What Exactly are Shares?

If you own an ordinary share in a company, then you quite literally own a tiny part of that company. You are entitled to a portion of any profits that are distributed, have a vote in how the company is run and are free to sell your holding whenever you want. So, if you own Tesco shares — you are a joint owner of Tesco. Simple as that.

A quick check on the web tells me that Tesco shares are currently priced at £2.14 each. So, for less than the price of a pint, you can become a big-shot company owner. Well, sort of. There are almost 10 billion Tesco shares in circulation. So, with an average private investors stake, you are not likely to own very much of the company, but you get the idea. I think many traders lose track of this fact and simply see shares as red and green numbers bouncing up and down on a screen.

Back in the day, you would have possessed a physical paper certificate to show that you owned the shares in question. However, nowadays it’s far more likely that your ownership is stored electronically and that makes the whole process a lot simpler — and cheaper.

So, which companies can I buy shares in?

Well for most investors, the answer is publicly listed companies. So, that’s any company that issues its shares to the public as opposed to a small group of private individuals. They are easy to spot as they tend to be large well-known businesses, are listed on a stock exchange and — in the UK — they usually have the suffix of ‘Plc’.  Many of the shares are owned by institutions such as pension funds, insurance companies and unit trusts. But, over 10% of UK listed shares are owned by individuals just like you and me. And many of those shares change hands every single day. So, for example, of the 10 billion Tesco shares outstanding, an average of 33 million of them are bought and sold every business day.

That brings me on to the next obvious question…

Why Would I Want To Own Shares?

There are primarily two different reasons for owning shares in a given company; you expect them to go up in value and/or you want to collect the dividend.

Much of the press and many investors are fixated on how much the value of shares rise and fall on a given day. They often overlook a key benefit of company ownership — to share in the profits via regular dividends.

Of course, there is nothing stopping you from enjoying both benefits of share ownership, but it is helpful to decide your priority.

If you have plenty of time, then you may want to invest in shares because you believe that they will increase in value over time.

I say ‘plenty of time’ because we all know that share prices can be volatile. Unless you have the nerve for short term trading, you really need to hang on long enough to ride out any volatility that may occur before you get the rise you hope for.

Growth Stocks

These types of stocks are often referred to as growth stocks. They tend to be expensive, but folk tend to buy them with the hope they are going to get even more expensive. Think of Facebook, Amazon and Tesla as good examples.

However, income investors are primarily interested in owning shares for the dividends. They want to own shares in companies that are happy to distribute a proportion of their profits to their shareholders — the owners.

Income Stocks

These income stocks are often in big boring household names such as GlaxoSmithKline, Vodafone or National Grid. You are not buying them because you expect the share price to suddenly rocket but because you expect them to keep paying a progressively rising dividend.

So that’s the what, and the why, but…

When should I buy and sell my shares?

Ah, the million-dollar question. If we could easily answer that then we would all be rich individuals.

There are essentially two schools of thought about how you should time your acquisition and disposal of shares.

Fundamental Analysis

This approach involves trying to establish the value of a company by examining its publicly available financial data, its management, the market it operates in and so on. In fact, any piece of data that you could use to work out how much the company, and therefore its shares, are worth.

Once you have that information, you can decide if it’s shares are currently cheap — in which case you should buy them — or expensive — in which case you should sell them.

Sound good? Well many investors would agree. You can either put in the hard slog of figuring this out yourself or rely on a professional or automated system to do it for you.

The problem is, you may be right with your assessment, but the market simply does not care. You could buy an undervalued share in anticipation of a price rise, only to find that it languishes at its current level for years.

Or, refuse to buy the latest hot shot because it’s too expensive, only to see it double or triple in value over a few months.

The reason, is that human beings are the ones doing the buying and selling and they are famously irrational.

Fear and Greed play a large part in the valuation of stocks and these emotions can drive the price far beyond any rational level suggested by cool headed fundamental analysis

Technical Analysis

This type of analysis couldn’t give two hoots about balance sheets or macroeconomics. Instead, it assumes that all those factors are already baked into the price and that you should focus your attention on stock’s price chart.

You then attempt to identify patterns in the price and volume of past trading to identify future price movements.

So, a very simple example would be to assume that a stock price that is trending upwards, is likely to continue trending upwards. That would be a good time to buy. It’s irrelevant if the up-trending price is rational or not.

There are a whole host of more sophisticated indicators and techniques that have been developed over the years to try and predict the future from prior price movements.

Many fundamental analysts think it’s a load of hocus pocus and they could well be right. But, if enough people buy into it, then it can become a self-fulfilling prophecy. And its worth understanding the basics just for that.

As a general rule, I would suggest that a combination of the two will provide the best guidance. But remember, whatever your favourite technique, at the end of the day the market will always do what it wants to. Not what you think it should.

And that’s why I always suggest that you ensure that you buy good quality stocks at a price you’d be happy to own them for long-term. And then, try to turn a blind eye to the inevitable short-term volatility

How Do I Buy and Sell shares?

Okay, so hopefully you now have a good idea of what a share is, why you might want to own them and when you might buy and sell them.

But, how do you actually trade them?

Publicly traded shares are traded on stock exchanges. In London we have the London Stock Exchange (LSE) and in the US they have the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), the NASDAQ and many others.

I’m sure you have all seen the images of men in brightly coloured jackets shouting at each other across trading floors. Well, they are the guys that are buying and selling millions of shares every day on behalf of clients.

Or, more accurately, they were a few years ago. Nowadays, that type of open outcry trading is pretty rare, and the vast majority of trading is done electronically at the exchanges.

Stock Brokers

In order, to access an exchange you need to use a stock broker. In fact, the actual stock exchange used is largely irrelevant to you the customer. The stock broker will deal directly with them and simply quote you a price to buy and sell the shares you are interested in.

Stock brokers come in several different guises and charge accordingly. You can pay hefty fees for a man in a suit to manage your entire portfolio and make all the buying and selling decisions on your behalf.

Or, at the opposite end of the spectrum are the array of execution-only online stock brokers. With these companies, you simply open an account, fund it and then buy and sell at the click of a mouse.

It’s quick, cheap and convenient. But of course, you are making the decisions yourself.

Shares are quoted with two prices; the bid and the offer. You buy at the higher price — the offer — and sell at the lower price — the bid.

Or, you can set a limit price. That’s a fixed price that you are prepared to buy or sell your shares at. There is no guarantee that your order will be filled, but if it is, you do know the price you will achieve.

There will also be an additional commission charged by the broker for making the trade. This is usually fixed and so has a smaller impact on your overall costs the more shares you buy or sell. For online brokers, it can easily be less than £10.

And — surprise, surprise — for UK share trades, the tax man wants a cut. You will be charged half a percent stamp duty when you buy your shares.

Is There A Better Approach?

I am pleased you asked that because I — and plenty of professional investors — would say that there is.

Selling options on stocks is a relatively straightforward way of making the whole process more disciplined, safer, and usually more profitable.

By selling a cash-secured put with a strike price below the current price that the shares are changing hands for, you give yourself the opportunity to pick up those shares at a discount.

In fact, you are obligating yourself to buy the shares at the lower price if the shares drop below that level. And in return you will immediately be paid a premium that is yours to keep whatever happens.

That premium and the low strike price mean that you have the chance to buy shares for a lower basis price than simply buying them outright.

Then, once you own your shares, you can sell a covered call with a strike price higher than the price you paid for the shares. That guarantees a profit on your shares if the price rises far enough and again, you will get paid a premium in the meantime.

Check out the sections on Covered Calls and Cash-Secured Puts for more details.