Interactive Investor

How to buy shares and become a stock market investor

Entering the world of investing can be daunting, so we have some tips to make things easier.

5th June 2019 11:20

Kyle Caldwell from interactive investor

Entering the world of investing can be daunting, so we have some tips to make things easier.

Since leaving university eight-and-a-half years ago I have made a living writing about investing. By my best guess, during this time I have interviewed perhaps 100 fund managers, including some of the sharpest investor minds around.

Not every fund manager, of course, can consistently deliver market-beating performance; in fact, far from it. Fund management is ultimately a 'zero sum' game and the majority of active funds fail to add value consistently. Unsurprisingly, therefore, some investors turn their noses up at the thought of handing cash over to a ‘professional’ when market-beating performance cannot be predicted in advance.

Self-directed investors in this camp have two options, the first of which is to buy an index tracker or exchange traded fund (ETF). The second option is to swot up and, if you then feel comfortable, attempt to take on the professionals at their own game and buy shares.

How to get started

In the 21st-century world of electronic trading, buying and selling shares is literally at the fingertips of anyone with an internet connection. Most private investors today enlist the services of a middleman – such as interactive investor– to access the stock market. Shares in the chosen companies are held electronically in a nominee account via the broker, rather than being issued as 'old-fashioned' paper certificates.

Your name, though, will not appear on the companies' share registers. As a consequence, there's a risk you may miss out on shareholder meetings or voting opportunities. Check with a broker before you sign on the dotted line, to see whether provisions will be in place.

According to ShareSoc, the UK Individual Shareholders Society, brokers tend to appoint investors to vote as their proxy according to the number of shares they hold as the 'beneficial owner'. These days such votes can be placed electronically via the broker ahead of the meeting, or can be cast in person if you wish to turn up. Documents such as the annual report may also be made available electronically by the broker. Another thing to check is whether you can access shareholder perks when they are offered.

Buying a share: bid-offer spread

You will also need to get to grips with the practicalities of buying a share. This involves getting your head around the mechanics of the bid-offer spread, which can at times leave you feeling short-changed.

The prices of shares on the stock exchange are set by market-makers, who spend their days trying to match buyers and sellers. Market-makers offer two prices for each share they are making a market in. The first is known as the bid price. This is the price they will pay people who want to sell the share. It can be compared to the process at an auction: you hold some shares you want to sell, and someone bids a price to take them off your hands.

The second price is known as the offer price. This is what you will have to pay to buy the share. The market-maker is simply saying: "I can offer you some shares at a certain price." It is the price that they want to sell the shares to you for.

In order for the market maker to make a profit from trading shares there is a difference between the selling (bid) price and the buying (offer) price. This is known as the bid-offer spread. This spread is usually very small for large companies in the FTSE 10) index, but can be quite big when trading the shares of very small companies.

When you are investing in shares, it is important to understand the bid-offer spread because it is a cost to you. The wider the bid-offer spread, the larger your initial reduction in value will be in buying a share.

The best way to understand all these terms is with a couple of examples. Let's say you want to buy some shares in Tesco (LSE:TSCO). In this example let's say the offer price is 205.3p, whereas the bid price is 205.2p. The difference between the bid and the offer price – the spread – is 0.1p or 0.049%.

This is very small because a market maker can easily trade millions of Tesco shares during the day and make money from it. What this means in practice is that someone buying shares in Tesco for 205.3p and then selling them for 205.2p would lose 0.049% on their investment.

Shares in smaller companies tend to have much higher bid-offer spreads. This is because there are not many buyers or sellers on a daily basis. The spread is bigger to give the market maker an incentive to trade the shares and make a profit from making a market in them. For very small companies, the spread can be huge. For example, iEnergizer (LSE:IBPO), a support services company, had a bid offer spread of 20p or 15% on 21 February 2019. 

In addition, when buying shares there's another charge to pay: UK stamp duty, which has a current rate of 0.5%. There are also a couple of annual allowances to be aware of. Capital Gains Tax, or CGT, is the amount of tax investors pay on profits in excess of the annual allowance of £11,700. There's also a tax to pay on dividend income of over £2,000. Tax shelters, such as ISAs and pensions, should be utilised as a first port of call. 

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Related Categories