Shares Trading: How to Get Started
Trading in shares was once the preserve of stockbrokers in major financial centres such as London. These days, anyone can have a go at buying and selling shares using a range of brokers and online platforms. Whether you’re financially savvy or a complete beginner, getting involved in shares trading is relatively simple.
What is shares trading?
Shares trading means buying and selling shares in listed companies with the hope of making a profit. Businesses will sell shares in their company to raise capital. The shares will all be exactly the same price at any one time although their price will fluctuate over time depending on the demand for the company’s services and how the company performs.
People buy and sell shares hoping to make money. If you hold a share or shares in an individual company it gives you voting rights on company policy and also gives you a share in the company’s profits, usually paid as a dividend twice a year. As well as earning a percentage of the profits, you can make money trading in shares by selling off shares at a higher price than you paid for them.
How do I get started?
If you want to start trading in shares, there are a few things you can do to prepare yourself to give yourself the best chance of succeeding. Firstly, spend a few days learning about the stock trading market. You need to learn the difference between shares, stocks and options, different trading strategies and stock trading terms as well as how the stock market works.
Next, you need to find yourself a broker. Even if you are confident you know what you want and how to go about it, you will need to use a broker to carry out the trades. Most brokers will provide you with stock trading software once you open a brokerage account with them.
How do I find a broker?
There are different types of brokers dealing in shares trading and the type you choose will depend on how much advice you need and how much control you want. Advisory brokers: If you’re a beginner in shares trading, this is your best option. Advisory brokers will advise you on which shares to buy and sell but will let you make the final decision.
Execution only brokers: Good if you’re confident in shares trading and want complete control. Execution only brokers offer no advice – you tell them what you want and they act as an intermediary to make the trade. Their fees are less than those demanded by other types of brokers as their job is less complicated and time consuming.
Discretionary brokers: Ideal for people with large portfolios. Discretionary brokers take control and make decisions on your behalf on what to trade. It’s the most expensive option.
You can find a list of brokers at the Association of Private Client Investment Managers and Stockbrokers (APCIMS). Most of the major banks such as Barclays and Halifax offer brokerage accounts and other financial institutions such as Redmayne Bentley, Killik & Co and Charles Stanley offer advice and services tailored to your requirements. If you want a simple, execution only platform you could try The Share Centre, Hargreaves Lansdown or Interactive Investor. Most brokers will expect you trade online – some will allow you to make a trade by phone but are likely to charge a small extra fee.
How do I choose a broker?
Once you have decided what type of broker you want, you should compare the various charges and fees. You will be surprised how different they are amongst the various companies – some charge an annual flat fee plus a small charge per trade, others have no annual fee but will charge more per trade. Some brokers will reduce the charge per trade the more regularly you trade and others will penalise you if your account is inactive for a period of time. You need to have some idea of how often you are likely to trade before you can work out which broker will offer you the best deal.
There are plenty of independent financial and shares trading websites offering advice and information about choosing a broker. They will list the major brokers and online platforms, outlining the fees charged and advising which brokers make good matches depending on your intended level of trading.
I’ve chosen my broker – what next?
Once you have chosen your broker you need to open a brokerage account and deposit some money. You won’t be able to make any trades until there is money in the account and you will need to keep the account topped up to ensure you can pay for any future trades. Sometimes you will need to wait for a password from your broker but once everything is set up, you’re good to go and can start trading.
Some brokers or online platforms allow you to set up a fantasy portfolio to practise trading before you start trading for real. It’s a good way of gaining confidence and getting a feel for how everything works. You could also join an investment club as a way of learning about the stock market and exchanging ideas with other traders.
How do I trade?
You’ve done your research or had some advice from your broker and you’re ready to trade. Using your stock trading software choose the stock or share you want to buy and you’ll be given a quoted price, usually in pence per share. Decide how much to spend (there has to be enough money in your brokerage account to cover the amount) and deal. You will then be given a real-time price and you’ll have about 15 seconds to carry out the deal, at which point the money will be taken out of your brokerage account.
Will I make money?
That’s the million dollar question! Company profits and share prices can go up but they can also go down. Unless you’re a very good trader or extremely lucky, the best advice is to hang on to your shares for a number of years to even out fluctuations in the market. In the meantime, you should hopefully earn some money from the dividend payments. Make sure you can afford to lose money before you start trading.
You need to take into account the charges per trade imposed by your broker or platform – expect to pay anywhere between £5 and £12 depending on how frequently you trade – and any annual flat fees. Don’t forget you will need to pay tax on your shares. If you buy shares you will have to pay 0.5% stamp duty reserve tax and you will be charged capital gains tax on any profits you make through your shares.
Tips for shares trading online
1. Before you start trading, work out how much money you want to spend.
2. Set yourself price limits before you start. Know your highest price limit for buying shares and your lowest price limit for selling shares so you don’t end up getting charged for not going through with the deal.
3. Don’t be too active. The more you trade the more you’re paying in fees which is eating into any profits you’re making.
4. Try to get a diverse shares portfolio – shares in about 10 companies from a variety of different sectors is ideal.
5. Trading before 9am or after 4pm should be avoided. Low trading volumes mean a wider than usual difference in price for buying and selling shares.
Watch out for scams. If you’re contacted over the phone or via email with an invitation to buy stocks or shares always say no as it is almost certainly a scam. If it sounds too good to be true, it probably is.