How to Buy and Sell Shares

When the London Stock Exchange (LSE) was first founded, the only route to share ownership was through direct purchase. Now, however, different instruments have evolved to offer three main ways of investing in LSE listed shares, each with different characteristics.

Contracts for Differences (CFDs)

cityindex-ukWhen investing in CFDs, the investor is buying a derivative instrument whose price is based on the share that it represents. It allows the investor to take advantage of both rising and falling markets by going long (buying) or going short (selling).

The investor never actually owns the shares that the CFD represents, but rather is trading on the amount of change in the share price. They are a leveraged product, with the investor able to trade on margin. This means he only has to deposit a small amount for the same exposure that owning the shares themselves would give. However, it also means that his risks are greater and it is possible to lose more than the amount originally deposited.

CFDs are commonly traded through specialist companies and as well as the attraction of margined trading, no stamp duty is levied upon them. However, because the investor doesn’t own the shares he will not receive any dividend payments.

>> Click here to compare CFD trading accounts and offers!

Investing in shares directly

The traditional way to invest in shares is to hold them directly.

To do so an investor will need to open an account with a broker and deposit cash to cover his purchase. Since Big Bang, and the deregulation of the LSE, the availability of stockbrokers has become widespread with most high street banks offering a broking service as well as many other financial institutions. Many private investors use an online brokerage, which gives them direct access to the stock market for fast and easy trading.

Once his cash has been deposited into his brokerage account, the investor is free to place an order to buy shares. The broker will in turn place that order into the market, with the order either routed to the market directly or shown to a market maker.

If there is an offer price that matches the investor’s buying price, then his order will be executed in the amount of shares available at the investor’s price.

Prices on exchange are composed of a bid (the price at which an investor can sell) and the number of shares available at the bid price, and an offer (the price at which an investor can buy, sometimes called the ask) and the number of shares available at the offer price. The best price available is displayed on a ‘yellow strip’ and is sometimes called the ‘yellow strip price’.

On the yellow strip, data will be shown in different colours. Blue signifies the last change has been an increase and red that the last change has been a decrease.

Investors are charged to buy and sell, either by a commission on the value of the trade or by a fixed fee. The fixed fee charging structure is now commonplace, with many brokers offering share dealing for a cost of £7 to £10 per trade, though there will also be stamp duty of 0.5% to pay.

When buying shares directly like this, the investor becomes the owner immediately with his name appearing on the share register and he will receive all dividends paid by the company.

Investing through collective investment schemes

Investors can also buy units in collective investments such as unit trusts or open ended investment companies (OEICs). These are funds managed by a professional fund manager which invest in a range of securities. Stock market funds give exposure to shares, and offer a diversification that a small investor could not achieve otherwise.

There are thousands of funds available, form general funds to more industry or sector focussed, and they are generally bought with advice from a financial advisor. Some funds are targeted to capital growth, with any dividends reinvested, while others pay dividends to their investors.

There will be commission or fees payable to the financial advisor upon purchase (although an increasing number of funds can be bought directly and without advise or commission costs), and the fund manager will be paid from the funds held by investors (thus having a negative impact on returns).

In summary

Buying and selling shares is easier today than at any time in the past. Investors can take a higher risk and trade on margin by buying CFDs, or use the services of a professional fund manager and benefit from immediate diversification when investing in a collective investment scheme.

For those investors who have a greater understanding of the stock market, and are prepared to spend some time conducting their own research, buying the shares of individual companies through a stockbroker offers direct ownership with the rights to dividends and vote at company meetings.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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