If you are looking to understand how to start investing in shares easily, this guide will help you get going in no time. Oh, and you should probably read this guide after checking it out its bigger sibling on investing – how to start investing in under 10 minutes.
On you marks, get set…
A share is a slice in a company that you can buy and will enable you to enjoy returns from capital growth (if the price increases) and income (if it pays a dividend or a share of the yearly profits). A company will generally enable people to buy shares in it in order to raise lots of money in exchange for ownership in it. The first time a company enables the public to buy shares in it is known as as an Initial Public Offering (IPO).
Go! Minute 1: stock exchanges & stock indicies
When companies go public they will be admitted to stock exchange (such as the London Stock Exchange). This serves as a marketplace for shares in the company to be bought and sold. Stock indices are also in operation to track or measure parts of the stock exchange – in the UK you will hear about the FTSE 100 and FTSE 250 regularly – these are just measures of the total value (market capitalisation) of the biggest 100 or 250 companies on the London Stock Exchange.
The total value of a company (market capitalisation) is calculated by multiplying the number of shares in circulation by the price of each share.
Stock exchanges and indices are present around the world. In the US there is the New York Stock Exchange and the technology-focused NASDAQ. They too will have indices such as as the S&P 500 which measures the total value of the 500 biggest companies in the US by market capitalisation.
Minute 2: understanding why share prices fall and rise
Demand and supply are the key factors. When demand exceeds supply, share prices rise when the opposite happens, they fall. The performance of a business is never certain. Companies will issue regular guidance as to where they think they will be through various updates to the market. Analysts will also take a view and tag companies with a buy, hold or sell rating and a share price target.
If companies exceed expectations, share prices tend to rise – the opposite happens if a company doesn’t do as well as expected. You tend to notice large movements on share price on the the presentation of half-year and full-year results.
Share prices can also be heavily influenced by general confidence from investors (and this can be linked to the state of economy or wider macro environment). In ‘bull markets’ there is a tendency for prices to rise across the board, but in a ‘bear market’ prices tend to fall.
Minute 3: share-picking strategy and characteristics
Having a strategy to invest in shares can help narrow the choice. The two main schools of thought are bottom up and top down investing- you either start by looking at individual shares thoroughly and move upwards or start from the top, identify the wider market trends and move down to finding the best companies that will benefit from the trends (such as a rising population benefiting house-builders).
Contrarian investing also offers opportunity for better returns – it’s about going against popular opinion and identifying long-term winners.
On the London Stock Exchange, shares are categorised by many sectors from financials to healthcare. These sectors are helpful to understand. Another way to filter things down is to understand the difference between defensive and cyclical shares – shares that are less and more regularly affected by the cycles of an economy moves through respectively.
Minute 4: analysing shares to buy
Analysing shares falls into two main buckets – one is called fundamental analysis and the other is technical analysis. Fundamental analysis all about interrogating the fundamentals of a company such as its financials and strategy.
There are a number of ratios to do this and you will most often hear about the P/E and PEG Ratio that try to see if a company is under or over-valued by seeing how much you are paying per pound of profit. The latter factors in the expected growth in profit of a company to give a more relevant calculation as it peaks into the future. Dividend Yield and Dividend Cover are important ratios for income seekers to see how much a share has historically paid out in dividends and to see how likely it is to continue.
Technical analysis is all about the charts and looking for patterns. The two key concepts to be aware of are support and resistance lines – these are just the consistent peaks and troughs on a share price trend line that show where the price tends not to increase or fall beyond respectively.
- Earnings & EBITDA
- P/E Ratio
- PEG Ratio
- EV / EBITDA
- Director Dealings
- Dividend Yield
- Dividend Cover
- Share Charts
Minute 5: buying and monitoring your investments
When you buy shares, you will need to house them somewhere in an account. A Stocks & Shares ISA with a £20,000 annual allowance is the best type of account if you re starting out as your capital growth and income is tax-free.
Your account will also allow you to put stop loss or limit orders on particular shares – these are just instructions to sell if a share falls below a certain point or buy / sell a share if it reaches a particular point respectively.
When you buy or sell a share, you’ll often notice the price you buy or sell at is different to the market price. There’s no need to worry – this is the bid-offer spread. The offer price (price you buy at) will always be higher than the market price, the bid price (price you sell at) will always be lower than the market price. It’s how the the middle-man (market maker) makes a bit of money for helping ensure you can buy and sell shares whenever you want!
Keeping an eye on your investments is crucial – monthly as a minimum but in particular around quarterly trading updates and in line with significant changes to the state of the economy.