Stocks and shares are a popular choice for investors because they are simple to trade and potentially very profitable. However, there are risks, so it is important to understand what you are doing with your money.
Stocks are usually thought of as a small share in the ownership of a company. However, you can also think of it as investing in the company in return for a share in the profits. The value of your shares will change depending on how well the company is doing.
As a shareholder you will also be eligible to:
Stocks are traded on a stock market or stock exchange. After the initial public offering when shares are first sold to the public, they can be traded at the exchange where the company is listed. Each stock is identified by a “ticker symbol” which is a few capital letters that usually relate to the company’s name. For example, Microsoft is traded as MSFT while Apple is AAPL. Traditionally, the stock exchange was at a physical location with a trading floor such as Wall Street where brokers made trades in person, but most trading is now done virtually.
The stock exchange brings together buyers and sellers of shares to exchange stocks at an agreed price. Buyers make bids to buy shares and sellers make offers for the price at which they will sell them. If there is an agreement between the two, a trade is made. The trade is arranged by a broker.
After setting up an account with a broker, you will be able to buy or sell shares through your online account or by phone. When you are ready to trade:
1. You check the stock quote, which will tell you the current bid and offer prices for the share. The numbers will change as trades are made.
2. You make a bid to buy or an offer to sell at a specific price. Your broker may offer a single price at which you can decide to buy or sell. You’ll usually pay a fee for each trade.
3. If your bid or offer coincides with the price another person has offered to sell or buy for, the trade will be made for you. This will usually happen right away as brokers are always ready to buy and sell for their clients.
You can also set additional terms when you buy or sell shares:
You don’t have to trade individual shares in order to invest in the stock market. If you put your money into a pension or fund, some or all of it will often be invested in stocks. You will be able to choose a fund manager and investment strategy that suits your needs, but you won’t be involved in the trading decisions.
Another option is to invest in an index rather than in individual stocks. Stock market indices are aggregates of a number of different stocks. For example, the FTSE 100 includes the 100 shares with the highest market capitalisation from the London Stock Exchange. Other examples are the Dow Jones Industrial Average, S&P 500 and NASDAQ Composite Index. You can buy and sell indices just like normal shares, but your investment will be spread out between different stocks. The price of the index will reflect the net gains and losses of all the stocks it includes.
If you are a UK taxpayer then you may want to buy shares through an investment ISA. You can invest in single stocks or a fund, but you won’t need to pay any tax on your profits or dividends.
A lot of information is available to help you make your investment decisions. It is important to understand what all of these terms and numbers mean.
Sometimes it is easy to see why a stock is moving in a particular way. If the company is about to launch a new product, its stock might go up if it’s expected to be popular. If the company has been hit by a scandal that will reduce sales, the stock will probably go down. In other cases, the causes can be less obvious. Companies can be affected by changes in legislation, weather causing delays to shipping, disputes with their workers, or what their rivals are doing.
Stocks will also be affected by investors. When lots of people are keen to sell a particular stock, its price will drop. When many investors are interested in buying, the price will go up. This means that the share price can react to anything that affects people’s perceptions of the company and its profitability, including rumours and predictions. Individual stocks can also be affected by attitudes to the market as a whole. Many stocks tend to follow the overall market trend, although some will usually go in the opposite direction and others won’t be affected much at all.
The price of a stock should reflect all of the information that everyone has about the company. It is decided by the choices made by all of the individual buyers and sellers, each acting on the information that they have. The number of shares multiplied by the price is the total value of the company, including its expected profits in the future. If profits are expected to go up, the stock should increase in value.
Most stock trading aims to buy shares at a low price and sell them at a higher one, although short selling can enable traders to make a profit when share prices fall. The difficulty is in predicting which way share prices will move so that you can make the right investment choices. The basics of investing in stocks are simple, but there are a number of different strategies you can take.
In order to decide on the right strategy, you will need to consider your reasons for investing, how long you can invest for, and how much risk you’re willing to take.
