Buying Your First Shares

A Brief Introduction to Shares

What are shares and where did they come from? As with most things, we need to go back in time to when the British empire was at its height and ruling the waves. British companies were making their fortunes by sending off their own ships to the four corners of the planet and buying as many new goods – such as silks, tobaccos, teas and spices – as they could carry on the ship and then bringing them back home to sell at a serious profit to the British upper classes. Because such ventures were both expensive and risky to set up and because all of the profits could be lost if the ship sank it quickly became common practice for a number of wealthy merchants to get together and share the cost of the venture (and therefore the risk)  with each merchant therefore taking a ‘share’ in the venture. This was done by drawing up ownership documents for the ships (and later their cargo) so that the rewards could be split according to their share when the ships returned. This then grew into merchants sharing in the costs of various other kinds of businesses; and then later on still those ownership documents or ‘shares’ took on a value of their own as part of a business, rather than simply the cargo itself. Shares in ventures and businesses were then traded amongst merchants by selling on the certificate of ownership to other people.

 

This is still, at its most basic level, what happens today when you buy shares. Let’s say you want to buy shares in JCB, all you do is phone up (or go online) and buy a number of shares in their company and you will then own a small part of JCB, alongside tens of thousands of other investors in their company.

 

How It Works Nowadays

These days most people and companies don’t bother with share certificates but instead use an electronic entry on a computer, referred to as a nominee account, with the official shareholder of the company being the broker who you buy the shares through.

 

How Brokers Operate

Brokers are effectively middlemen who buy the shares on your behalf via the London Stock Exchange and who allow you to sit at your computer and buy your shares online. They will take your order to buy and pair it with someone else’s order to sell (or vice versa) and allow you to trade in all the listed companies without having to actually go and buy shares from them directly. For this they will charge you a small fee on every trade, which is usually around the £10 mark. You will also need to bear in mind the cost of the ‘spread.’ The buy / sell spread is the difference between the cost of buying and cost of selling a certain share, and the price of buying the share is usually slightly higher than the cost of selling the share. This is the built-in profit of the market and on larger companies the difference is very small, less than a percent, but on smaller companies this can be anything from 2 or 3% all the way up to 10%. So, when thinking about buying shares in these companies you need to price in the fact that you will need to see significant growth in that company before any profit is made!

 

Stamp Duty on Shares

Another cost to keep in mind is stamp duty. This is a 0.5% charge that is payable every time you buy shares. You don’t have to pay it when you sell, however, only when you buy.

 

Buying Your First Shares

Ok, so you understand the process and you’re ready to buy some shares. Where do you start? First of all, you must set up your share dealing account. You can do this either with your own bank, or more likely, one of the many companies online who will be eager to take your business. There are all kinds of comparison websites where you can choose the best broker for your needs (based on cost / level of experience required etc) and once you have found one you simply need to deposit some of the money you need to invest, let them know where to pay your dividends or whether to reinvest them, provide the ID they require and then you’ll be all set to buy and sell shares.

 

When it comes to purchasing the shares you’re interested in, you will see a price on the screen that is normally delayed by a few minutes. The price you decide to buy at will be offered to you as a live quote and you will normally have 20 seconds to decide whether you want to make the trade or not. Once you confirm, the price you confirm at is the price you will be buying at.

 

 

 

Selling Your Shares

The process is similar the other way around for selling shares. Once your shares hit a price you’re happy to sell at, you confirm the sale in the same way. The money will be sent straight to your account but because share deals sometimes take a couple of days to settle, you might not be able to take your money out for three working days.

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