Buying Shares 101

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Buying Shares 101

Stocks and shares are a popular way to invest in companies and hopefully, get a return when these companies perform well. There is a lot to learn about stock trading, but the good news is that you can start buying shares online in just a few steps.

Owning shares can reward you in several ways. Apart from earning a profit if you sell shares for a higher price than you bought them, you could also receive income through dividends. In fact, it is not uncommon to find investors who take extremely long positions in order to live off the dividends alone while their capital investment continues to mature.

Buying shares is not as difficult as many people think, but if you want to be successful you are going to need to invest time in research and education. This guide will help you get started, while our other guides will teach you about advanced trading options, such as CFD Trading and Day Trading. Over time you will learn to appreciate the dynamics of the economy and external influences, and how this impact the stock market.

But first, let’s get started with the basics.

Where should you buy shares?

Shares are ultimately bought from a stock market, however, as an individual investor, you will need to go through a broker. Brokers liaise with traders on stock market floors who carry out their orders. Within a very short period of time, you can give your broker an instruction, which is passed on to the stock market traders and executed. 

Different Brokers

There are four primary types of stockbrokers available to you. 

Online Brokers

Online brokers represent the lowest cost option for buying shares. Through the use of online platforms, these brokers execute your orders and normally charge a transaction fee. You normally interact with the broker through live chat or telephone, and modern platforms normally allow you to use either desktop computers or smartphones to access them.

Discount Brokers with Assistance

Similar to online brokers, discount brokers with assistance differ by offering additional assistance in some form, normally at an extra fee. Very often, this assistance is limited to offering you research resources, and it rarely includes personal investment advice or recommendations.

Full-Service Brokers

As the more traditional option, full-service brokers are normally the ones that you would meet in person or over the phone. They would study your financial situation and lifestyle, and recommend the best investment strategies for you. To cover this additional support, full-service brokers are normally considerably more expensive than online brokers.

Money Managers

Money managers are often selected by individuals who do not wish to carry out trades or investments themselves. Instead, they give these brokers full discretion to make decisions on their behalf. Money managers normally require a minimum investment of over $100,000 and their charges are much higher than the other brokers in this list.

How to Find a Good Broker

Finding a good broker with whom to buy shares can be challenging, especially with all the choice available. You need to keep in mind fees, trading platform options, market accessibility as well the overall look and feel of the broker.

Testing Strategies

Before starting to trade with your own money you should open a demo account. Demo accounts behave just like a real account, with the only difference being that orders are not actually executed, and you cannot lose nor gain money.

Demo accounts simulate real-world markets and normally give you a substantial amount of cash to test different investment strategies out. As you research your way to becoming a successful trader, you should use this account as a way to confirm what you have learnt, and to see it in practice. You’ll be able to see the results of your predictions, without the emotions to cloud your judgement.

Once you are happy with your fake trades you should go ahead and open a real account. This is when you can start to reap the rewards of your patience and research.

Opening an Investment Account

Once you have settled on one or more brokers, you need to open an investment account. The best brokers allow you to open an account online, normally in a matter of minutes. You might have certain trading limits at first, especially if you are required to present verification documents. These mechanisms are there to protect the trading platform and other users and are usually a sign of a reputable broker.

When you have the initial registration out of the way, you can start buying and selling shares online. Your investment account will have two main functions; it will store your funds until you use or withdraw them, and it will store records of the shares that you own.

Uploading Your Money to Your Account

The next step to buying shares is to deposit funds into your investment account. The options available to you vary considerably from one broker to the next. Some of the best brokers offer you multiple payment options, using the most convenient and popular methods.

Find a Stock You Want to Buy

There are several ways to find suitable companies to invest in. A very popular way is to follow trading shows to get inspired by industry analysts and business professionals. The trouble with this option is that many other people are also watching, so if they execute instructions before you do, you might be too late.

A similar strategy is to follow what other traders are doing. Many tend to emulate trades by superstar traders such as Warren Buffet, but again, doing this late might lead to lower potential gains.

The best way to find a good stock is to do your own research and find overlooked investment opportunities. These will provide you with the best returns, but will also require the most research of news and investment lessons.

Buy the Stock

If you chose to buy stocks a reputable online broker, actually buying the stock is as simple as pressing the buy button next to it. Before executing the order, you will need to enter the number of shares you intend to buy, but that is practically all you need to do.

When buying a stock you can choose between different order types. These normally include:

  • Market Order – The most common order type, which simply executes your instructions at the next available moment using the best available buy or sell prices.
  • Limit Order – Allows you to set an instruction where you specify the buy and/or sell price of the stock. The platform will automatically execute the instruction once the defined price is reached.
  • Stop Order – Ideal for protecting the majority of your investment, this order type automatically closes your position in case a share price falls below a certain value.
  • Stop Limit Order – Used in conjunction with a Stop Order, this order type de-activates the Stop Order once the share price falls to a pre-determined value which is lower than that set in the Stop Order.

Review Your Share Positions Regularly

Once you bought your shares you might think that you are done, but in fact, this is the most important period for your investment. You opted to buy particular shares because you believed in their growth, and now you need to monitor these shares to see whether your predictions are coming through. Monitoring is especially important if you only set market orders without any automatic limits.

The frequency of monitoring depends on your investment strategy. If you bought shares with a long-term vision, it might be sufficient to monitor them bi-weekly or monthly. However, if you are planning smaller, more frequent trades, then you need to monitor your investment daily, and in some cases, hourly. Whichever strategy you choose, you should always set automatic limits to protect your capital even when you are not directly monitoring it.

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