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How to buy shares
by Gavin Lumsden on Oct 01, 2011 at 00:01
Shares are bought through a stockbroker.
The cheapest and fastest way to buy and sell shares is through an online, ‘execution-only’ broker. Execution-only means the broker will take your order and implement it without giving you any advice.
The Apcims (Association of Private Client Investment Managers and Stockbrokers) website has a good ‘find a firm’ facility to help you find a stockbroker offering the level of service you want. For example, you can search for all execution-only brokers who cater to customers with less than £20,000 to invest, have an online service, and allow you to invest via an ISA.
Although many execution-only brokers provide lots of information and research about shares this does not constitute advice. Anybody wishing to use an execution-only service must take full responsibility for their investment.
If you do want advice you need to find a stockbroker offering either an advisory or discretionary service. With a discretionary service, you authorise the broker to buy and sell shares on your behalf, within pre-arranged limits. By contrast an advisory client has to give his or her permission before a broker can conduct a trade.
Check if a firm is authorised
Stockbrokers have to be approved by the Financial Services Authority. All Apcims members will be FSA authorised, but you can check the firm you're interested in by using the FSA Register. The FSA also lists the names of some of the unauthorised firms that are targeting UK investors, such as 'boiler room' scam operations.
Brokers make money from charging commission on each transaction, either as a flat rate or as a percentage of the value of the deal. Online dealing charges can be under £10 in some cases.
Brokers also make money from the ‘spread’ (or the difference) between the price at which can buy and sell a share. Brokers quote both prices. The ‘offer’ price is the price at which you can buy, the ‘bid’ price is the price at which you can sell. The bid price is always lower than the offer.
Bear in mind, you will also pay the government 0.5% stamp duty each time you buy a share.
Although it is sensible to look for the cheapest service you can find, there are other factors to consider when choosing a broker. Quality of information, speed of execution and the breadth of markets covered are also important. The better or faster the service, the more it will cost.
You will also face credit and identity checks when dealing with a broker for the first time.
Share certificates and nominee accounts
Most brokers hold shares for clients electronically. This dispenses with paper share certificates that traditionally proved investors’ ownership. This is cheaper and speeds up the process of settling (paying for) share transactions. However, it means your shares are held in a nominee account managed by your broker. As there is no direct communication between you and the company, you have to rely on your broker to pass on dividends, annual reports and other information from the company.
An alternative is to set up a personal Crest account. Crest is the UK's settlement system, where share holdings are recorded, and having a personal account rather than using the broker's nominee account means that you own the shares directly - like owning certificates, but without the paperwork. The Apcims 'find a firm' facility allows you to choose a broker that allows you to use a personal Crest account. Here's a fuller discussion from our forums on the pros and cons of certificates vs. nominee accounts vs. personal Crest accounts.
Dividends are one of the main attractions of holding shares. These are usually bi-annual payments made to shareholders. Although dividends are paid at the discretion of the company and can be scrapped or reduced, if you choose a well managed company with good prospects you can hope that its dividend will be gradually increased as the years go by. Dividends can be taken as an income or reinvested in the company’s shares. Reinvesting dividends can greatly increase your returns over the long term.
Investing in shares is risky. There is no guarantee that the share prices of even well managed companies will rise. Therefore it is best to only invest money that you can afford to lose. However, if you do your research and choose companies wisely and take a long-term view on your investments, you have every chance of doing well.
Many experienced investors set a ‘stop loss’ or limit of how much they are prepared to lose when they invest. If, for example, a share price falls 25% and hits their stop loss they sell the shares straightaway.
Our Smart Investor page has more information on how to analyse stocks and approach investment.
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