Share dealing need-to-knows
The cheapest way to buy, sell and hold
Trading in shares can be a good way to make a return on your money, but is less rewarding if dealing costs are through the roof – these alone can take a sizeable chunk of your money. Here's everything you need to know about buying, holding and selling shares, including the cheapest way to do so and tips for new investors.
There are no guarantees when you're investing
Investing is a long way from putting your cash in a bank account where it sits to earn interest. An investment is a gamble: instead of the security of guaranteed returns, you're taking a risk with your money. This means your money can go up as well as down in value.
We can't tell you whether investing is right for you. But if you're going to do it, it's recommended you invest for at least five years. This is because the longer you invest, the longer you have to ride out any bumps in the market.
What is a share?
A share is simply a divided-up unit of the value of a company. For example, if a company is worth £100 million, and there are 50 million shares, then each share is worth £2 (usually listed as 200p). Those shares can and do go up and down in value for various reasons.
Companies issue shares to raise money and investors (that's you) buy shares in businesses because they believe the company will do well and they want to 'share' in its success.
The 7 share dealing need-to-knows
There are two options when buying shares, you can either:
1. Own shares yourself; or
2. Pool your money with other people in a collective investment known as a fund
For first-time investors pooling your money is a slightly safer option as you're not putting all your eggs in one basket (as you're not just investing in one company) and it means you can ride out any bumps in the market. For more information on funds see our Fund need-to-knows.
As a rule of thumb, you should invest for at least five years. This allows enough time to ride out any bumps in the market that might see you make a loss on your money. If you know you're going to need access to your money in this time, then perhaps investing isn't the right route for you.
Think about it. If that company gets into difficulty then you could lose some or all of your money. Instead, spread your risk by buying shares in a variety of companies.
It's also tempting to try to time the market, but it's almost impossible and even the most experienced investors get it wrong. By pulling out of the market as soon as a share dips or trying to second-guess when a share will reach its peak, you could lose out on sharp recoveries or see the price go down again.
Instead, you should invest on a regular basis – in investment lingo this is called 'drip-feeding' – to smooth out any ups and downs. This will give you an added benefit of something called 'pound cost averaging'.
This is how it works:
If you invested a £10,000 lump sum and bought shares valued at £10 each, you'd have 1,000 shares. If you bought £5,000 worth of the same shares per month over two months (amounting to £10,000 overall), you'd buy 500 shares in the first month.
But if the share price went down to £9.50 in the second month, you'd be able to buy 526 shares, as the shares are at a lower price. So, rather than just getting 1,000 shares for your £10,000, two payments of £5,000 buys you 1,026 shares.
If you're new to investing an ISA should be your preferred route for the first £20,000 (the current ISA limit). Most platforms will let you do this and it's a great way to reap tax benefits at the same time as investing your money.
However, how much you'll benefit from moving your shares to a stocks & shares ISA will also depend on things such as whether you'll max your capital gains tax (CGT) allowance. See more on this below.
If you have more than £20,000 to invest, you can put the first £20,000 into an ISA and then use a standalone dealing account for the rest. For full details on investing in stocks & shares read the Stocks & Shares ISA guide.
There are two ways you make money from investing. One is when the shares increase in value and then you reap a nice little profit when you sell them. The other is when they pay dividends.
Dividends are a bit like interest on a savings account. If a company makes a profit, it gives some of it back to you - it could be on a regular basis or as a one-off. And just as you have a personal savings allowance for interest on savings, you also have a dividends allowance each tax year where the first £2,000 you receive is tax free.
Any dividends received above this allowance will be taxed - at 7.5% for basic-rate taxpayers, 32.5% for higher-rate tax payers and 38.1% for additional-rate taxpayers.
If you're a higher or additional-rate taxpayer who receives taxable dividend income, then you must inform HMRC.
If you're contacted out of the blue by someone inviting you to invest in shares, say 'no'. It is almost certainly a share scam, often referred to as a 'boiler room' scam. Here fraudsters will cold-call investors offering them worthless, overpriced or even non-existent shares.
While they promise high returns, those who invest usually end up losing their money. And remember, if it sounds too good to be true, it probably is.
Follow the five golden rules below to ensure you have a good investment journey:
The greater return you want, the more risk you'll usually have to accept. It's normally wise to take on more risk the younger you are where you have more time to make up any dips in the market.
Don't put all your eggs in one basket. Try to diversify as much as you can to lower your risk exposure, ie, invest in different companies, industries and regions.
If you're saving over the short-term, it's wise not to take too much of a risk. It's recommended you invest for at least five years. If you can't, it's often best to steer clear of investing and leave your money in a savings account.
Review your portfolio. A fund might be a dud or you might not be willing to take as many risks as you did before. If you don't review your portfolio regularly, you could end up with a fund account which loses money.
Don't panic. Investments can go down as well as up. Don't be tempted to sell or buy funds just because everyone else is.For more on investing see our brand new Investing for beginners guide.
If you've had your eye on Royal Mail shares, or have always fancied investing in Marks & Spencer but you're not sure where to start, the good news is that buying shares is not complicated.
The easiest and cheapest way to buy shares is online from what's called a 'share dealing platform'. These platforms allow you to buy shares from any company listed on the stock exchange and various overseas exchanges.
There's the main stock exchange – the London Stock Exchange, where you get a whole host of companies including the really big players such as Marks & Spencer. Then there's the Alternative Investment Market (AIM), which lists smaller developing companies that you may not have heard of.
Companies get listed on the stock exchange after they have completed an Initial Public Offering, a process which basically takes the company from being private to public – allowing others to eventually buy shares in it.
So the basic principle is, if the company is listed on an exchange, you can buy a share in it.
You'll always be able to buy and sell shares trading on the stock market. However, the price is determined by the supply and demand from prospective buyers and sellers at any particular time – high demand will drive up the cost (while low demand will do the opposite).
Even if you know the exact share you want to buy, you'll still have to set up a trading account and make sure there is enough money in it before you can buy the share.
Once you've done this, you can log into your account and search for the share you want to buy. You can either choose to buy a quantity of shares, or a value – whichever you choose, you need to have enough money in your dealing account to cover both this and any dealing charges.
Once you've selected how you want to trade a price will be quoted, once you've accepted the price the shares will then show in your portfolio.
How much will it cost?
One of the biggest things to take into consideration when buying (and selling) shares is how much it'll cost you in charges. The main ones to look out for are:
Account fee: Platforms may charge a monthly, quarterly or annual account fee, but in some cases this is waived if you make a minimum number of trades, or your account is of a certain size.
Inactivity fee: An inactivity fee may be charged unless you make a certain number of trades within a set period. However, these days most platforms don't charge this as a bonus to lure you in.
Buying/selling shares: The fee you pay each time you buy or sell shares. You'll often find discounts for frequent traders.
Stamp duty: When purchasing UK shares expect to pay 0.5% stamp duty and an extra £1 on transactions above £10,000.
Aside from charges and what impact these will have on your share dealing, a few things to look out for when you're picking your platform are:
– Whether any share tips are provided
– Ease of trading online
– Whether there is any helpdesk support
Even the most experienced investors will benefit from share tips and helpdesk support, while everyone will want an easy-to-use website. Take some time to look around the platform's website and look at the information it provides before you sign up, it could save you time and money in the long run.
If the shares are held in a nominee account then you'll need to contact the platform on which the shares are held. The shares are valued from the date of death of the person who held them.
Executors of the estate (the person/s dealing with the deceased person's estate) have the choice of selling these investments and receiving cash, or transferring the ownership to one or more of the beneficiaries, but only once probate has been granted (ie, when the administration of the deceased person's estate has been sorted).
Paper share certificates are slightly more difficult to sort out and will probably cost more, but if you approach a platform it will probably be able to help you value them and help with the administration.
While investments should be chosen for their potential to hopefully make you some money, shareholder perks can be a welcome bonus. These are no longer automatically given as they were when people held paper certificates, but some platforms still pass them on through the accounts.
For example, a simple search will show that if you buy Marks & Spencer shares through a platform such as Hargreaves Lansdown, you'll be sent vouchers offering discounts across the Marks & Spencer product ranges. In order to get these you'd need to get in contact with the broker – the same applies if you want to attend shareholder meetings.
Before things moved online, all shares were traded through paper certificates. Trading in paper shares is a more expensive and cumbersome option. Online trading is quicker and easier for not only you but also the stockbroker.
As time is money, if you still want to trade in paper share certificates you'll be penalised for this by the broker who'll have to spend more of his time and therefore your money on the trade. So if you still have paper shares, your best option is to convert these to online shares.
Most platforms will allow you to do this at no cost, you'll just have to fill in a form and it will take a few days to convert them to online shares.
If you're worried about diving straight in at the deep end with investing, but you're serious about doing it, then dummy portfolios let you build up your confidence first.
A lot of the platforms these days have 'dummy' or 'virtual' portfolios you can practise with. You trade exactly as you would if it were real, except you're not actually exchanging any money or buying any real shares, so if you do make a mistake, there's no harm done.
You have to be an existing investing customer with some companies first before they allow you to set up virtual portfolios alongside your real ones.
If you decide to trade your shares online, then the easiest thing to do is open what's called a 'nominee account'. This allows you to own shares without becoming involved in any of the paperwork.
A platform will set up the nominee account and hold the shares on your behalf. You are still the legal owner of the shares, but your name will not appear on the company’s share register. You can also hold your shares in a stocks & shares ISA or self invested personal pension (SIPP) wrapper, for more information see the Stocks & Shares ISA guide and Cheapest SIPP guide.
While you're holding your shares, it's important that you don't forget about them. When you're new to investing, the excitement of it all may mean that you keep an avid eye on how your shares are performing.
However, as you build your portfolio up and invest in more shares it's easy to let things slide, so make sure you keep a track of everything you've got by reviewing your portfolio regularly.
This is possible, but be aware that you will pay for the privilege and not all platforms offer this service. For your name to be on the share register, you'll need to become a personal member of CREST, the electronic settlement service. You can be sponsored for CREST membership by a platform.
Once a special nominee account has been set up within CREST, you'll then receive information directly from the company and you can attend and vote at company meetings and receive shareholder perks, such as discounts on products sold by the company.
This is usually something that few first-time small investors embark on and is reserved for fairly active investors with a large number of shares.
A direct transfer of your shares into a stocks & shares ISA or pension is not allowed. Instead you have to sell them and repurchase them within the ISA or SIPP.
This is called 'bed & ISA' or 'bed & SIPP'. The sale and repurchase are done immediately after each other to limit any exposure to the market.
How to sell shares
Selling shares is just as easy as buying them. Each platform's website will work slightly differently, but the principle is the same for each.
If you have set up a nominee account (as explained above), as you don't hold the share certificates, you have to sell the shares through the platform you bought them from.
When you sell your shares you'll have two options, you can either:
1. Sell your shares by number, or
2. Sell your shares by their value
However, if you want to sell the full holding (ie, all the shares you have in that company), you'll have to select number of shares.
Once you place the deal you will be shown a quoted price for the sale of the shares. You normally have a limited time period to decide (eg, 15 seconds), and the price quoted will not necessarily be as high as the price you bought them for. If you accept, then any money you have made from the sale will show in the account.
Don't be emotional when it comes to shares, they are an investment. People tend to give the market all kinds of properties it shouldn't really have. Let’s take a very common question to help explain:
Q. I bought/was given shares in Company X a few years ago. The value of this investment has now plummeted. Should I sell it or hold on?
A. Don't consider it as an amount lost. For the sake of illustration let's imagine it was worth £4,000 and is now worth £2,000. The big problem is that many people then think, 'how do I recoup my losses?' Yet it just doesn't work this way. There is no 'what goes down must come up' rule. You have to let go of the past value and clinically think - I have a £2,000 investment in company X.
Forget whatever it was worth and make the decision on this alone. This means the real question to ask yourself is - would I be willing to invest that £2,000 in the stock market right now, and if I did, is this the investment I would choose? There is no difference in the risk profile between buying a share new, or having a share that you've held for a long time, it doesn't change the chances of what will happen. So considering it to be a fresh investment is the only way to go.
When it comes to investing in shares, which platform you choose for your share dealing will depend on a number of different factors, such as how experienced you are and how often you want to trade. This means it's not just as simple as providing a best buy table. Below we've given a number of different options to suit different people's investments needs.
Good if you're going to make 10+ trades a month
AJ Bell* has very low dealing charges of just £4.95 for those making 10+ trades a month, plus an annual platform charge of 0.25% (up to £7.50 per quarter).
If you're into making deals on the go, then AJ Bell also offers a mobile app for iPhone, iPad and Android devices. It also offers a range of information that would be helpful to those that are new to investing.
Platform charge: Up to £7.50 per quarter
Transfer out fee: £25 per holding
Buying/selling: 0-9 deals/mth £9.95, 10+/mth £4.95
Interactive Investor has three different plans to choose from ranging from £9.99/mth for its cheapest option which gives you one free trade a month, to its most expensive option costing £19.99/mth, where you get two free trades a month, with further trades costing £3.99.
See the II site for full details and other options.
Platform charge: £9.99 / £13.99 / £19.99/mth (depending on plan)
Transfer out fee: N/A
Buying/selling: £7.99 with cheapest plan, plus one free trade/mth and commission-free regular investing
Good if you know what you're doing
X-O has no platform charge, although its trading charge is slightly higher than AJ Bell's if you're going to make more than 10 trades. It is cheap, but it's a very basic offering and doesn't offer much in the way of recommendations so you need to know what you're doing to get the most from it.
Platform charge: £0
Transfer out fee: £15 per holding
Buying/selling: £5.95 per holding
Good if you need hand-holding
Although it doesn't have the cheapest buying and selling charges, Hargreaves Lansdown* has no platform fee for shares, it provides a wealth of knowledge and the website is easy to use for those who are new to investing.
Platform charge: £0
Transfer out fee: N/A
Buying/selling: £11.95. This moves to £8.95 if there were more than 10 trades the previous month and to £5.95 if there were more than 20
If this is the first time you've considered any type of investing, it'll be worth reading our beginners' guide to investing to get a broader idea of what's involved.
We don’t cover what to invest in because we never want to have told you to put your money in something, only for you to lose money on it.
But these sites do:
ADVFN – Live news, lists of gaining and losing companies, company-by-company performance charts, news and discussion forums.
Hargreaves Lansdown*- Offers news, guides and tools - and you can download a free guide on how to select shares. You can also sign up to a free weekly share insight email.
Interactive Investor – Offers information, news and discussion forums.
Motley Fool – A wealth of company-by-company information including news, commentary and comparisons of fund performance.
Citywire – Features financial information on companies, and is also a news source. You can watch shares in a virtual portfolio if you sign up for an account.
If you're not sure how to invest and what to invest in, seek independent financial advice. Read the Financial Advice guide for more information.
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