What is share trading and how does it work?
In the UK, share trading is extremely popular and can be done through a variety of channels. These include traditional stockbrokers, online trading platforms, and mobile apps. Each channel has its own advantages and disadvantages, so it is important that you do your research and find the one that best suits your needs.
If you are new to the stock market, you may find it daunting and not know where to start. In this article, we will help you with some of the more novice questions you may have. We will look at what share trading is, how it works. We will also look at how you can choose a broker if you are interested in trading shares. So, if you would like to get started, read on.
What is share trading?
Share trading, also known as stock trading, is the process of buying and selling shares or stocks of publicly traded companies. This is typically done through a stock exchange or an online trading platform. Share trading allows traders like you to invest in individual companies, giving you the potential to earn a return on your investment through share price appreciation or dividend payments.
How share trading works
Let’s say you are interested in buying the shares of XYZ Group. After doing some research, you decide that they are a good investment opportunity as they are on the rise, and you purchase some shares through your trading account. Your broker normally trades on your behalf after you have given the order, in which you specify the number of shares you would like to buy and the price at which you would like to purchase them, and you become a shareholder of XYZ Group.
If the price of XYZ Group shares goes up, you can sell your shares for a profit. Alternatively, if the price goes down, you may sell your shares at a loss. XYZ Group may also issue dividends quarterly, in which case you as a shareholder will receive them.
How to choose a broker for share trading
If you would like to begin your share trading journey, there are multiple ways to go about it. But the first step you must take is that you must have a trading account. Below, you can look at a run-through of how a trader can get started in trading shares.
1. Set up a trading account with a broker
The first step you must take is that you must set up a trading account with a broker or a trading platform. When choosing a broker, make sure they are reputable and regulated by the Financial Conduct Authority (FCA), the UK’s financial services regulator. You should also make sure they offer the assets you want to trade, so that you can curate your investment portfolio the way you want it.
When you set up an account, there may be several account tiers and types you can choose, depending on your trading preferences, style, and your financial situation. For example, most brokers will offer a classic or standard account for regular retail traders. They will also offer a premium or premier account for traders that want a better deal on their trades or more opportunities in the market, if the trader agrees to a higher minimum deposit.
Finally, they may also have corporate or professional trading accounts for the experienced trader or someone who works in the financial services full-time. These accounts may have access to expert trading tools and tighter spreads and lower commissions.
It is essential that you understand the differences between the accounts on offer from your broker or trading platform, so that you can apply for the account that best suits you. When setting up the account, you may have to provide information such as proof of identity and proof of financial status.
2. Research the companies you want to invest in
Next, you will need to conduct thorough research on the companies you want to invest in. In other words, you need to know as much as you can about the shares you want to buy. This can involve looking at the company’s financial performance, historical price charts in the stock market, its management team, its industry, and other factors that can potentially impact its share price.
At this stage, you can conduct both fundamental and technical analysis in your approach. You can keep up to date with the news and the wider economy (fundamental analysis), and you can employ tools such as stock charts and trading indicators to help you analyse price charts and trend-spot (technical analysis). A combination of both analysis methods can give you a well-rounded idea of how the financial markets are performing. This is an important step, as you will be trading with your hard-earned money, and you want to make sure you are making the most informed decision you can make.
3. Place an order and buy the shares
Once you have decided on the shares you want to invest in, you can place an order to buy them. You can do this through your trading platform provided by your broker, and you will typically have to pay a small commission for each trade. The price of the shares depends on the supply and demand of the market, and the commission depends on the number of shares you buy. Therefore, both may change depending on news events, economic data, and market trends.
When placing your order to buy the shares, be sure to also incorporate any risk management strategies you have. This means setting up any stop and stop-limit orders that can help you automatically close your positions should the markets move against you. Regardless of your position size and your level of expertise, you should have risk management strategies in place, because all markets are unpredictable, and you will never know how prices will move.
4. Monitor the markets and receive dividends if possible
Finally, once you have bought the shares, you are a shareholder of the company and have a stake in its performance. If the company does well, its share price will increase, which will mean the value of your investment portfolio will increase accordingly. If the company does not do well, its share price will decrease, and so will the value of your investment portfolio. When you are satisfied with the appreciation, you can sell your shares on the market and take profit.
On top of that, there are some companies that pay dividends annually or quarterly. Dividends are a small sum a company pays out to its shareholders when it earns a revenue. However, not all companies pay dividends.
The bottom line
Share trading is a popular way of participating in the financial markets in the UK. It can bring potential profits if you trade well, but it also carries risk. Therefore, you should ensure you conduct thorough analysis and research before purchasing any shares, as you want to make sure you are making as informed a decision as possible. If you are new to the markets and you are unsure of how to trade, you should contact a professional who can offer you expert advice. With the right tools and strategy, you can build a successful share portfolio and achieve your financial goals.