What is share dealing?
An introduction to buying and selling shares.
Share dealing explained
When you buy a share, you are buying a sliver of ownership in a company. As such, you become a part-owner (or shareholder) of the company. Share dealing is the buying and selling of shares in the hope of earning a profit.
There are two sources of returns for shareholders: capital growth and dividends. As a company’s value increases, so should the price of its shares, which might then be sold for a profit. The opposite is true if a company’s value decreases; the shares will drop in price and may have to be sold for a loss.
In general, more mature businesses pay out a portion of the company’s profits in the form of a dividend.
It’s important to remember that businesses that pay dividends are not a source of ‘free money’. When a company goes ‘ex-dividend’, its share price will fall by the same amount as the dividend paid. Companies may increase or reduce their dividends based on their profitability and economic outlook.
Owning individual shares is considerably more risky than owning exchange traded funds (ETFs), which track indices such as the FTSE 100, or Investment Trusts, which are effectively funds listed on the stock market.
How to deal shares
To trade shares, you need to open an account with a share dealing provider such as IG. You can elect to either buy a fixed number of shares (say 100 shares of Vodafone), or a fixed value (perhaps £1000 of Vodafone).
Once you have bought the shares, you own them. Your provider will segregate your assets in a custodian account, so that in the unlikely event it goes bankrupt, you still own the assets.
Shares are bought and sold on a global network of exchanges. Most UK shares, for example, are traded on the London Stock Exchange (LSE), but many countries have a number of exchanges where shares are listed.
These exchanges have rules for the companies that can list on them, the AIM market being less strict than the LSE, for example, and they set hours during which shares can be bought and sold. UK shares can only be bought between 8am and 4.30pm.
When you buy and sell a share, you are not buying it from your share dealing provider, but from stockbrokers who will be asked to quote a price based on your order. Your share dealing provider simply gives you access to the markets and charges a transaction fee to make money.
Similarly, when you receive a dividend, your share dealing platform relies on third parties to process and pay the dividend to your account. This is usually the cause of dividends being delayed.
In the share dealing platform, IG offers clients two ways to buy shares: ‘at quote’ or ‘on exchange’. At quote gives the investor 15 seconds to accept or decline the best price provided by our stockbrokers, while on exchange sees your order placed on the LSE order book. The latter approach may be more appropriate if you want to trade at a certain price, but most people like the convenience of at quote pricing.
Types of investment accounts
- Stocks and shares ISA
- General Investment Account
UK investors have the option of either using their £20,000 ISA allowance (a ‘stocks and shares ISA’), which has the beneficial element of allowing for tax-free income and capital gains, or a taxable general investment account (GIA).
While taxable, many investors will not breach the annual HMRC limits (2018/2019 capital gains tax [CGT] allowance: £11,700, dividend allowance: £2000), and it has the advantage that capital losses can be carried forward to offset future gains. In an ISA, capital losses cannot be carried forward.
A sensible investment approach should result in gains being made over time, resulting in most investors using their ISA allocations first.
Who deals shares?
Falling commissions and an ever-increasing number of investment vehicles, ranging from shares, to ETFs to Investment Trusts, allows investors of all ages and wealth to participate in share ownership. The self-directed investing market is one that grows larger every year, and clients at IG range from 18 to 90 plus.
Individual share dealers tend to fall into one of two broad categories:
- Investors, who focus on long-term value by building a portfolio to deliver returns over several months or years
- Traders or speculators, who try to capitalise on short-term movements, often by making many trades in a single day
At IG we offer share dealing as well as IG Smart Portfolios, an investment account where we manage investments on your behalf. IG Smart Portfolio accounts can be opened with as little as £500 — and for an investment of £15,000 we will waive your share dealing custody fee.