How to Buy Shares in the UK: Complete Beginner’s Guide

How to Buy Shares in the UK?

What is a share?

For centuries, investing in shares was a mystery model to get rich fast and with no efforts put. In the current economic era and complicated financial environment, it takes a bit more competence to hit the right target.

Share is a part of the company. From the time being when people realized that the business is too risky to jump into it with all their money, they shared the risk and each of them invested only a part of their fortune.

Gradually systems developed where merchants would get together in the coffee shops to raise additional investments for their business. That was the onset of the first “stock exchanges”.

Today, with the rise of technology the liquidity of shares sharply rose. You can see the price of any publicly listed company quoted on the stock exchange and changing its price at every instant.

Any investor can buy & sell shares of a publicly listed company, thus the market itself defines the price of the share. If a pool of investors decides to buy the share at once, the demand will sharply rise and push the price up, and vice versa.

Shares

Total Share Prices for All Shares for the United Kingdom (1960-2018) Image Source

You’ll soon get exposed to such graphs and charts showing the prices of shares going up and down at certain periods or even during a day or an hour.

You can buy and sell your share round the clock, as there are open stock exchanges around the globe any time of the day. The commissions for the transactions also became very affordable. It’s easy to find a broker platform who will charge you as little as £10 per transaction.

How to Invest

When you invest in the company, you own a share of it. That right enhances you getting annual dividends- the proportional part of the company’s profit, in case the company is doing well. The secret sauce here is to balance your risk-return, as the higher the risk, the more probable you can get higher returns.

There are two ways to buy shares:

  1. You can purchase shares yourself
  2. You can invest in collective pools, known as funds

It makes sense to diversify your investments from the most mainstream popular shares, like Tesco or Marks & Spencer to less risky bonds and gilts (government bonds).

Funds are usually a safer option to go for first-time investors, as funds have their fund managers who know their job inside out and have shown remarkable results for the previous years. They can respond fast to the market price fluctuations and make changes in their portfolio as needed to ensure high performance of the fund.

What is an ETF?

Read: What is an Exchange Traded Fund (ETF) ?

Alternatively, you can consider investing in FTSE 100 tracker, which is an index of 100 mainstream companies of the UK. So if the overall economy in the UK shows a growing trend, FTSE 100 will also perform well, and market experts will ensure you gain the yields from your investments in this case.

FTSE 100 Index

Read: What is the FTSE 100 ?

Smaller companies trade their shares on the Alternative Investment Market (AIM). When they get large enough, they go through IPO (Initial Public Offering) process, which means that the company becomes public and publishes its reports publicly.

Get registered online

Well, now you feel ready to invest and need to follow some easy steps to make your first investment. So, you will need to get registered in the share dealing platform where you can buy any shares of a publicly listed company at London Stock Exchange, as well as stocks listed on various stock exchanges such as New York Stock Exchange (NYSE),  Hong Kong Stock Exchange or Deutsche Börse, to name a few.

There are dozens of well-established stockbroker platforms where you can get quality service, advice and customer support at the lowest cost. The brokers act as intermediaries between you and the London Stock Exchange in order to settle the deals on your behalf.

Set up a trial account

Dummy portfolios or trial accounts will help you to build up your confidence at the start. It will give you a chance to trade in virtual reality in the real time, buy and sell without using your real money. You can then see how your account grows over time. Only at the instant, you find yourself in the shoes of a “mature” investor you can then step into the real trading.

Buying

Image Source

When you look up for share quotes, you will see that each company has its code there. In financial terms, we call it a ticker. For the most UK companies, this code reads as three or four letters, sometimes even two, and it is identical on all trading platforms.

Deposit money

After picking up your favorite shares and forming your portfolio, you may need to choose the best option to deposit money on your account in order to complete the trading process. Once you’ve selected the share, you can either opt to buy a certain number of shares, or a value of shares matching your account balance. Please, note that the platform will charge a commission fee for the transaction.

Close the deal

Online trading is a faster and easier option not only for you but also for the stockbrokers. Upon selecting the trading option, you can see the quoted price. Right after confirming the transaction, the shares will move to your portfolio.

You can select the option what to do with the dividends you receive later. You either can choose to reinvest them or save in your account for the later acquisition of shares or have them paid out to your current bank account.

Withdraw your funds

Actually, you should know that most brokers will let you withdraw your funds within 3 working days following your sale transaction. Though they can let you buy other shares with the proceeded amount before the settlement date (known as T+2).

Keep charges under control

Account fee: Trading Platforms might apply a monthly, quarterly or annual account fee, but in most cases, you can gain free of charge access to the trading platforms if you make a minimum number of trades, or if your hold a balance of a certain amount.

Buying/selling shares: On the top of the share price, you will pay a small fee, which is the commission trading platforms charge for settling your transaction. Frequent traders usually find their trading fees discounted.

Stamp duty: UK trading platforms also charge 0.5% stamp duty on each purchase, as well as extra £1 on transactions exceeding £10,000. There is no stamp tax when you sell shares.

Hold the shares in ISA Accounts

If you intend to hold the shares, you can set up a nominee account on the platform where the platform will store your shares on your behalf.  Your name will not show in the company’s register; however, you will still act as the owner of the shares.

If your investment is not exceeding £20,000, then Individual Savings Account (ISA) should be the best option to go, as you are exempt of paying any tax on any stock market gains you make up to that threshold. You can open a nominee account to hold your shares and get the use of tax benefits while investing.

Re-visit your portfolio

When you start building a portfolio made up of several shares in different asset classes, you will find it easy to keep things flowing and forget about your investment. Keeping an eye on how your investment is performing is already halfway on the guarantee of the success.

Dealing with taxes

HMRC will let you deduct the first £2,000 you get as a dividend from your income tax. Any dividends received above this threshold will be a subject to the basic rate of 7.5% or 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. Married couples or registered civil partners can share their taxable dividend income between them to reduce the tax liability.

Tax bandTax rate on dividends over your allowance
Basic rate7.5%
Higher rate32.5%
Additional rate38.1%

Source:  https://www.gov.uk/tax-on-dividends

It is your responsibility to inform HMRC that you have received income in the form of dividends and they will advise you the easiest option to pay your tax.

5 Tips to Minimize Your Loss

1. Go Direct

The more intermediaries and brokers involved in your trading, the more commissions they are going to charge. This will eventually wear off your final gains. So, the best way to minimize your loss is to trade directly at the London Stock Exchange (LSE).

2. Diversify your portfolio

No matter how good the perspective of the company is, there is never a 100% guarantee that the company will hit the peak for the next years. So you can increase your chances of growing your money just by dividing your investment amount and investing in several growing companies. It will provide you with a safety pillow in case one of your companies shows poor performance for a year or two.

3. Don’t rush to outsmart the market

It sounds tempting to outsmart the market, but you may never know when the market will go into the recovery stage after a sharp decline or when it will reach the next peak. So, you don’t want to find yourself losing badly on timing the market, as the majority of amateur investors do.

4. Don’t invest all your money

Just remember to keep some cash not tied up in shares, as life is full of surprises and you may need money for unexpected expenses. Investment is always associated with risk, so you definitely need to put aside some money for your basic needs and invest the rest for growth.

5. Help the temptation

To build up a smart portfolio don’t be tempted to buy shares just because everyone else is buying, and don’t panic to sell at times when the price suddenly goes down. To make money on the stock market you might need to surf against the flow. That is to say to buy at the lowest price and sell when the market hits the next peak in order to make wealth on the difference of the price. That’s exactly what you do when you invest in real estate or in other businesses.

Maximize Your Profit

Hold to Receive Dividends

Probably you might have heard about day trading or even hour trading before. However, in order to grow your passive wealth, we recommend you make the right decisions and wait for the company to grow. It can give you a chance to taste the fruits at no sooner than a year.

Those investors who invest for a long-term perspective, longer than five years, have better chances to enjoy rewards. There can be bumps on the way or there can be years when the economy or the company sales decline. However, in the longer perspective, the well-researched and grounded investing strategy will reward you with benefits.

Buy & Sell

Of course, you can buy and sell shares from a short-term perspective when you are sure the market or the company will grow in the following day, month or year. This strategy might look appealing to many who long for get-rich-fast models.

However, you need to bear in mind that market prices fluctuate highly on short-term perspectives and you will need to keep an eye on all factors affecting the price change constantly.  So, this option will take more proficiency, speed, and competence to beat the full-time traders in the game.

Bottom line

It’s always fascinating to make passive income with minimum efforts. But you can also lose a lot if the risk is high. That’s why expert investors always choose to invest in several companies, either in various sectors of the economy or within competitive fields where they expect high growth.

Ani Stepanian

Ani is a PhD Candidate and has worked as a Business Consultant and Financial Analyst. She has facilitated training sessions for Chartered Accountants (in her homeland country Armenia) throughout the last 5 years. Ani has an academic type of personality with passion for research in the areas of Investing and Asset Management worldwide.


ani@moneycheck.com
https://www.linkedin.com/in/stepanyani/

Content on Moneycheck.com is provided for general informational purposes, and shouldn't be seen as an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment. The opinions expressed on this Site do not constitute investment advice and independent financial advice should be sought where appropriate. All our articles fact-checked by a relevant professional with expertise in that area of finance and we regularly update guides as necessary.

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