What you need to know about trading shares

published 12 September 2007

How do I buy shares?

If you've never done it before, the idea of buying and selling shares in individual companies can seem a little daunting, or even a bit mysterious. The truth is that investing in shares in a broad range of UK and overseas companies has never been easier, or cheaper, for private investors.

Essentially, there are three ways of buying shares: using the stockbroking services offered by your bank; over the telephone via a traditional stockbroker; or over the internet using an online broker.

Which is best?

That depends on how confident you are and on how much responsibility you want to take for your investment decisions. In the past, when stockmarket investment was the preserve of the super-rich, the vast majority of stockbrokers operated on an advisory' or discretionary' basis.

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If you feel you want lots of help with your investments and are prepared to pay for it you might be best suited to a full advisory service, where the broker will monitor your individual circumstances and portfolio and give you suggestions on buying and selling shares.

But if you really want to hand everything over to someone else, you could choose a so-called discretionary service. Here, brokers are free to buy and sell shares with your money without asking you first, within an agreed strategy. This kind of broking is highly tailored to individual circumstances and is very expensive as a result.

What's the alternative?

Much more common these days are execution-only' services. With this kind of service, the broker simply takes your order and executes' it for you. The rise of the internet over the past ten years has led to an enormous boom in this area. This has come about for two reasons.

First, the vast amount of information publicly available on the internet about companies, stocks and markets means that far more people are willing and equipped to carry out their own research into potential investments. This, after all, is half the fun of investing.

The second reason is the rise of online brokers, who offer cheap and convenient execution-only services. Online brokers cannot legally give customers any advice on their share-dealing decisions. But many do offer a wealth of tools (access to company research, news, share-price graphs and portfolio-analysis software) for all kinds of investors, from experts to novices. And they are very much cheaper than the old-fashioned type of broker.

How do I pick a broker?

There are four principal factors that you should take into account: the quality of information, the speed of execution, the markets available, and the cost. First, decide whether you want the option of telephoning your broker as well as dealing online.

Some brokers charge extra for this facility, but others don't. Next, ask yourself the following questions: do you want to be able to deal in American and other international shares as well as on the UK market? If so, how much extra will your broker charge you for the privilege?

Will they give you access to instruments other than equities, such as contracts for difference (CFDs), which are an increasingly popular way of accessing international markets? How much interest does the broker pay on the unused cash in your trading account and what discounts/penalties are there for frequent/infrequent trading?

Where do I start looking?

Currently, some of the biggest names are the Share Centre, TD Waterhouse and Squaregain; also Hargreaves Lansdown, Internaxx, ETrade Financial, Barclays and the other high-street banks. There are many more and some offer flat-fee dealing for under £10.

Comparison sites, such as Moneysupermarket.com and Interactive Investor, are also good places to start looking for a broker, as is the London Stock Exchange's Locate a Broker service. But bear in mind that your needs could change in the future; as you become more confident and experienced, you might want to branch out into new types of investing.

Placing an order the mechanics

Whether you choose to trade through your bank, through a traditional broker over the telephone, or online, the first thing you need to do is to open an account with your broker and send them some money. When you've decided what shares you want to buy, you are ready to give the broker your instructions.

On a typical share-dealing website, the first thing you will be asked is your username and password. Next, you will be asked what company you want to buy, and how many shares, or what cash value of shares you want. You will then get a price quote and a short amount of time (around 15-20 seconds) to make up your mind whether to do it.

If this sounds a bit tense, don't worry. You'll soon get used to it. If you don't want to do the deal, you can wait, have a think, and come back to it (although possibly at a different price).

For added peace of mind, you can use limit orders (which mean you don't buy above a certain price, or sell below a certain price), or stop-loss orders (which limit your loss if the market moves against you). Once placed, the broker will email you confirmation of the order, and the deed is done.