Beginner’s Guide to Investing in Shares
- December 4, 2018
- by Suliman
A beginner’s guide to investing in shares
DISCLAIMER: Our publications do not offer investment advice and nothing in them should be construed as investment advice. Our publications simply provide information and education on a given subject. If you’re looking for investment advice, please get in contact with a financial advisor or broker.
Investing in shares is an alternative way to generate income from your savings. It is important to remember that like many types of investments, this can go up or down. There is the possibility of making money or losing money, make sure to carry out your own research before you start. In this guide we will look at a number of things to consider before deciding if share investing is for you. First, we need to define ‘shares’.
Shares are part of a company that board members decide to sell in order to raise capital. The capital revenue raised will be invested back into the company. Shares of public companies can be sold in the stock exchange market. The price of these stocks are determined by how valuable a company is at any given time.
What is your target?
The two most popular reasons to invest are:
1. Generate a regular income
2. Build capital over a period of time
As an example, if you are a retired pensioner and want to increase the amount of money you have available to spend each month, you should be investing for income. If your aim is to save for retirement or have the money to make a large purchase in years to come, you should consider investing for capital growth.
How much time do you have?
When you are deciding to invest in shares, you should be looking at a minimum of 5 years. If you are unable to wait this long, or need access to this money within that time period, you should consider alternative options such as a short term investment or a savings account.
How much risk can you take?
This is the most influential part of investing and will dictate the decisions you make. If you are investing in shares, your capital will increase and decrease according to market performance.
If you can’t manage seeing your money fall in value, you should reconsider your choice of investing in shares and stocks as this may not be the right choice for you. Alternatively, there are options available if you see yourself as more risk averse. Generally speaking, more risk = more potential reward.
How to manage risk:
Stop orders: You set the bid value and the broker will automatically offload shares if they drop below a certain level. This allows you to remove yourself from trading before share prices drop further, potentially avoiding a larger loss.
Trailing stop orders: Updated daily to track share price movement and limit a potential loss to a level you are comfortable with.
Put options: Reduce the risk of buying too high or selling too low, these guarantee the price at which you are able to buy and sell shares.
Call options: Guarantee the price at which you are able to buy an asset for a fixed duration period.
How much are you able to invest?
Calculate how much money you have available to invest, and if you can afford to lose it or not. Before proceeding, think about other expenditure you may have right now or in the foreseeable future, make sure your commitments are taken care of. Consider if you prefer to invest a large amount from the start of slowly invest smaller amounts over time.
What options do you have?
After you have decided that investing in shares is the right option for you and you have a clear investment goal, it’s time to consider your options. Your goal is to buy shares when they are at a lower price, and sell shares when their value has increased to a higher price. This is how you will make money.
How much does it cost to invest?
The main fee you will come across is the dealing fee. You will be charged this from a stock broker when doing business. If you are trading online, the dealing fee can be much lower, although it is important to remember that you may not receive advice from a broker on the decisions you make.
Investing in funds instead of shares will usually come with an initial fee and a yearly management charge by the manager of the fund. These fees will differ, but are generally based on the percentage of the amount you are investing.
Investing in shares isn’t the only option available to you. It is important to consider what your alternative investment options are before you start buying shares. Here are some of the most popular alternative options to think about:
How to invest in shares
To invest in shares, you will need a stock broker. There are a number of different ways you can use the services of a broker. Here are a few examples:
You can ask them to advise you
You can ask them to make decisions for you
You can ask them to make trades for you with no advice
The option you select will depend on how much experience you already have, and if you require advice. To buy shares, here are the three main types of brokers available:
Advisory stockbrokers: They will offer you advice on the share deals you want to make. They can help you manage your portfolio and will stay in regular contact to make sure you are on track. You will be paying a minimum 1% to 2% for their service.
Discretionary stockbrokers: They will make investments on your behalf and carry out portfolio decisions for you. They will likely charge an increased fee compared to advisory stockbrokers.
Execution only stockbrokers: They will take action on your trades but will not give you any advice. This can be a good option if you are more experienced and do not want to pay for further advice. Their services are also available online.
Creating an investment plan
When you are creating your investment plan, think about what shares you wish to invest in. Here a few things to consider:
What sector are you investing in? Consider a section you have knowledge and/or experience in.
What markets should you invest in? It may not be the best option to go ‘all in’ on one market, you may choose multiple markets to spread your risk.
Your strategy will depend on your goals (growth vs income), and what level of risk you are willing to take
Before you start investing, it can be useful to use a ‘test account’ to familiarise yourself with the platform before you commit any money. Many online brokers will offer this option for free.
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