You may have heard a lot over the years about share trading, and perhaps even heard a story or two about people who have made a significant amount of money through the stock market. While share trading is hard work, and not to be entered into without doing your preparation, it can be lucrative for those with the right skills and qualities.
Before you take the plunge, it’s a good idea to understand the basics, or to refresh your understanding with this brief beginners guide to shares.
What is a share?
A share is effectively a piece of a company. When you buy a share, you are buying a part of that company, and that share has a monetary value. As a shareholder you also become entitled to a say in how the company is run, through voting at their Annual General Meeting, and you may from time to time receive a payment from the company called a dividend, which is paid out to all shareholders as a form of profit sharing.
How do stock markets work?
A stock market is a forum in which shares are bought and sold. There are numerous stock markets all over the world, but in the UK, the main market is the London Stock Exchange. Stock exchanges are no longer places full of shouting traders, as most of the market processes are handled by computer.
To give an overall idea of how shares are performing, certain shares are grouped together in what are known as Market Indices. These consist of a group of company shares that have been combined to provide an overall figure, reflecting their average value. Some of the most common indices include the FTSE 100 and the FTSE 250. Share traders, investors and others often rely on the indices for clues as to how the market is faring.
Why buy shares?
The short answer is: to make a profit. Although share dealing can be a complex business essentially, there are two main methods of making money through trading.
Changes in share price
If the price of the shares you are holding goes up, you can sell them for a profit. The ‘buy low, sell high’ maxim is at the heart of many share trading strategies.
As mentioned earlier, companies sometimes pay out dividends to their shareholders in the event of rising profits. There is no obligation for any company to pay a dividend, but spotting successful dividend-paying (income) companies can be a successful trading strategy.
How to get involved
To get involved in share trading, you will need to use a stockbroker to handle the trading process so it is a good idea to review options analysed by an investment resource like The Bull before using any particular service. There are two main ways to start owning shares:
- Initial Public Offerings or IPOs occur when a company starts selling shares for the first time, having previously been privately-owned.
- Buying on the Secondary market made up of shares from companies that have already started selling shares. This is the most common market for share trading.
Share trading, like any other financial venture, isn’t something to be done lightly, and it carries considerable risks. But if you understand the basics, set aside sufficient funds, and take time to learn how markets work, you can make share trading work for you.