How to Buy Shares
Here is a short guide to help you understand how to buy shares. This guide includes where to open an account, the documentation you need and more.
Where to Buy Shares
Typically shares are bought through a stock broker either online or over the phone.
If you want to make a one off purchase of shares you may also be able to buy shares through your bank although this is an expensive route.
In my opinion those new to investing should open an account with a phone broker whilst more experienced investor could open an online account.
Phone brokers generally provide two types of service: advisory and execution only.
The advisory service is generally for large accounts and is more expensive than an execution only service.
It is my opinion that brokers who offer an execution only service would be happy to spend a few minutes discussing a share that you would like to buy.
After all, the more profitable you are the happier your broker will be!
Phone brokers are generally a little more expensive than online platforms but at least you can ask for some advise, such as overseas transaction costs etc, which is especially handy if you are new to investing.
What to Look For When Opening a Stock Broking Account
You can open either a personal account or a nominee account.
A personal account means that the shares are held in your name. This ensures that any documentation, such as share tenders, is send to your own address.
A nominee account let’s a third party look after your shares. All communication from the company in which you hold shares will be send to the third party holding your shares.
Personal accounts are more expensive than nominee accounts.
One main separating factor when deciding on a stock broker is the annual account management charge.
Some brokers do not charge an annual account management fee whereas others do. Research carefully.
Other items to research are the broker’s commission structure; administration fees, any other fees (important when buying stocks in markets not represented by your broker), which markets your broker represents (without going through a third party) and which securities/derivatives, as well as exchange-traded funds your broker can deal.
Also check if your broker pays interest on the cash in your stock broking account.
What Documentation Do You Need
Opening a stock broking account is just like opening a bank account.
You will generally need the following documents;
- Two utility bills with your name and address on them
- Either your passport or your birth certificate
When opening an account by post you need to have the above signed by the Gardai.
Don’t forget to ask for an application form to open an account from your broker. They can send this to you by post.
Also you need a cheque to cover your first purchase of shares. After your first transaction you can buy shares on a T+3 basis which means that you don’t have to pay for the shares until 3 days after you have bought them.
A share has three prices. These are the bid, mid and offer prices.
The mid price is the share price that you see in the business section of the newspaper.
The offer price is the price as which you buy the shares at (or conversely the price the market makers sell the shares at).
The bid price is the price at which you sell your shares at (and the market maker buys at).
The difference between the offer price and the bid price is called the spread.
For large, liquid companies, such as the Dow Jones or FTSE-100 constituents, the spread is tiny at often much less than 1%.
For illiquid micro capitalised companies the spread could be very wide at 10% or more. This means that the share price must increase by at least 10% for you to break even!!
Before buying shares you should always have a cash surplus available for emergency circumstances. A chief reason why people crystallise paper losses is that they need the money from their shares for other reasons.
Also be very wary of leveraged products that can force losses greater than the principal investor.
As always be aware that all investments can fall as well as rise. Always invest with patient money.
I hope that this short guide has proven useful to you.
If you have any questions feel free to contact me at Marcel@Market-Swings.com
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Please note that all the work on this site represents my personal opinion and does not constitute investment advice. Investments can both rise and fall in value. I may, or may not, have a position in any shares mentioned. Further research should always be done by the investor before purchasing any mentioned shares on this site or newsletter.