August 28, 2014

How to buy shares

Welcome to the how to buy shares tutorial from Investoo, this tutorial will teach how you how to buy shares in the most effective way as a retail investor.

Homework complete

So you’ve done all your homework on which shares to buy, you’ve read the key financials, analysed the charts technically and listened to all the various analyst views. You should have also carefully considered your attitude to risk and whether you are looking to buy shares for income and dividends or purely for increases in value.

Equally important is the decision as to whether to hold your shares in an ISA or not, if you chose to do so, then you will not need to keep records of dividend income and capital gains as they are exempt from shares within an ISA.

Now it’s  time to buy shares…

So you’ve picked the share or shares you want to buy, and now comes the time to actually buy them. The most popular and efficient way is to do this via an execution only broker online. An execution only broker purely carries out your request, which will be to buy a particular share or shares. However, there are other options available including an advisory service or discretionary managed service whereby a stockbroker will make decisions on your behalf. You could also purchase a variety of shares through a fund, which pools together investors money and logically reduces risk.

When purchasing shares through an online stockbroker, your shares will typically be held in a ‘nominee’ account, which means the stockbroker is holding the shares on your behalf.

How to buy shares online

Find an online stockbroker which you are comfortable dealing with and provides you with the information you require. Once you’ve made your decision, most online stockbrokers will allow you to open a share account online within minutes or through the post via forms.

One of the key things investors look out for when buying shares is the costs involved. Amongst the key costs that vary between brokers are account charges (if any), share dealing charges, dividend reinvestment charges and dealing over the post and telephone.

Dealing charges for shares is usually far lower online than it is via post and telephone, which usually carry a minimum/maximum amount and/or percentage of transaction.

When buying shares, you will also be subject to stamp duty of 0.5% – even when the shares is wrapped within an ISA. Also be aware of the bid/offer spread.

How frequently to buy shares

You can buy shares as frequently or as infrequently as you wish as online brokers are generally flexible in terms of minimum amounts. Some investors prefer to buy shares in one lump sump, while others prefer to logically reduce the risk via ‘pound cost averaging’. This method is where investors buy shares on a monthly basis in smaller amounts to balance out the expected rise and fall in share price.

So now you’ve read all the key points about how to buy shares, let’s put it into practice with a quick step-by-step example:

  1. Login to your account, find the share you wish to buy and click ‘place order’ or similar
  2. You should be presented with a screen that features various options such as account type, market, stock symbol and order type. A market order is most common and means you will be buying at the available market price.
  3. Then an order confirmation screen will appear, which will usually have an offer price (price which you can buy at) than at the previous screen. Typically, you will have 15 seconds to confirm your order, if you don’t, you will be taken back to the order screen and the price will be recalculated.
  4. Congratulations, you have purchased some shares, providing you confirm your order!