Buying shares means you become a part-owner of a company. The value of your stake will rise and fall according to supply and demand. Investors create a demand – or lack of it – depending on a company’s future or their opinion of it.
If the market thinks a particular company has good prospects, or is a leader in its field, it may be valued quite highly. But if the market thinks the firm is badly managed, or not making enough profit, it may be valued lower. This is what is known as ‘market sentiment’. It’s the driving force behind shifts in a share’s value, even though nothing may have actually changed within the company.
TIP: Market sentiment makes investing in shares a risky business and most experts recommend buying a range of shares in different sectors of the market – it’s the principle of making sure you don’t end up with all your eggs in one basket.
There are two ways you can gain from owning shares. Firstly, your share may increase in value – known as capital growth. You can only benefit from this growth when you sell the share. Secondly, most companies share their profits with shareholders in the form of dividends so you are normally paid an amount per share twice a year.
When buying shares you can use several types of dealer service – discretionary management, advisory or execution only. Execution only, you select the shares and the broker simply carries out your instructions.
With advisory, the broker makes suggestions and the decision to buy and sell is yours.
With discretionary management, the broker actively manages your portfolio according to a strategy you agree. He buys and sells without referring to you. Some brokers charge for a discretionary service, while others provide it free to regular customers. Most experts say that investors need a minimum portfolio of £50,000 to make it worthwhile using a discretionary service.
Picking the right shares involves careful research. If you only want to invest in a few companies you would have difficulty creating enough variety to keep the risk down. Before buying, it’s a good idea to run a phantom portfolio. Follow the market, buying and selling shares without actually handing over cash. It will give you a good feel for the process and the risks.
Remember to take into account dealing charges, effectively the commission that a broker takes. Competition has driven charges down and you can now trade for as little as £10. You will also have to pay stamp duty when you buy shares. This is a government tax on the deal and is 0.5% of what you pay for the shares. A share price quoted in newspapers is not the price you will buy or sell at, it is simply the average of the buying and selling prices, known as the bid and offer prices. Expect to pay more than the printed price and sell for less.