Buying shares in a company is one of the best ways to grow your savings over the long term.
This is because when you buy a share you are buying part of a company and you’re doing it because you think the company and in turn, your share of it is going to grow in value over time.
But where do you start?
Whether you’ve bought shares before or you’re a beginner, here are the things you need to know when it comes to buying shares online in the UK.
Before we start, it’s important to understand that the value of your investments can fall as well as rise, so you could get back less than you originally invested. You also need to be aware that pension and tax rules can and do change. Any tax treatment depends on your individual circumstances.
Why buy shares
Beyond the headlines of rags to riches investment tales, there’s a really important reason why investors buy shares.
Buying shares (i.e. putting your money in a diversified basket of stocks) is a reliable way to beat inflation.
The process of inflation is how money loses its value over time. It’s measured by the increase in the price of goods and services.
Nobody wants to lose money. And with most UK bank accounts failing to grow our savings after inflation, there are good reasons why more of us are turning to stocks.
Now, of course, you can also lose money by buying shares.
But we’ve made this guide to help you understand the risks, determine your best course of action, and ultimately buy shares if and when you’re ready.
Who can buy shares in the UK?
Buying shares isn’t just for the mega-rich or professionals. It’s for everyone.
If you’re in the UK and want to buy shares, you’ll need:
- To be over 18 years old
- A national insurance number
- A bank account
- Enough savings to buy shares while keeping your rainy-day fun
10 steps to buying your first stock
- Understand if buying shares is the right thing for you
- Choosing which shares to buy
- Find a share dealing platform right for you
- Look out for different types of charges and fees
- Understand how your shares will be taxed
- Choose the right account for your shares
- Open an investment account
- Fund your account
- Buy your first share
- Build and diversify your portfolio over time
Most people can buy shares but it may not always be the right decision for you or your finances at the time.
That’s not to say don't, it’s to say make sure you’re going in with your eyes open.
With that in mind...
Here are a few things to look at before buying your first share:
- What is a share and how do they work?
- Why buy shares?
- What is investment risk and why do you need to know about it?
And a few golden rules for first-time stock buyers:
- Past returns are not a sign of future returns
- Don’t invest more than you can afford to lose
- Always keep cash on hand, in case you need it for a rainy day
- Keep your eye out for scams. “Too good to be true” isn’t just a rhyme, it’s real.
- Don’t bet your future on one company. Diversify by spreading your money across different shares.
There are a few different ways to buy shares and become an investor in the stock market.
Choosing different stocks and companies to buy in is the obvious one but there are also some ready-made options available.
We walk you through each option and the stocks you can buy in the UK in our guide on how to invest in stocks.
Need ideas for which shares to buy?
- Take a look at the most traded shares on Freetrade.
- Check out 2021’s top dividend stocks.
- Learn about buying shares in smaller companies.
When you want to buy and sell shares you don’t go knocking on the stock exchange door yourself, a stockbroker does that for you.
Historically, a broker was someone you had lunch with from time to time and called when you wanted to buy or sell.
But today many brokers are built as a platform. You might also hear them called an online broker, investment platform or share dealing platform, and Freetrade is one of them.
There are pros and cons to every online broker, as it all depends on what you are looking for.
When it comes to choosing the best broker for your needs we think it’s best to think about features and fees.
For features here are some useful questions to ask yourself:
- How experienced am I?
- Which shares do I want to buy?
- What kind of accounts can I set up?
- Do I need support in terms of research?
- What’s the customer service like?
When it comes to fees, there are two types of charges you need to know about.
Trading fees (how much it costs to place a trade) and account fees (how much the platform charges to hold your shares).
- Trading fees can include things like commission (where the platform charges a fee for buying or selling shares) and FX or foreign exchange fees (which you tend to get when you buy overseas shares like US stocks).
💡 Commission-free share dealing is when you are not charged by a platform or broker to buy or sell shares. This is how Freetrade operates and we are one of only a handful of commission-free platforms in the UK.
- Account fees tend to come in two forms. Some platforms charge you a percentage fee based on the value of your investments while others have a subscription fee where you pay an amount for the account e.g. with Freetrade you pay £3/month for a stocks and shares ISA.
The key difference between the two is that a percentage fee varies in line with the value of your portfolio but a subscription fee stays the same regardless of whether your shares have risen or fallen over time.
Each platform has a different charging structure, so how much it costs to buy shares will differ. Check out our investment fees calculator to compare fees.
Tax shouldn’t be scary but it’s important to understand how shares are taxed in the UK, as it will help you choose the right investment account to keep them in.
The main type of accounts include:
- Share dealing account (also called a general investment account or GIA). There’s no tax efficiency, meaning you may have to pay capital gains taxes on any profits and dividend taxes on any dividend income, over certain annual allowances.
- ISA (individual savings account). This is a tax-efficient account for your shares. While there’s a limit to how much you can contribute to your stocks and shares ISA each tax year (£20,000 for 2021/22) once inside, your shares and other investments can grow free from UK tax.
- SIPP account (self-invested personal pension). This is a tax-efficient account that lets you choose how your retirement savings are invested. You can’t withdraw any funds until you’re 55 (or 57, from 2028 onwards) but like an ISA, once inside, your shares and other investments grow free from UK tax.
Once you’ve chosen your broker and you’re ready to open your account, they’ll need a bit of information from you.
What do you need to open an investment account and buy shares?
- A valid form of photo ID
- Your email address
- Your phone number
- Your national insurance number
- Your bank account details, to link it up and fund your account
Now your bank account is linked up to your investment account, you can fund your account.
How much will you need?
Each of us will have a different answer. But the two main things to think about are what you’re trying to achieve by buying shares and how much you can afford to spend.
Check out how much money should I invest in stocks?
At this point, you are ready to buy shares online.
To find the share or shares you want to buy, you can use the company name or the stock symbol or ticker code (e.g. like MCD for McDonald's).
You’ll be shown the current stock price and if you are happy with that price, you’ll likely be asked how much you want to spend on the shares or how many shares you want to buy.
If the platform lets you buy fractional shares (which are partial shares) you will specify how much you’d like to spend and the platform will show you how many shares that will buy you.
There are a few different types of buy orders to know about. When you buy a share you’ll likely be asked to specify which one you're after.
Basic orders are orders executed at a set time each day during market hours. This also tends to be what happens if you buy a share outside of market hours (but not always, see triggered orders below).
Instant orders are where your order executes instantly and you buy at the best price available now.
Triggered orders are actually an instruction to buy when the share price reaches a certain limit you’ve set. They can be a good way to buy shares outside of market hours, at a guaranteed price.
Limit and stop-loss orders are also types of instructions.
- Buy limit order - buys shares at a price equal to or below the Limit Price set by you.
- Sell limit order - sells shares at a price equal to or above the Limit Price set by you.
- Stop-loss order - sells shares at a price equal to or below the Stop Price set by you.
Most platforms will show you a preview of your order before you buy the share but keep in mind you only have 15 seconds to accept a live quote so make sure you are happy with the share price being offered.
If you accept the price, the shares will be bought and the cash will be taken from your brokerage account. You’ll receive confirmation and a contract note (try to hang on to these for your tax records).
It’s not a bad thing to have your finger in a lot of pies. In fact, when it comes to growing your savings over the long term, diversifying your portfolio is key.
Now that you’ve bought your shares, monitoring how your portfolio is performing (but not over monitoring tiger mum style) is important.
We’ve got a whole learning area dedicated to helping you build and manage your portfolio.
How do you make money from buying shares?
“Buy low and sell high” would be most people’s answer.
But there are a few other ways to make money from buying shares.
The first one is dividends where the company pays out part of its profits to its shareholders.
The second one is the secret growth sauce that is compounding. Compounding is not a direct source of income in the way capital gains or dividends are, instead it describes one of the biggest benefits of buying and holding shares over the long term. Compounding helps you grow an already growing portfolio.
Here’s more detail on how you can make money from shares.
When to sell your shares?
Being able to buy shares online has sped up the process but it still requires a hell of a lot of time, energy and research to get to this point.
Funny then, that as soon as we buy a share, many of us switch our brains to focus on when to sell.
You might see your shares start to climb, and worry it’s time to sell before they drop back down. Or, you might see your shares take a tumble and think it’s game over.
Neither is a particularly useful way to think about things. You need to find a balance.
Share price movements (or volatility for the cool kids) is something to get a handle on. You can then decide what you’re comfortable with. Here are 5 tips for managing volatility.
Selling tends to take as much (if not more) brainpower as buying shares. To help, we’ve written a comprehensive guide to help you think about when to sell your stocks.
Buying shares FAQs
What happens when I buy the same stock at different prices?
Well, nothing ‘happens’, really. But it does change what your position (i.e. the price today versus the price you bought at) looks like.
Here’s an example to help illustrate.
Let’s say last week, you bought 100 shares of a company at £10 each. The value and original cost of your holding would be £10 x 100, or £1,000.
But you’ve woken up this morning, and the company’s share price is down 50%, so £5 each.
You love what the company’s doing, and think this is just a natural market fluctuation. So you decide you want to increase your position, and you buy some more shares.
You buy 100 more shares, this time at £5 each, so at a total cost of £500.
At this stage, you now own 200 shares, that are worth £1,000 but cost you £1,500.
So the average price you paid is £7.50 per share.
How much does it cost to buy shares?
When buying a share there are two costs to be aware of.
Firstly there’s the share price (the cost of one share). And this varies by share, every share has a different price.
Then there’s the transaction cost (how much the platform or broker) charges you to buy a share. As we mentioned earlier this could include things like commission and FX fees, but it doesn’t always.
Which are the best shares to buy?
The million-dollar question.
Unfortunately, there isn’t one answer. The best share depends on what you are looking for and what you value in a company.
But don’t let that answer get you down - choice is exciting.
Your focus might be dividends, fast growth, healthy financials or a company with prospects for international expansion.
It might also be a company that takes its environmental, societal and governance role seriously, or one disrupting an old industry.
There isn’t one size fits all when it comes to finding the best shares.
In our Invest Hub, we often talk about different sectors or companies to watch.
But the best way to start is by doing some of your own research and then heading to the ‘Discover’ area in your Freetrade app where you can search by sector.
When is a good time to buy shares?
The sooner you get into the stock market, the more time you’re giving your money to grow. So it’s less about timing and more about time.
Trying to time the market doesn’t really work and you should be suspicious of anyone who tells you it does.
There’s always a better, and worse, time to buy shares. But if you can give yourself more time in the market, you’ll most likely be better off thanks to the magic of compound interest.
If you understand the level of risk involved in buying shares, you’ve got some spare cash and you feel it’s time to try, then you’re probably ready to do so.
What happens to a share after you buy it?
When you buy a share on the stock market, you aren’t buying it directly from the company, you’re buying it from an existing shareholder. And once the transaction is complete (in the UK there’s a 2 day settlement period) you become a shareholder.
What to do after you buy stocks?
Forgetting about your shares for a few days, weeks or even months could be a good start. Watching the daily share price ups and downs is not going to make good viewing or lead to good decisions.
And while we’d suggest not monitoring the share price, keeping an ear to the ground on things that might affect the company over the long term is a wise idea. So is bearing in mind why you bought the shares in the first place and what your goals are.
Check out what to do once you’ve bought your shares for more info.
Take control of your savings by joining our commission-free trading platform. Stop letting share dealing fees and charges eat into your investments when you buy stocks, ETFs or investment trusts. Download our iOS trading app or if you’re an Android user, download our Android trading app to get started.