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SHARE DEALING - INFORMATION

        

Please find below more information on Share Trading. Just click on the links to get more information.

What is Share Dealing?

Shares can also be referred to as 'equities' or 'stocks'. These will be listed on a stock market. Each share is a unit of ownership in the company that has issued your share. So if you buy a share, you own a percentage of the company. You become a shareholder.

By buying shares in a company, you essentially own part of that business, no matter how few shares you buy. Your stake and level of control in that business is dependent on how many shares you buy.

You, the shareholder, make a profit through dividends. This means you receive some of the profit of that company. Dividend shares are called 'Income Stocks'.

The trader uses a broker to buy or sell shares in a chosen company. Each commercial company will sell its shares if it wants to raise money. You, the shareholder, will profit if you sell your share when it rises. If it falls, you stand to make a loss.

A share of stock means a share of ownership in a company. A stock can also mean one of a range of financial instruments, such as bonds and other investment types. Each shareholder will be given certain rights with each share they own. However, even if you were to own half the shares of a company, it would not necessarily mean you were given rights to the actual assets of that company. You would not necessarily be allowed to access the company's building or equipment. The shareholder's rights lie more in the policies of a company and the election of boards and other performance-related areas.

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What Types of Shares are there?

The level of rights to the shareholder depends on how many shares they hold within a certain company, but also on the type of stock they own. The two main types are:

  • Ordinary share.
  • Preference share.

Ordinary Shares. Are considered to be the highest-risk of all share types. They give the shareholder no special rights and mean if the company were to go bust, the shareholder will be the last to get paid. However, they provide the highest potential for good returns.

Preference Shares. Do not give the shareholder voting rights but they do have an advantageous aspect they give the shareholder the right to receive a level of dividend payment before these are issued to other shareholders. Unlike a preference share, the value of a preference share is fixed, which means the shareholder will not gain the benefits should the company increase in profit.

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What if the Company goes Broke?

Luckily for shareholders, they are not liable in the event that a company goes bust. Even if the company has to default on loans, there is no responsibility for shareholders. However, shareholders will stop receiving money until all creditors, loans and debts are paid.

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Where are Shares Traded?

Shares are traded via a stock exchange. We have listed all world stock exchanges on our site. The stock exchange provides a central marketplace where shares can be traded. Other financial instruments can be traded there, such as bonds, currencies and other financial derivatives. Investors use a stock broker to buy and sell shares from a range of companies which are listed on that exchange. Trade is either physical or virtual. Many companies choose to be listed both within their own country exchange yet also on a US exchange (the largest of which are the New York Stock Exchange and NASDAQ). This broadens their 'investor base'.

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What are the Methods to Buy and Sell Shares?

We have mentioned stock brokers before and these are the most common avenue through which to buy and sell shares or stocks. Most brokers will also be listed with a stock exchange and they vary in the service they provide. Some will offer a large amount of advice and assistance, for which they will charge fees. Others will be referred to as 'discount brokers' and they will offer little or no advice, but will be cheaper to trade with. All stock brokers will charge a fee for each trade made, this is the 'transaction fee'.

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When looking for a stock broker, you will need to ask yourself:

  • How much are the fees?
  • Which markets can I access can I buy shares globally?
  • How fast can I buy and sell?
  • How much advice and information will I receive?
  • Is this stock broker regulated?
  • What is the minimum and maximum account size?
  • If online, what software is available?
  • What added features do they offer (mobile trading, live chat, support, Direct Market Access)?

Many brokers will be able to provide other forms of investment instruments. You can buy and sell shares without using a broker, by buying direct from a company.

Nowadays, the easiest and quickest way to buy and sell shares is via an online stock broker. That way, you are able to trade using the internet giving you easy access to global markets. However, there are still shareholders who prefer to use the traditional method of post or telephone.

Telephone Share Dealing. This type of share dealing can be carried out in an instantaneous way.

Internet and Postal Share Dealing. This type of share dealing can take a little longer, up to a few days. If you intend to trade via the internet, make sure you find out which platform the broker is offering. It is vital when carrying out trades, that the platform is reliable and will not crash. Software is a key element to the successful trader.

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How much does it Cost to trade Shares?

Whether buying or selling stock, you will be charged a transaction fee by the stock broker. This fee varies according to the type of broker used. Shares can either be purchased directly or bought on margin. Buying on margin means the shareholder buys shares using money which is borrowed against the shares. This means that if they are unable to repay the loan, the stock broker can sell the stock to repay the money. Buying shares on margin increases the risk to the shareholder, as they may lose all of the funds invested plus interest charged by the broker. Interest is most commonly around 10%.

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What Fees are Associated with Share Dealing?

Assuming you are employing the services of a stock broker to buy and sell shares, you will be subject to fees. These typically include:

Admin Charges. The Admin fee is charged regularly throughout the year, usually once a quarter. These vary according to broker so make sure you find out what this is to get the best deal.

Other Admin Charges. Take a look at what other admin fees a stock broker charges. There may be various extras such as custody fees, registration fees, limit order charges and more. Some brokers will charge many extra fees such as these, others will not. It is worth finding out exactly what fees apply.

Transfer Fee. The stock broker will charge a fee per transfer made. This varies according to broker so it is wise to compare these before committing yourself. A normal transfer fee will be around 10.

Dealing Commission. All stock brokers will charge dealing commission. This applies to both the purchase and sale of shares. The dealing commission may vary according to broker: some will charge a flat rate no matter what size the trade while others will set this at a percentage of the trade value. The dealing commission will be somewhere around 10 depending on the services offered by the broker.

Statutory Fees. Statutory fees are dependent on the amount of the transaction you make. If the transaction is over 10,000 you will be charged 1 for the Panel of Takeovers & Mergers (PTM) fee.

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What is PTM (Panel of Takeovers and Mergers)?

Sometimes known as the Takeover Panel, this is a UK regulatory body acting for shareholders. Despite being non-statutory, PTM has a respected reputation within the financial sector in Britain and makes sure shareholders are treated fairly and equally. As mentioned in the section above, a 1 fee is charged on transactions over 10,000 which is referred to as a PTM levy and is paid to the PTM panel.

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What is a Settlement Period?

Each time you make a trade on shares, you will be subject to a settlement period. This is the time between your trade and the date of payment. The standard settlement period is 3 working days and this is abbreviated to T+3. The T stands for Trading Day while the number shows the amount of days until payment is made (or shares are received).

Many stock brokers in the UK will offer Extended Settlement. This gives you longer than the standard T+3 period. These vary according to broker and also will change according to whether the trade was made via telephone or online. Most offer Extended Settlement of between T+10 to T+20.

Extended Settlement shares dealing is essentially a form of leverage trading, or a type of Futures contract. This is because it involves the contract between two parties to buy or sell a specific amount of shares at a specified quantity at a date in the future. At settlement date, the underlying share must be purchased by the investor who buys.

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What is the Advantage of Extended Settlement?

Choosing Extended Settlement gives a share buyer more time to choose to close the position or pay for the shares before payment is required. The trader can react quickly to market changes with less money at stake. If you choose to close the position before the settlement date means you are only likely to have to pay the difference in price if there are any.

The Extended Settlement (ES) contract allows a variety of strategies such as hedging, the ability to take a short position and the ability to gain a longer view of the market.

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Disadvantages of Extended Settlement

Because ES contracts are a form of margin trading, the trader is investing in a trade that is higher in value than the margin funds deposited. This means that leverage is in force meaning gains can be large but losses can be equally huge, if not larger.

The ES contract is subject to margin calls. That means, if the market moves against the contract, additional funds may be required in order to top up the fund. Even if the trader chooses to close the position, the broker may still call for further money to cover losses.

If the ES contract remains open until expiration, then the trader is liable to physically deliver shares in order to settle.

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Is there Tax on Buying Shares?

Yes. HM Revenue & Customs provide information on taxation in shares. When you buy shares in the UK you will pay tax on each transaction. This is different according to what type of transaction you make, either electronic or using stock transfer forms. If using the electronic CREST system (see In what Form do I receive a Share?) you will be required to pay Stamp Duty Reserve Tax. This has a flat rate of 0.5%. If using 'paper transaction' (ie via a stock transfer form) you will pay Stamp Duty, which is also 0.5%. If you are given shares for nothing, you are not required to pay Stamp Duty.

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Are Stock Brokers Regulated?

Stock brokers must pass the Securities and Investment Institute Certificate in Securities. This is a two-part exam. There are various units to the exam and one of these includes proof of having attained FSA Approved Person Status. Stock brokers should be readily willing to provide details of their qualifications and approved status.

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What affects stocks?

Share prices will rise and fall dependent on the performance of the company and on market forces and fluctuations. The value of shares is affected by the principle of supply and demand. The price of the stock is related directly to the level of demand. There are other factors which affect the price of stock and these are analysed in order to be able to forecast price direction and pattern.

Shareholders and prospective share dealers can keep an eye on the markets via looking at indices in the UK this is the FTSE with its various forms (FTSE 100, FTSE 250, FTSE Small Cap and so on).

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How Important are Research and Analysis?

As mentioned above, share price is analysed closely in order to aid share traders in making the right decision to buy or sell, and where. Is it worth buying a more expensive share if it has a higher dividend payment? Or is it better to buy more cheap shares?

Analysing involves looking at yield. This means the dividend paid per share, divided by the share price. This can help to make the decision on which share to go for the more expensive or the cheap.

Something else you should look at is the share price of a company versus its actual earnings. This is the 'price to earnings ratio', and is worked out by taking a company's share price, then dividing it by its earnings on each share. The result will give you a clearer idea of the prospects of investing in that company.

Researching a company and its share prices will give you a good idea of your investment what has affected the share price up to now? Is the share price constantly fluctuating and is this a good or a bad sign? Most stock brokers offer to assist on analysis and the level of assistance will vary according to broker.

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What is Dividend?

Dividends are what the shareholder receives from the company in which he or she holds shares. A dividend is a proportion of the profit of that company. The company has a choice to either use its profits to re-invest within its business or pay shareholders as dividends. There are different forms in which dividends can be paid. They include:

Stock dividends. These are paid by issuing new shares. That means, if the shareholder owns say 100 shares of stock, 5% of stock dividend will be allocated and this will yield 5 extra shares.

Cash dividends. These are the most common form of dividends. These will be paid in the form of a cheque and are taxable. Each share will carry a pre-designated amount of money. So the cash dividend of a share may be 50 pence. If the shareholder owns 100 shares, he or she will then receive 50 cash dividends.

There are other forms of dividends which are less commonly employed, such as property dividends. These are paid in the form of assets such as products.

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What are Dividend Dates?

All dividends will always carry important dates. These will carry liabilities for both the company and the shareholder, and must be kept to as they are pre-decided by the Board of Directors. They include:

Declaration Date. This date will be decided by the Board of Directors of a company, and is the date on which a dividend will be paid. This becomes a liability.

Payment Date. This is the date on which dividends will be physically sent to shareholders (either in the form of actual cheques or paid into a specified brokerage account).

In-dividend Date. This is the date on which current shareholders will receive the dividend. Anyone who buys shares on this day will also receive the dividend, but those who sell their stock will no longer have a right to the dividends.

Ex-dividend Date. This is the 'fresh start', or day after the in-dividend date. Now, those who own stock and decide to sell can still receive dividends. New buyers of stock will not receive the recently declared dividend. Note: it is normal for the stock to lose some value on the ex-dividend date. This is simply because the company has declared dividend and therefore loses some assets.

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In what Form do I receive a Share?

Traditionally, shares were issued in the form of a stock or share certificate. This is a legal paper document that provides certification of ownership of a number of shares.

There is another way that ownership of shares can be recorded today: via an electronic system called CREST in the UK.

CREST (Central Securities Depository) allows share- and bondholders to hold their shares electronically. It also provides a useful and safe way to record each transaction from both sides. Interestingly, shares settled via CREST are not subject to regular stamp duty but to stamp duty reserve tax.

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Stock Market Indices

A stock market index is used to benchmark the performance of stocks. There are national indices such as the FTSE 100 for the UK and the Dow Jones in the USA, the DAX in Germany. These show the performance of the stock markets of each nation. They also reflect the habits of investors in light of the health of that country's economy

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What are RSP's / Market Makers?

Market makers are a possible option when trading shares. Market makers are broker-deal companies that regularly buy and sell a certain amount of shares at a price which is quoted publicly. Market makers will accept a level of the risk in the holding of that specific amount of shares. Usually the shares sold will be from its inventory or 'old' stock.

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What other Investment Options are there?

You can invest in a large range of areas. In fact, it is widely encouraged to spread risk by 'diversifying' your investment portfolio. A good stock broker will be able to offer you these various forms of investment strategies. They include:

Unit Trust Dealing. This involves collective investment and has a strict structure system. The trust is run by a fund manager, and a group 'investment objective' is adhered to and ensured by the trustees. The fund is divided into units which vary in value and price. Unit trusts are open-ended, which means they are slightly higher risk than regular investment funds. You can buy units directly from a fund manager and held in an ISA or Personal Equity Plan. Partaking in a Unit Trust usually incurs an annual management charge from the fund manager.

He or she makes a profit from the difference between the offer price and the bid price of units. This is known as the bid-offer spread and is usually around 5%.

Bond Dealing.Most private investors will buy or sell bonds via their stockbroker. A bond is a security which represents the debts of a company, organisation or even government. Unlike many forms of trade that go through a central exchange, the bond market is often direct between institutions and brokers. The issuer borrows money to a certain amount, and will receive that amount in securities. He or she then commits to pay a determined rate of interest per year, paid once or twice a year. A date of maturity is then set, which is the day of repayment of the money. Bond prices fluctuate frequently. There is a high risk that the investor cannot repay the funds.

He or she is also at risk of market movements, meaning the bond price changes and can lead to loss of capital.

ISAs.Using an ISA (or Individual Savings Account), money is invested by using a combination or stock market investments, bonds or cash. Each ISA carries a risk profile which will vary according to what it contains.

ISAs can be managed by using a stock broker or collectively using a unit trust or investment trust.

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What are SIPPs - Self Invested Personal Pensions?

Most stock brokers will offer SIPPs as another alternative to invest. SIPPs offer a means to save and invest for a pension in a tax efficient way. SIPPs were introduced by the UK Government in the late 1980s as a means to getting more out of your pension. A SIPP allows you to invest in a far greater amount of areas than a regular pension investment scheme. This means more flexibility and higher chance of good returns.

Where can I invest with a SIPP? A SIPP allows you to invest in:

  • shares and stocks
  • equities
  • OEICs and Unit Trusts
  • gilts
  • property (this has been possible since 2006)

What are the Advantages of SIPPs?

The main perk of a SIPP is the tax benefit - an investment in a SIPP is tax free. That means, even if you pay low taxes, you are still likely to save around 20 per cent.

Other advantages include:

  • There is no minimum contribution (depending on broker)
  • Pay contributions at whatever level you want
  • Pay no income or capital gains tax
  • Design your own investment portfolio
  • At retirement, can claim a percentage of the SIPP as a lump sum

What are the Disadvantages?

As with any form of investment, there are disadvantages in SIPPs. These are similar to other shares trading in that the market can move for or against you. This means you risk losing all of your invested funds as the value of your investment changes. Make sure you seek independent financial advice before committing.

  • Fees and charges
  • Investments can change in value
  • You risk losing all invested funds

When considering an SIPP, check which platform the broker is offering. This will make a huge difference to the reliability and speed of your trades.

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What are the Advantages in Share Dealing?

Investing in shares and stocks provides many advantages. These include:

  • As long as the market is open, you can sell your shares at any time.
  • You can increase your income through dividends.
  • You can use shares as collateral when borrowing.
  • You can spread risk by buying shares in a number of areas international and across industries.

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What are the Disadvantages?

Of course as with any investment plan or method, there are disadvantages in share dealing. By buying shares, you risk losing your investment if the share prices fall. Other disadvantages include:

Your investment can lose its value if the majority of other shareholders decide the company is of less value.

During difficult economic times such as a recession, share values fall.

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Is Share Dealing Good for Short-Term Investment?

Most traders find that share dealing is best for long-term investment of at least around 5 years. For short-term investment, other forms of trading may be more beneficial, such as CFDs trading. You can read more about CFDs trading in detail on our site, but the main reason why it is better for short-term trading is because of margin. CFDs are traded on margin while shares are not. When trading on margin, you pay interest on each 'bet'. That means, if you keep a position open for a lengthy period, the interest will mount up and could become expensive to keep up.

The advantage of long-term share trading is the amount you can earn from dividends, the lowering of impact from stock fluctuations. Long term investment means the trader will be affected less by short-term market volatility.

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What are the Risks?

While the returns on shares can be very profitable, it is important to understand the risks. As mentioned above, the best way to invest in shares is to be in it for the long-term. This reduces your exposure to market fluctuations, but you are at risk of loss all the time.

No matter how experienced you are on the stocks and shares market, there is never a guarantee you will get more or even any of the funds you invested to begin with. Make sure the broker you use explains the risks to you from the outset. If they are a good service, they may provide support in managing risks.

Areas of risk you may want to consider include:

  • You could lose all your invested money.
  • The value of your shares can go down as well as up.
  • Taxation levels can change and change according to circumstance.
  • Relying on one area can increase risk it is best to spread risk through various forms of investment.
  • There is no guarantee you will get back what you put in.

We have outlined the risks in some more detail in a separate document: The Risks of Share Dealing

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