Sharing is caring, so we’ve made our ELI5 guide to buying shares.
Why you should invest in the stock market
Beyond the FOMO from headlines bragging of rags to riches investment tales, there’s a really important reason that investors love to invest in the stock market.
Investing in 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. Unfortunately, even by doing absolutely nothing, sometimes your money will lose value.
Of course, you can also lose money by investing in the stock market. But we’ve made this handy guide to help you understand your risk, determine your best course of action, and ultimately buy shares if and when you’re ready.
What is a share and how do they work?
You can think of a share as a slice of pizza, and the pizza as the company you’re investing in.
When you buy a share, you’re getting equity ownership in a firm. The value of the share can rise in fall, for a hell of a lot of reasons.
Who can buy shares in the UK?
If you’re in the UK and want to buy shares, you need:
1. A national insurance number
2. A bank account
Is it a good time to buy stocks and shares?
The sooner you get investing, the more time you’re giving your money to grow. It’s less about timing, and more about time.
Trying to time the market doesn’t work. There’s always a better, and worse, time to get investing. If there were a crystal ball for it, I certainly wouldn’t be writing this article right now. 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 stocks and shares, and you feel comfortable with your own personal risk appetite, then you’re probably ready to do so.
What stocks and shares can you buy in the UK?
Here in the UK, you’ve got a smorgasbord of stocks and shares you can buy.
Individual company shares
When you invest in a company’s shares, you’re buying a stake in the business. That means you get some ownership in the company too. Usually the value of your shares will rise and fall depending on how the company is doing. Because if things are looking good, more investors will want to get some skin in the game. If the business is failing, that can prompt investors to jump ship. But there are a lot of other factors to consider here, and a share price is definitely not always indicative of a company’s success.
An exchange-traded fund, or ETF, is a collection of investments pooled into a single fund. It’s set up to mirror the performance of that basket of stocks and doesn’t have a human at the helm. You can buy and sell it through a stock exchange. Check out our ETFs to buy.
An investment trust pools together money from multiple investors, then invests it on their behalf. It has a real life human managing the portfolio, judging when to buy and sell investments.
Bonds are a way for companies or governments to raise money. In return for buying a bond, you’ll receive the money you put in, plus interest. It’s effectively a loan which promises to pay a fixed return at one, or several, preset dates. The interest rate paid is usually preset as well. But these days, you can also get your hands on a bond with a floating interest rate, which means it can change over time.
A real estate investment trust, or REIT, is an investment trust that specialises in commercial property investment - think shopping centres and parking garages, or even warehouses. Here’s a list of REIT stocks on the Freetrade platform.
An Initial Public Offering, or IPO, is a common way for a company to list their shares on a stock exchange. Essentially, a private company decides they want to go public, and it sells a block of its shares to the public. Want to stay tuned for upcoming IPOs? We’ve got you covered.
A special purpose acquisition company, or SPAC, is another way that a company can go public. It’s becoming an increasingly popular way for private companies to get on a stock exchange. A SPAC lets you make an investment in a listed shell company whose goal is to acquire or merge with another company. The SPAC takes the other company public by using the proceeds of its own IPO. The process is also referred to as a ‘reverse merger’ in the investment circle. Here are the SPAC stocks we have available.
Dividends are a portion of the company’s earnings that it pays to its shareholders as a thank you for sticking around. Bigger, more established firms are more likely to pay them because it’s easier for them to afford it. So a dividend stock is simply a stock that comes with a dividend payout. But to get the payout, you have to make sure you’ve bought the stock before its ex-dividend date. You can read up more on dividends here.
A simple way of deciding your personal risk appetite is by determining how much money you’re prepared to lose in order to gain. The more you’re willing to risk, the more you could lose or gain.
That amount of money of course depends on what you own. If you’re not swimming in cash, you’re going to have a lower level of risk than someone who’s got a lot of money in the bank.
Your investment timeline is another factor in deciding your level of risk. Are you planning to invest over a long period of time? You can probably take more risk than someone who’s looking at a shorter-term horizon.
10 steps to buying your first stock
Don’t let 10 steps sound daunting! It’s a pretty small staircase if you think about it. And after you’ve bought your first stock, the whole process will start to come much more naturally.
1. Understand if investing is the right thing for you
Investing comes hand in hand with risk, no matter what. Any investment involves a degree of risk, and as an investor, you need to do your research and figure out what level of risk you are comfortable with and prepared to take.
2. Research what you want to invest in
Once you’ve decided that you’re ready and able to invest, you need to decide what to invest in.
3. How to find companies to invest in
The Freetrade app has over 5,000 stocks available to you. Wondering how to pick stocks?
- Look at our list of UK stocks to buy
- Read the news. Is an industry taking off? Maybe the government’s just announced it’s banning the sale of petrol and diesel cars. What will that mean for electric vehicles? What are some publicly traded companies that give you exposure to the trend?
- Literally, just open your eyes. Look around your room - do you have a Peloton in a corner, perhaps a MacBook in front of you? How do you feel about those companies? Do they get you excited, are you passionate about what they’re doing? Peter Lynch used to stand in a supermarket and watch what people were buying. It can be that easy to tap into trends.
- Keep those eyes peeled. New companies are knocking on the stock market’s door all the time. Keeping tabs on upcoming IPOs is a good way to stay in touch with what’s happening.
- Browse our most bought shares. They might not fit with your risk appetite, financial goals and time horizon but they could give you a jump-off point to look elsewhere.
Find a share dealing platform
Wondering how to invest in stocks in the UK? A share dealing platform is a good place to get started. There are a lot of stock trading apps and platforms out there though and knowing what’s on offer can help you find the right option for you.
Online stock trading has seen a huge boost over the past few years, and we’ve got investment apps to thank for that.
A robo-advisor is an automated financial advisor. Typically, you access your advisor online or on an app. You plug in some information about who you are (age, income, debt, etc.), and it churns out some different investment options for you. Your money then automatically gets invested in the assets that the robo-investor thinks are best for you. So the robo-investor actually makes the call for you.
Should you use a robo-advisor? As seems to be the case with many questions asked here, the answer’s going to hinge on your desired investment strategy and financial situation. Most robo-advisors offer a similar type of service. But the type of investments they can offer you and the fees they charge do differ. Also, they’re typically cheaper than using a human advisor. While that could be a benefit, the fact remains that robo-advisors are just that, robots, they can’t replace humans (yet).
Unlike a robo-advisor, a traditional brokerage account usually involves a human in the flesh. When you set up a brokerage account, you’re partnering with a licensed brokerage to invest. The type of broker you use depends on your experience, how much support you need, and how much you want to invest. If you want to be able to interact directly with a human broker, a traditional brokerage might be your best bet. If you do want to open a brokerage account, it’s worth reading up on more important considerations.
4. Look out for different types of charges and fees
The fees associated with each of the above platforms are going to vary greatly. The only thing you can really count on is that there’s very little uniformity to fees - even within the same type of platform. But here are a few to look out for:
- Account charges: This could be a charge for opening an account, or for maintaining it.
- Subscription fees: This fee might be monthly, annually, or dependent on the amount of money in your account.
- Trading commissions: Some platforms charge you every time you place a trade, some platforms don’t.
- FX fees: If you live in the UK and invest in US or EU stocks, a currency conversion needs to take place. For instance, you might be investing with pounds, but the stock you’re buying needs to be purchased in dollars. There’s a fee attached to this, and although it might seem small, it can add up.
5. Understand how your investments will be taxed
Tax shouldn’t be scary. And luckily, the rules for tax on shares aren’t too complicated. But there are definitely a few important things to keep your eye out for, so be sure to give our guide a good look.
6. Types of investment accounts
Share dealing account
A share dealing account lets you buy and sell shares. A general investment account (or GIA) has no tax-efficiency, meaning you may have to pay capital gains or dividends taxes on any profits you make.
An individual savings account (or ISA) is a tax efficient way of saving money or making investments. There’s a limit to how much you can contribute to your stocks and shares ISA. That limit is determined in each tax year, and was £20,000 for 2021/22. Another limitation to an ISA is the type of investment you can make with them. But for the most part, you can own a lot of popular stocks and funds.
A self-invested personal pension (or SIPP account) lets you control and choose how your pension is invested. You can’t withdraw any funds until you’re 55 (or 57, from 2028 onwards), without incurring substantial penalties
7. How to choose the best investment platform?
There are pros and cons to every investment platform, and they’re contextual to what you’re looking for as an investor. How to choose the best platform for you depends on your needs. Some useful questions to ask yourself:
- How experienced am I?
- What kind of investments do I want to make?
- What assets do I want to invest in?
- What are the fees attached?
- What’s the app’s customer service like?
- What kind of accounts can I set up?
8. Open a brokerage account
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?
- 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
9. Fund your account
Last but not least, now that your bank account is linked up, you can fund your account.
10. Buy your first share
And voila! You’re ready to buy your first share.
Beyond the fact that if your investment pans out, you can sell your shares and make money, there are other perks to being a shareholder. If the company pays a dividend, you’ll get a payout as a shareholder. There are also several perks depending on the company you have invested in. Here are some shareholder perks available to Freetrade customers. Remember, as great as a 25% discount on Next is, a perk in and of itself is never a reason to buy a share in a company.
With the Freetrade app, when you refer a friend, you and your pal get a free share worth between £3 to £200.
The golden rules of investing for first-time stock buyers
First times can be scary, but our ‘how to invest in stocks’ guide is here to hold your hand. Here are some investment principles that are great to follow.
- Remember that you can lose money. Past returns are not indicative of future returns, so beware of convincing yourself otherwise.
- Always keep cash on hand, in case you need it for a rainy day.
- Don’t invest more than you can afford to lose.
- Keep your eye out for scams. “Too good to be true” isn’t just a rhyme, it’s real.
- Diversify. It’s not a bad thing to have your finger in a lot of pies. Here’s more on why diversifying your portfolio is so important.
Understand different types of buy orders
- Basic order: this is what happens when you place an order outside of available trading hours. If you place a basic order after the cut-off time, it will execute at a set time when the market is next open.
- Instant order: this type of order executes instantly. So you’re going to buy at the best price available at that time. These orders can only be placed while the market is open.
- Triggered order: this type of order is actually an instruction. So you’re instructing a purchase to happen when a certain limit is reached.
- A buy order: you set an order to make a purchase when a price falls to or below the trigger price set by you.
- A sell order: you set an order to make a purchase when a price rises to or above the trigger price set by you.
4. Limit and stop-loss order: this type of order is also an instruction. There are the three limit and stop loss order varieties.
- Buy at a price equal to or below the Limit Price set by you (a Buy Limit Order).
- Sell at a price equal to or above the Limit Price set by you (a Sell Limit Order).
- Sell at a price equal to or below the Stop Price set by you (a Stop Loss Order).
What happens to the shares once it's bought?
When you decide to buy a share on an electronic platform, you (the buyer) is matched with a seller. 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, you become a shareholder.
Who owns the share after I bought it?
If you make an investment through your Freetrade app, the shares you buy are held in your name by Freetrade Nominees Limited. So they’re held in CREST, the UK’s central security depository, with you as the beneficial owner.
What to do after you buy stocks?
Twiddling your thumbs muttering “what do I do now that I’ve invested?” Relentlessly refreshing your portfolio’s value?
It’s very tempting to feel like you need to ‘do’ something now that you’ve bought stocks. But the next steps really vary on why you’re investing in the first place. If you’re planning on buying something big in the next little while, maybe you want to sell off some of your investments to get the cash needed to do so. Timing is of the essence.
How do you make money from buying shares?
If you’ve made an investment and the share price has increased, congratulations! If you decide to sell your shares, then you will have successfully made money from buying those shares. Here’s how to sell shares if you’re ready to do so.
What happens when I buy the same stock at different prices?
Well nothing ‘happens’, really. But it does change what your position 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 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 a total of £500.
Now, your share position combines both of those purchases.
Your first 100 shares are now only worth £5 per share. Your holding went from £1,000 to £500. This is an unrealised loss of £500.
Your second 100 shares are also worth £500.
Your combined holding is 200 shares worth £1,000. The average price paid is the average price of both your investments. So £1,000 + £500 = £1,500, and you divide that by the number of total shares, which is 200. Your average price paid is £7.50 per share.
When to sell your stocks?
It’s really easy to get in your head after you’ve made an investment about when it’s best to sell your stocks. You might see your shares start to climb, and worry it’s time to sell in case they drop back down.
And on the flip side, you might see your shares take a fall, and panic at them tumbling any further.
You need to find a balance. Risk is something to get a handle on, and decide what you’re comfortable with. It isn’t something to be scared by. Here’s a comprehensive guide for deciding when to sell your stocks.
Investing long or short term or saving
What kind of returns are you expecting from your investments?
If you’re just trying to invest for the short term, and might need cash on hand soon, you’re taking a bigger risk. Investors who can take advantage of smaller gains over a longer timeline will benefit from compounding. That means you’ll make multiple little gains, but they’ll add up in the long run. This is a much more realistic expectation than explosive short-term gains.
At Freetrade, we think investing should be open to everyone. It shouldn’t be complicated, and it shouldn’t cost the earth. Our investment app makes buying and selling shares simple for both beginners and experienced investors and keeps costs low. So download the app and start investing today. Choose from a general investment account, a tax-efficient stocks and shares ISA or SIPP, and a Freetrade Plus account.