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THE BASICS

HOW TO INVEST IN THE STOCK MARKET  

If you don’t know where to begin, you could call us for some general advice.

ShareSoc can provide some general advice for new investors (but not specific advice on what shares to buy or sell). Go to the Contact page to contact us.

This page covers four basic questions that face new stock market investors:


1. How to trade in shares.

2. How to hold your shares.

3. How to select a stockbroker and monitor your investments.

4. How to construct a portfolio.


How to trade in shares


Shares are normally now traded either on-line via an internet web site, or over the telephone (although even if you trade on-line you will probably occasionally need to phone your broker with queries). Different stockbrokers offer different services at different prices although on-line trading tends to be cheaper. Usually the price charged for a transaction relates to the value of the order placed, although some brokers offer a low fixed price for deals below a certain value, and others offer discounts for “frequent” traders. There is usually no charge for simply opening an account, although there may be an initial or annual charge for accounts such as ISAs or Personal Crest accounts (see below). So it’s best to have some idea of the likely volumes of trading you will undertake and what type of account you wish to use before comparing costs.


Stockbrokers typically offer three types of account:



Execution-only charges are usually less than advisory charges which are less than discretionary charges, which is even more reason to make your own decisions.


Note that in addition to actually owning shares, you can trade on the basis of the share price going up or down by using Certificates of Deposit (CFDs) or by using spread betting. These are not something that ShareSoc would recommend except to sophisticated and experienced investors, and they tend to be used for short term trading whereas ShareSoc deals primarily with medium to long term investing rather than speculation.


How to hold your shares


There are three ways you can hold shares in companies  - whether or not they are “listed” companies - “listed” meaning traded on a recognised stock exchange such as the London Stock Exchange (LSE):



In practice if you approach a stockbroker, and don’t specify what you want, they are likely to set up a nominee account for you - indeed if you are wanting a “self-select” ISA account (which is free of capital gains tax and income tax) then legally it unfortunately has to be in the form of a nominee account. But nominee accounts tend to disenfranchise you. You may not receive information automatically about a company’s affairs and may lose the right to vote and attend general meetings of the company. This is a very regrettable state of affairs. Note that your name will not be on the share register of the company (only the nominee operator’s name is) and the company will not therefore recognise you as a shareholder and you will have to rely on your nominee operator to accurately record your share interest (which can cause problems if they go bust, not a rare event, particularly if they use “pooled” nominee accounts where your holdings are pooled with others as is normally the case). There are a few stockbrokers who do provide voting and information rights to those in nominee accounts but most do not - contact ShareSoc for a list of those who are known to do so, which we would recommend if you are opening an ISA account where you have no option but to use a nominee. Go to this page for detailed information on how to attend and vote at General Meetings if you hold shares in a nominee account: Nominee_Accounts.


A Personal Crest account ensures your name is on the share register of the company and gives you all the benefits of direct ownership. But because it is an electronic system, it still enables you to trade quickly (e.g. via phone or the internet). It does require a stockbroker to support this system though (they act as the interface to the Crest system for private shareholders), which not all do, and some make a small charge for supporting it. So this system tends to be used by more active or sophisticated traders. However we do recommend Personal Crest accounts for those who are active and serious investors. More information on Personal Crest accounts is given in this article published in June 2015: Personal-Crest-Membership.


Share certificates are the original and old fashioned method but again at least you are on the share register of the company. To sell the shares, you will need to post in the paper certificate to your broker so “clearing” times (i.e. how quickly you get the cash) are delayed. It is also easy to accidentally lose the paper certificates, or have them stolen so it is not a recommended method in the modern era for new investments. However, many shareholders hold certificates from past investments. Stockbrokers may charge more for trading in paper certificates because of the extra costs involved.


Note that moving a certificated holding into a digital format (personal crest or nominee account) is known as “dematerialisation” and you can also go the reverse way, although there can be charges for such transfers. There was a move to dematerialise all paper share certificates in recent years into a new “electronic” format which would have had many advantages for shareholders but this was killed off by the Government in 2010 after lobbying by stockbrokers, which is unfortunate. But this is likely to have to be revisited due to an EU Directive on the subject.


There is a page here: Brokers, which gives a number of brokers who still support Personal Crest Membership or Certificated share trading. This article published in a ShareSoc Newsletter explains why that might be of interest if you are worried about your stockbroker going bust: Protecting Against Brokers Going Bust


Selecting a stockbroker


The trade body for stockbrokers, called the Wealth Management Association (WMA), offers a “find a broker” facility on their web site. This enables you to customise the search based on your local geographic area, how you wish to trade and hold shares and by other criteria. It enables you to quickly identify several brokers that might meet your basic criteria. Go to their web site at www.thewma.co.uk to use this facility. Unfortunately ShareSoc cannot recommend specific stockbrokers but as when dealing with any financial institution you may want to research their background and financial stability before using them.


Boiler rooms and other share promoters: You should be very careful not to deal with anyone who approaches you out of the blue to sell you shares - cold calling is illegal. All stockbrokers should be registered with the Financial Services Authority (FSA) - see www.fsa.gov.uk/pages/register/ where you can check their register. Do not respond to mailings for free advice or to attend seminars unless you know who you are dealing with. Disreputable firms promoting shares in small, very high risk companies that are very difficult or even impossible to sell once you hold them are quite common, and unbelievably may even be registered with the FSA, so caution is essential. If in doubt, call ShareSoc for advice.


Monitoring Your Investment and Attending General Meetings


One of the things that you should do as a shareholder in a company is to monitor what it is doing and ensure you read the information that it issues, particularly the Annual Report and Accounts. Go to this page for information on receiving Annual Reports from a company, and other news: Annual_Reports. In addition it is wise to attend the Annual General Meeting of companies in which you are invested so you can meet the directors, hear what they have to say and ask them questions. See General_Meetings for information on that.


How to construct a portfolio


The first problem any new stock market investor faces is how to pick the first few shares. There are lots of investment publications and tip sheets that will give you stock picking ideas. But it is essential that you own more than a few shares - in effect that you have a reasonably diversified portfolio and don’t bet the house on one wonder stock. A good minimum is about 10 shares of roughly equal total value. This will protect you against unexpected disasters. You should not need reminding that all shares are risky by their very nature, and some are more risky than others. So small AIM stocks are inherently more risky, and are likely to have more volatile share prices than FTSE100 companies. You may want to purchase shares from different market sectors (i.e. not all of them oil companies otherwise your portfolio will rise and fall in value with the price of oil - a highly unstable situation). Indeed it is wise for private investors to purchase shares in sectors in which they may already have some knowledge because of their past careers. If you are going to compete with professional analysts and share traders, who will have researched markets extensively and specialise in them, you need to know as much as you can.


Do tread carefully before you have built up some experience. It also takes time to build up a “trading style” that you are comfortable with. Do you really wish to spend all your day monitoring share prices as active traders need to, or rely on a longer-term, more fundamental style of trading? You also need to gain some understanding of how shares are valued (i.e. What makes them relatively cheap or expensive). Reading those basic tomes in our recommended reading list will also help you to get started - see Reading_List. One article worth reading about the selection of companies for investment purposes is given here: Selecting_Companies


If you don’t want to put in the effort to select and monitor investments in individual companies, you can choose to invest in a “collective” fund such as an investment trust, unit trust, OEIC or ETF. Many people choose a combination of direct company investments and holdings in collective funds to assist diversification. See this page for more information on those (particularly on investment trusts): Investment Trusts


Obviously joining ShareSoc as a member could help you - just reading our regular newsletters will give you investment ideas for example. But if you want more assistance, please give us a call.

GETTING STARTED?

Did you find this information useful? If so why not join ShareSoc and help to support our activities? Go here for more formation: Membership