Buying shares is the easy part: you find a stock broker (expensive), bank or online broker and buy the shares in the company you wish. This section looks at what to look out for when purchasing shares, what type of share actually makes you money and when you should buy. Well here goes!
First the wealth warning: I gave up buying stocks and shares when I realised that I would never really make any 'get rich quick' money from it: you need a serious amount of money to make money from shares in the same way that you need a large amount of money to earn significant interest from your cash at the bank or building society. It's pretty much the same deal. DO NOT expect to own shares that will make you a fortune over night: it is my experience that this does not happen. In fact quite the reverse. Only play with money you can afford to lose and don't come back to me saying that all this is my fault - this is my opinion and experience gained as an unqualified and novice share investor who now knows better and prefers, even in the credit crunch times to invest in property. Having said that my experience was invaluable.
What makes a company and therefore it's share value better than another? Why do shares values change so much? How can I make money from shares over time? Is any broker better than any of the others? Why does market sentiment matter and what is it? Who are the market makers? Hmm so many questions for a property site! but relevant to analysing any asset class.
No one buys an asset unless it has a value for them directly for themselves or for others so that they can make a profit. By working for extra resources and then investing these to make income later on makes sense when planning for retirement. When buying shares you'll be hoping to make money from the capital appreciation of the shares as well as earning money from the dividends too.
The rate of return when investing your money at the bank is around on average 5%. The yield on shares varies too, some give good dividends others can't afford to - yet! It all depends on the company and as an investor, you really do have to do your homework.
Buying shares is about understanding the company fundamentals which can be very boring but I've also heard that novice investors can beat the analysts by blindfolded pin sticking the FT on a number of stocks! (NB I don't recommend this.)
Lastly, have you heard the one about... What's the difference between gambling on a horse race or buying shares in the stock market? The answer is that the agony of a big bet is over in just a few minutes...
Here are some FAQ's on buying shares:
Q: What's a good share to buy?
A: One that has a great dividend and capital growth.
Q: How do I know if a share (or company) is a good bet?
A: You need a crystal ball or at least good insight into how well a company is being run. It's the amount of profit that's generated that counts.
Q: So if a company makes huge profits, then they'll pay out huge dividends?
A: Not always. Companies have different criteria and will only agree to distributing certain amounts of profits to shareholders.
Q: If shareholders own the company, shouldn't they distribute all the profits.
A: It depends if you want the company to be in existence next year with new and better products and with a sustainable business plan. It's all about the future as well as the present.
Q: How does a potential investor know more about a company and whether buying shares in it is a good idea?
A: You phone up and ask for last years Shareholders Report and Accounts - always a good place to start. The Accounts will have been audited and will also show how they compared to the previous year as well.
Q: How else does an investor know about a share?
A: Look online: The FT (The Financial Times), Yahoo and the BBC all have a great resource. The FT is the investor's bible. As it says, 'No FT, No Comment'.
Q: I saw that HBOS shares were cheap compared to the other banks the other day, does that mean that HBOS is not as good a company as the others?
A; Not necessarily. First the share price has nothing to do with other competitors companies; the share price depends on the market capitalisation in £ divided by the number of shares issued. It's true that companies 'engineer' the look of their share price to make them look attractive and affordable to buy. If a company does very well over time, it may 'split' it's share price so that one share might for example become two for half the price: you'll have the same money just the same...
Q: So how do I really tell how to compare a company in it's different sector?
A: By looking at various ratios. The one that many investors look at is the P/E Ratio ( or Price / Earnings ratio). This is the price of the share divided by the 'earnings' or the equivalent of it's net profit (/ EBITDA). The great thing about the PE ratio is that it's a financial barometer of the popularity of a share. So shares in companies during the internet boom had astronomical PE's: no earnings but a lot of hope. Some worked out some did not. The FT lists every listed company's PE daily.
Q: So if I was buying shares in a company with a low PE that would be better?
A: That depends again! The management may be sleepy, or there may be some sort of share restriction on the business: there may be all sorts of reasons for a low PE.
Q: So what's the best type of share to buy?
A: It has generally been found that 'income' shares do the best. It's a bit 'tortoise and the hare' when it comes to investing, so safe and uneventful is better than betting your shirt on some fanciful and perhaps far fetched ideas. It's better to buy what you can see rather than to buy an idea.
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