Okay, you’ve decided to join the crazy world of trading stocks and shares. But where to start? Let’s kick off with the basics: What is a share? Where can you buy them? And which shares should you buy?
What are Shares?
Imagine every company is a cake. Owning shares is like owning a slice of the cake. If you hold shares (also known as stock) in a company, you’re a shareholder. You’re entitled to a portion of the company’s earnings, depending on your percentage of shares.
But alas, because life is not a bed of roses, the shareholder also has to bear any losses of the company, equal to his percentage share.
For example, if you buy 50% of the shares in Haribo Sweets, you’re entitled to 50% of the company’s profits. Nice! But if the next day, the government bans sugar and Haribo doesn’t sell a single pack of its delicious FangTastics… well, in that case you’ll have to deal with 50% of the losses. Not cool, but such is life. (Let’s just hope you don’t end up bankrupt, like this guy).
There are different types of shares available (like ‘common shares’ and ‘preferred shares’), but this is the stuff of experienced traders, so never mind for now. Just know that shareholders usually have a right to vote at company meetings. But, if you own just one of the three billion Facebook shares… well, don’t expect Mark Zuckerberg to listen to your opinion!
Another thing you need to know is that a company’s shares are indivisible. You cannot buy fewer than one. For example, if Haribo issues shares for £100 each, you can’t invest just £50. The minimum is £100; that’s the price of a share.
Once-upon-a-time, shares were pieces of paper that shareholders kept in a safe. But in the ‘90s, this all changed to virtual shares (perhaps the greatest ‘90s invention after The Spice Girls).
Where Can I Buy Stocks?
Before you start trading stocks, you have to buy them! You can do this in many different ways. All pretty straightforward.
Some companies allow you to buy its shares directly from them. You’ll usually find stock purchase plans on the company’s website. So, if you’ve already got a company in mind, take a look on its website first.
If you can’t purchase the shares directly (or you’re not sure which company to invest in), ask your bank. Some banks offer an online trading service connected to your existing accounts. Look at your bank’s website or speak to them direct to see if this option is available.
If your bank doesn’t offer a trading service (or if you keep all your money in a piggy bank like a caveman), you can purchase shares through a brokerage company.
These brokers buy and sell securities for thousands of customers in exchange for a commission. You can set up a simple brokerage account online or hire a so-called ‘full service broker’ who will trade stocks and other financial instruments on your behalf. They may even act as a consultant or advisor for you. Obviously, this will cost a little more.
How to Start Trading Stocks With Small Amounts of Money
As we said, shares are indivisible, and one share can be super expensive, depending on the company. Some might cost a few pennies, but others are over £1000 per share.
For example, Google’s shares (or rather, Alphabet, the parent company of Google) was worth €860 in March 2017. That’s a lot of money (and that’s all before you add the broker’s commission).
So, what if you want to invest in Google, but don’t want to risk more than £50?
It is precisely these cases that apps like BUX come in handy. BUX does not sell shares, but instead sells CFDs. A CFD is a ‘derivative’ that accurately reflects the performance of the shares. It mimics trading stocks, but allows you to use any amount of money you like.
If you want to start investing in stocks or CFDs, always remember three things:
1. Never invest more money than you can afford to lose. With shares and CFDs, there is a risk of losing all the money you have invested. If Haribo fails, for example, its shares will be worth less than toilet paper. No matter how much you paid for them.
2. Follow your head, not your heart. Your heart will always pull you towards certain stocks. It’s like investing all your money into your favourite football team, and then watching it all disappear when they are eliminated from The Champion’s League. Stop and think. Only invest in companies that seem able to grow their profits, regardless of your passions.
3. Never invest your savings in just one company. ‘Never put all your eggs in one basket,’ as the saying goes. Distribute your investments across many different companies. This way, you’ll greatly decrease the risk of loss, and increase the chance of growing your investment. This is one of super investor Warren Buffet’s golden rules.
Gotcha, but why does the stock price rise and fall?
The Share Price
Just like everything you can buy in this world, a company’s share price has two factors: supply and demand.
The share price is determined by the number of people who want to buy the stock at any given moment, balanced against the number of people who want to sell it. When more people want to buy (i.e. there’s more demand), the price tends to rise. When more people want to sell (there’s more supply), the price drops.
There are countless reasons why investors might buy or sell stocks, but some are more important than others. What most often drives the share price is an investor’s expectation of the company in the future.
For example, let’s say Haribo unveils a new recipe. Haribo cola bottles are now as healthy as an apple! The stock price will probably go up, because investors will anticipate higher sales.
Investor’s expectations of a share price may differ a lot from the real value of the company. For example, Haribo might discover that its new recipe has an unintended side effect: it turns children orange. The stock would then fall, because the reality is nowhere near the expectation.
That’s why we get overvalued companies, where their share price is higher than their real value, and undervalued companies, which are worth more than their price. Your goal, if you decide to buy shares, will be to distinguish between overvalued and undervalued companies. And hopefully only invest in the latter!