If you’re new to investing, understanding how to invest in shares can seem complex. However, the returns you could make by investing in the stock market are potentially rewarding (although not without risk), so it’s worth doing your research to understand how it works. On this page, you’ll learn how to buy shares and understand the risks and benefits you may encounter in the process.
- Buying shares on the stock exchange means you’re purchasing a small portion of a company or companies
- The value of the shares you purchase can both increase and decrease. If a company’s value increases, so will the value of your shares, and vice versa
- Purchasing shares in a single company can be risky, because if the company encounters difficulty, you’ll stand to lose some or all of your money
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What are shares?
When a company goes public, it’s listed in the stock exchange, allowing investors to buy and sell shares of that company. Shares are basically a tiny fraction of a company’s value, meaning if you own a share, you own a portion of the company’s value.
You can own shares yourself, or through a collective investment which is known as a fund. Owning a share of a company means you’re a shareholder, which might give you the right to vote on corporate decisions.
Smaller, less well-established companies can also sell shares in their company, but may not meet the requirements to be listed on the stock exchange. Instead, their shares are sold on the Alternative Investments Market (AIM)*.
The objective of buying shares is to later sell them for profit, as the company or fund you’ve invested in grows.
How does the stock market work?
The stock market is a marketplace where you can buy and sell stocks and shares. The main exchange in the UK is the London Stock Exchange**. Shares are listed on an index, with the largest index being the FTSE100, which includes 100 of the biggest firms in the UK.
A company initially sets the price of their shares, but that price may change within as little as a day and is usually determined by a company’s financial results and the UK’s economic health.
For example, if buyers think a company will struggle, the price of their shares may decrease. On the other hand, if a company were to double its growth, its share price would probably rise.
The graph below shows the performance of shares on the London Stock Exchange between 1987 and 2017. Taking this long-term view, you can see how the market fluctuates, and share prices rise and fall.
How does investing in shares work?
If the company you’ve purchased shares in grows, the shares you own will increase in value. Investors usually buy shares to keep them for the long-term, with the hope of getting a good return on their investments. As you can see from the above graph, if you started investing in 1987 and sold your shares in 2017, you should have made a handsome profit. However, if you started buying shares in 2002 and sold them in 2003, you probably would have made a loss.
If you buy shares in a larger, well-established company, you may also receive a dividend each year. Dividends are profits made by a company in that year. While dividends can be a good way to earn money, it’s unlikely you’ll see rapid growth in larger, well-established companies. That being said, dividends can provide a steady, reliable income that allows you to increase your capital.
The flip side of this is choosing to invest in a smaller company in the hope that it experiences rapid growth, but this is considered a more risky move, and shouldn’t be done without thorough research and independent financial advice.
How do I buy shares?
The easiest and cheapest way to purchase shares is through an online platform called a share dealing platform. These platforms allow you to purchase shares from any company listed in the stock exchange, such as the London Stock Exchange, as well as the Alternative Investment Market, which lists smaller, developing businesses.
Before you can make any transactions on the stock market, you must set up a trading account and make sure there’s enough money in it for the shares you want to purchase.
Share prices vary depending on supply and demand. High demand will likely increase the share price, while low demand has the opposite effect.
Once your account is ready, you can simply log in and search for the shares you want to purchase. When you know which shares you want to buy, you’ll receive a quote which you must accept before making your purchase. Once you’ve bought your shares, you’ll be able to track their progress in your portfolio.
Alternative ways of buying shares are through a traditional stockbroker, or potentially via your financial adviser. It’s important to find out what the fees are for buying shares, whichever way you choose to start investing.
What are the risks of investing in shares?
Buying shares can be risky because you never know how the stock market is going to behave. It’s unpredictable and can be volatile. If the share price falls, the value of your investment also falls. It’s possible to lose all your money if you invest in the stock market, so it’s a decision that requires thorough research and determining how risk-averse you want to be.
Shares bought in smaller companies that are not listed on the London Stock Exchange are also known as ‘penny shares’. Investing in penny shares can be risky because they can be difficult to sell, so your money is tied into them.
Holding shares in a single company can also be risky, because if the company encounters difficulties, there’s a high probability that you could lose some or even all of your money. For this reason, many investors choose to diversify their investments into different companies, as a way to help control such losses.
What are the benefits of investing in shares?
The most common benefits of investing in shares are the following:
- Capital gain – Selling your shares at a higher price than you bought them for is known as capital gain, which is pretty much the objective of starting to buy shares. It’s possible to make a lot of profit with long-term investments in the stock market, but it’s essential to consider the risk to your capital.
- Dividends – As mentioned earlier, the dividends you earn from shares are determined by how much profit the company has earned in a year. The more shares you own, the more you’ll receive in dividends.
- Liquidity – Shares by nature are a liquid product, and you can easily buy and sell shares in the stock market whenever you wish.
- Shareholder benefits – Some companies offer shareholder benefits, such as service discounts and entertainment. However, you’ll need to own a lot of shares in a single company to access most of these types of benefits.
Is buying shares right for me?
Keep in mind that investing in shares doesn’t always guarantee returns. If you’re not open to taking risks, it may be difficult for you to handle should your investment fail. Think about how much you could invest, and if you could afford to lose that money if the stock market or a company or fund you’ve invested in fails.
A good way to help you determine if investing in shares is right for you is to thoroughly examine your personal finances, and seek independent financial advice. If you’re struggling with debt, for example, buying shares may not be right for you, as it’s an additional risk that can potentially create more debt.
How do I sell my shares?
Selling shares is as easy as buying them. Share dealing platforms may have different processes when it comes to selling, but the principle is the same. You can use the account you’ve set up to sell the shares you own.
When you sell shares, you can either sell them by the number of shares you own, or by their value. When you want to sell, you’ll receive a quote for the amount you’ll earn, and a limited period to accept it. The money you earn from selling your shares will be paid into your share account if you do accept the quote.
If you’d prefer a less risky way of growing your money, opening a high interest savings account may be a more suitable option for you.
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