How to Invest in Stocks & Shares: A Beginner’s Guide

Investing in stocks and shares can be a great way to generate returns that outstrip inflation and provide a real return. This article will provide a comprehensive overview of what investors need to know about investing in stocks and shares, including the risks and benefits of this type of investment.

It’s important to note that all investments carry a varying degree of risk, and investors should understand the nature of these risks before investing. The value of investments can go down as well as up, and investors may get back less than they put in. Additionally, investments in a currency other than sterling are exposed to currency exchange risk, which may affect the value of the investment in sterling terms. Stocks listed on overseas exchanges may be subject to additional charges and may not provide the same regulatory protection as in the UK.

Despite these risks, investing in stocks and shares can offer the potential for higher returns than cash savings accounts. According to research, average annual returns from cash ISAs were 1.2% from 2012 to 2022, while the average annual return rose to 7.4% for a stocks and shares ISA invested in the FTSE 100. This quest for inflation-beating returns has prompted a rise in the popularity of investing amongst private investors.

How to Set a Budget for Stock Market Investments

Before investing in the stock market, individuals should prioritize paying off high-interest debt and building an emergency fund that can cover at least three to six months of expenses. Once these steps are taken care of, investors can begin to consider their investment objectives and attitude towards risk.

It is important to keep in mind that stock market investments should be viewed as long-term commitments, with a minimum time frame of five years recommended to allow for market downturns to recover.

Risk-averse investors may prefer to allocate more of their funds to lower-risk options, such as savings accounts, and a smaller amount to higher-risk stock market investments. It is crucial to only invest money that one is willing to lose in case of adverse market conditions.

Step 1: Open a Trading Account

To begin investing in the stock market, individuals must first open a trading account. This can typically be done online in as little as 10 minutes. Basic information, such as bank account and National Insurance details, will be required during the application process.

Electronic checks may be conducted during the initial application process, and further documents may need to be provided to verify identity.

Step 2: Add Funds to the Account

Once the account is open, investors can add funds via a debit card or electronic bank transfer. For individual shares, investors will generally need enough money to buy at least one share. However, some trading platforms offer fractional shares, which allow investors to buy less than one share. This is particularly useful for high-priced US companies.

For funds, investors can buy a fraction of a unit, but some platforms may require a minimum lump sum investment of £50 to £100. This can be beneficial if share prices fall, as investors will pay the average cost over a period of time.

Step 3: Place the Trade

Shares on the London Stock Exchange can be traded from 8 am to 4.30 pm on weekdays. After logging into the account, investors can search for the name or ticker of the fund or company they wish to invest in.

At this point, investors will be given a live quote, which they can choose to accept or let lapse. They can choose to either buy a specific number of shares or invest a specific amount of money.

Most companies have a ‘buy-sell’ spread, which is the profit that the provider will make on the transaction and varies across different shares. For example, the price may be listed as 98-100 pence for a company. This means that investors will pay 100 pence to buy a share and receive 98 pence to sell a share.

Investors will pay any share trading fees and Stamp Duty Reserve Tax (SDRT) of 0.5% on UK shares at the point of purchase. The process for buying (OEIC) funds is slightly different, as they are forward, not live, priced. This means that investors will not know the price until after the trade has been executed.

Step 4: Monitor the Portfolio

Once the purchase has been executed, the shares or funds will be lodged in the account. Most trading platforms provide apps that allow investors to review their portfolios’ performance in real-time.

If the company or fund pays dividends, these are typically held as cash within the portfolio, or may be automatically reinvested to buy additional shares.

Step 5: Selling Shares

The process for selling shares is identical to buying, with investors given a live quote that they can choose to accept or let lapse. It is usually possible to sell a portion of a holding, for example, 40% of the shares held. The proceeds, net of any trading fees, will be credited to the account after the sale has been executed.

What fees are charged on buying shares?

Share trading fee

A share trading fee is a flat fee that providers charge for each time an investor buys or sells shares. While some providers don’t charge any share trading fee, others typically charge between £5 to £10 per trade. Providers may also offer lower trading fees for regular traders based on trading a minimum number of shares per month or quarter. Trading fees for funds vary from zero to the same fee as for trading in shares.

Platform fee

A platform fee is an annual fee that providers charge for holding shares and funds in an account. While some providers charge no fee, others charge a flat fee, and some charge a percentage of the value of the portfolio, typically ranging from 0.25% to 0.45%. These fees are usually taken out of any cash held in the account, or they can be paid directly by debit card. However, if fees remain unpaid, the provider may sell a proportion of investments held in the account as a last resort.

It’s important to note that some providers charge for holding funds but not for shares. Also, when a platform fee is charged for holding shares, it may be subject to a maximum cap per year. There are two types of percentage-based platform fees: tiered fee and non-tiered fee. A tiered fee is the most usual type of platform fee, whereby different rates are charged on different ‘slices’ of the portfolio. On the other hand, a few providers charge a non-tiered fee, whereby the same fee is charged across the whole portfolio.

Foreign exchange fee

If shares are denominated in a currency other than pounds sterling, the majority of providers charge a foreign exchange fee, also referred to as a foreign currency conversion fee. This fee typically varies from 0.5% to 1.5%. Some providers also charge a higher trading fee for non-UK shares and funds. A small number of providers allow investors to hold their funds in a foreign currency, which enables them to convert it once and use this ‘pot’ for buying and selling shares in the same currency.

Other fees

Providers may charge other fees, such as inactivity fees and withdrawal fees (for accounts held in a currency other than sterling) and fees for trading by telephone rather than online.

Frequently Asked Questions

Are investment trading apps safe?

Investment trading apps have security protocols similar to those of trading over a website, with passwords and/or additional security requirements. It is important to log out of the trading app after use and set up a password or other security feature to allow access to the mobile device.

Are stocks beginner-friendly?

Investing in stocks is a higher risk option than depositing money in a savings account, with the risk of losing some or all of the money invested. Beginners who want to invest in equities should consider starting off with small amounts of money. Another option is to invest in funds, which provide a ready-made diversified portfolio managed by a professional fund manager. It is recommended that beginners carry out their own research before deciding whether to invest in shares and consult a financial advisor if needed.

Is there a minimum age for investing in shares?

The minimum age for investing in shares is 18. However, parents and guardians are able to invest in shares and funds in a junior stocks and shares ISA on behalf of children aged under 18. Although the parent or guardian is responsible for managing the investments, it may be a good opportunity for children to learn more about investing, alongside an adult.

Is it possible to invest small amounts of money in stocks?

Yes, some platforms allow shares to be bought with as little as £1 through fractional shares where investors are able to buy a percentage of one share. However, not all platforms offer fractional shares, in which case the minimum investment is likely to be the cost of buying one share in the company. Minimum investments for funds vary by platform, but typically start at £50 to £100.

What are the risks of investing in stocks?

The main risk of investing in stocks is that investors can lose some or all of their money if there is a significant fall in a company’s share price. Stock market downturns are a natural part of investing, and historically, there has generally been a substantial drop in stock markets, or so-called ‘crash’, every 8 to 10 years. Young investors tend to have the highest appetite for risk, according to the FCA Financial Lives Survey. However, there are ways of managing risk, such as investing in other assets like bonds or diversifying a portfolio across different companies, funds, sectors, and geographies.