetings, cast votes, and enjoy shareholder benefits, such as discounts on the company’s products.

Typically, this path is not common among novice small investors and is generally pursued by more active investors with a substantial shareholding.

Q – Can I get shareholder perks?

A – Investments are typically selected for their potential to generate returns, but shareholder benefits can add an extra incentive. Unlike the past, when paper share certificates guaranteed these perks, today’s digital platforms may still offer them.

For instance, if you purchase Marks & Spencer shares through a platform like Hargreaves Lansdown, you might receive vouchers for discounts on various Marks & Spencer products. To claim these perks or to participate in shareholder meetings, you would need to reach out to the broker directly.

Q – How do I move my shares into a stocks & shares ISA or SIPP?

A – Transferring your shares directly into a stocks & shares ISA or pension isn’t permitted. You must first sell the shares and then buy them back within the ISA or SIPP.

This process is known as ‘bed & ISA’ or ‘bed & SIPP.’ To minimize market exposure, the sale and subsequent repurchase are conducted in quick succession.

Q – Can I convert old paper shares online?

A – Before the advent of online trading, all stock transactions were conducted through physical paper certificates. Trading using these paper certificates was not only more expensive but also more cumbersome. The advent of online trading has streamlined the process, making it faster and more convenient for both traders and stockbrokers.

Given that time is money, opting to trade using paper certificates today will incur penalties from brokers, who will need to invest more time—and thus more of your money—on each transaction. If you still hold paper shares, it is advisable to convert them to digital shares.

Most trading platforms offer this conversion service free of charge. You simply need to complete a form, and the process of converting your paper shares to online shares typically takes just a few days.

Q – I inherited shares, what do I do with them?

A – If the shares are kept in a nominee account, you should reach out to the platform managing those shares. The valuation of the shares will be based on the date of the account holder’s death.

The estate’s executors—those responsible for managing the deceased’s estate—can either sell these investments to receive cash or transfer them to one or more beneficiaries. However, this can only be done after probate has been granted, meaning the estate administration is complete.

For shares held in paper certificates, the process is a bit more complex and might incur higher costs. Nonetheless, contacting a platform can assist in determining their value and managing the required administration.