Why do people buy shares?
People buy shares in the hopes of making a return on their investment – ie with the aim of selling them for a profit. This would happen if the share price goes up while you hold the asset, enabling you to sell it for a higher price.
Another way to earn returns on shares is through dividends, if the company pays them out. Dividends are periodic payments from a company’s profits or retained earnings to their shareholders. As a dividend recipient, you can choose to reinvest these and own a bigger chunk of the company or use them as income, depending on your strategy.
If you decide to reinvest your dividends, your payout wouldn’t be credited to you – you’d use it to buy more company shares. In turn, your shareholding will increase gradually in conjunction with the company’s performance, possibly earning you a higher total return due to the effects of compounding.
You’d buy shares with the aim to:
Earn returns over time
Share prices constantly fluctuate based on a company’s performance, as well as other factors like market volatility. If you own company shares, you’ll make a profit or loss based on the stock’s performance over time.
Investing in shares is a long-term strategy, and you’ll need patience when the market fluctuates. The risk-reward trade-off (the idea that the higher the risk appetite you have, the greater the potential reward) may encourage some investors to buy into companies that show potential for growth. However, this is never guaranteed, and your returns can be less than your initial investment.
One of the best indicators of how equity stocks are performing around the globe is the MSCI World Index. The chart below shows the growth of an initial $10,000 capital invested in global stock markets as measured by the MSCI World Index over a period of 10 years.
We discuss stock price volatility and investment risk in more detail further below.
MSCI stands for Morgan Stanley Capital International, a firm that researches the performance of stocks, investor behaviour, government instruments and how they affect the market. Although the returns have been positive, note that past performance doesn’t guarantee future returns.
Earn returns to beat inflation
The purpose of venturing into share dealing is to earn income that’s higher than the inflation rate. However, this isn’t guaranteed because the return on investments (ROI) isn’t certain.
If your money isn’t earning interest to equal inflation, you’re losing your wealth. When you invest, you face several types of risk. But, if you make positive returns, you’re essentially earning a reward for taking that risk. If you decide to rather hold onto your money because it’s a riskless alternative, it isn’t earning any interest – it’s only losing value due to inflation. This is where the risk-reward trade-off of investing comes in.
Note that investing your capital carries a level of risk that is different from holding cash. For example, if you start out with £10,000 cash, you’ll still have £10,000 cash in five years, but the buying power would have decreased due to inflation. When investing the money, you could have more or in five years if the investment pays off. However, you could also lose money.
Below, we show a graphic representation of cumulative returns comparison between choosing a savings account, or investing in UK gilts, a 50/50 portfolio or global stocks. Each condition is impacted by the inflation over a15-year timeline and show varying degrees of making above inflation return, as well as falling below the value of the initial investment.
In understanding the cumulative returns, you have to consider if the investment vehicle will gain or lose value over time. The average rate of inflation can serve as a benchmark of how much your investment will be affected, and assist in calculating your risk.
Earn returns through pound cost averaging
You can earn returns through pound costing averaging, which protects your investment from being eroded in the event that the stock tumbles. Pound cost averaging involves investing smaller amounts of capital incrementally over time, instead of taking a single lump sum position.
Market trends are never constant, so distributing your investments over several positions enables you to achieve a much lower average cost. Continuously taking positions over time has the potential to lead to you earning more returns than if you’d only bought into the market once.
You’ll need to take into consideration that performing multiple transaction over time will incur several costs such as commission. Your aggregate profit – if your predictions are correct – will reflect the cost of taking multiple positions.
Check out the difference in investing funds versus putting them in a bank account over a couple of years. Remember that both scenarios carry risk for your capital.
To buy shares, you need to open an account with a broker who’ll execute orders on a stock exchange on your behalf. Creating a share dealing account with us can be done over the phone or online, and you don’t have to fund your account or buy shares until you’re ready.
How to buy shares in the UK – your beginner’s guide
Open a share dealing account
With us, you can create a share dealing account to buy a stake in a company. You can open an account online or paper, with 12,000+ shares, funds and investment trusts to choose from.
We offer low dealing costs, including zero commission on US shares when you trade three or more times in the previous month, and just £3 on UK shares.1 Start your journey by creating a demo account to practise your strategy. There’s no sign-up or exit fees, with no obligation to fund until you’re ready.
We also offer Individual Savings Accounts (ISAs) and Smart Portfolios. One of the benefits of ISAs is that you’ll get certain tax breaks from the government. Smart Portfolios give you access to expertly managed portfolios across a diversified range of assets.
Once you’ve opened your share dealing account, you can deposit funds into it using any card, PayPal or bank account that’s registered in your name. With us, there’s no minimum deposit for a bank transfer, however, you’d need at least £500 using PayPal, credit or debit card.
Pick your stock or ETF
Browse our award-winning platform to find our full range of shares, ETFs and investment trusts you can buy.2 There are 12,000+ shares to choose from in a variety of sectors.
You can access the platform and our support line 24 hours a day, but you can only deal shares during market hours. We offer extended sessions on US stocks.
Set how many shares you want to buy
When you’re ready to invest, you can set the number of shares you want to buy or enter the amount of capital you want to spend. You also have to determine the timeframe of your position, taking into consideration the trading trends that support a short-, medium- or long-term investment.
Place your order
With us, you can choose to deal shares either ‘at quote’ or ‘on exchange’.
- When dealing at quote, we’ll show you the best available price from our selection of market makers, and you’ll be asked to confirm your order.
- If you’d prefer to deal shares on exchange, you’d select an order type and price. Orders enable you to set the price at which you want to buy and sell shares with a willing counterparty. The price and number of shares are entered into the exchange’s order book, for other market participants to see and accept.
On our platform, you’ll find 12,000+ shares, ETFs and investment trusts. With a competitive fee structure, you’ll pay from zero commission on US shares, and just £3 on UK shares1, with a foreign exchange fee of just 0.5%.
What is stock price volatility and investment risk?
Stock price volatility and investment risk are two closely related concepts. Volatility refers to the fact that the price of a stock varies – sometimes considerably – over time. This means that you can’t truly predict what its future price will be, so you have no certainty about potential returns on any given day.
Investment risk is the chance that you may get out less than you put in – ie a negative return. There are two ways to lessen your exposure to this type of risk: a long investment horizon and diversification.
What is an investment horizon?
This is your investment timeframe. When you invest over a long period of time, you could see the stock price to grow on average. While the investment may experience fluctuations, you could wait to sell when the stock price has risen to regain the losses it has incurred along the way. Your investment horizon is a critical feature of any strategy, and you need to be clear about it from the outset in your investment plan.
If you only intend to invest for a shorter period, you might consider assets that are more volatile so that you can take advantage of the price fluctuations. If you plan for the long term, however, you may decide to buy and hold less volatile securities like stocks to sell at a later stage to make profit. You should always monitor your investment, because the longer you hold it, the higher your risk.
What is stock portfolio diversification?
Stock portfolio diversification is buying shares from many different and unrelated companies. The more you diversify your stock holdings, the less exposed you are to the price fluctuations of a single stock or industry. One of the best ways to diversify your holdings is to buy a share in an investment fund, like an ETF.
For example, you could decide to invest in a fund that has exposure in the tech industry and diversify your portfolio by also investing in bonds. While bonds are notorious for reducing the overall returns that a fund can make, it’s a sector that has low volatility and risk profile.
Exchange traded funds (ETFs) vs stocks – what’s the difference?
Exchange traded funds (ETFs) measure the performance of an index like the FTSE 100. They can also track different sectors such as energy stocks, healthcare or agriculture and so much more.
An ETF will hold assets that enable it to track its benchmark market as accurately as possible. You can buy and sell ETF shares as you would company shares. The main difference is that ETFs typically give you exposure to a wide selection of stocks, thereby offering you a high degree of diversification.
Investment funds like ETFs pool shareholders’ money and invest in an array of securities. Many ETFs simply attempt to mirror the performance of a stock index, using the pooled capital to buy and sell stocks in the index.
What are shares?
Shares are units of ownership in single or multiple companies. When you’re an owner of a company’s shares, you have shareholder voting rights. You’ll also be entitled to receive dividend payments, if the company grants them.
How does the stock market work?
The stock market is the place where investors buy and sell shares of companies. Before the company’s stock is available on an exchange to be bought or sold, it has to go public. Through an initial public offering (IPO), special purpose acquisition company (SPAC) merger or directly listing, a company’s shares will be available to investors.
How can I start buying shares?
There are a few ways you can buy shares, each method having its benefits and drawbacks. You can choose between being an active or passive investor.
A passive investor enlists the help of a broker that will manage their positions on their behalf, thereby having limited involvement in the investment decisions. Additionally, you’ll buy and hold financial securities that suit a long-term investment horizon strategy.
On the other hand, an active investor takes a hands-on approach, directly getting exposure to a wide array of company stocks, ETFs and investment funds in hopes of making profit in the short-term and outperforming a benchmark or index.
Can I buy shares online?
What is a stockbroker?
A stockbroker is a representative of a brokerage firm that executes orders (buying or selling stocks and other securities) on behalf of an investor for a fee or commission.
1 Trade in your share dealing account three or more times in the previous month to qualify for our best commission rates. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.
2 Best trading platform as awarded at the ADVFN International Financial Awards 2021 and Professional Trader Awards 2019. Best trading app as awarded at the ADVFN International Financial Awards 2021.