Stocks are among the most popular investment options. Before you start investing, it’s important to understand what stocks are, what affects their value, and how to evaluate them. This will help you decide whether to buy shares in a specific company.
This article provides essential information to help you get started with stock investing.
What are stocks?
When you buy stocks, you become a shareholder and gain certain rights, such as voting in company meetings or getting a share of the company’s profits. Companies divide their ownership into many small parts called shares. These shares are traded on the stock exchange, making it easy for people to buy or sell them.
Owning only a small number of shares generally won’t give you a lot of power to influence company decisions.
Investing in stocks should be seen as owning a piece of a business. If you believe the business will grow, it makes sense to own some of it. If not, it might be better to sell your shares, even at a loss, to avoid future risk.
How are stocks classified?
Stocks come in different types based on their functions:
- Common Shares: These give you the right to vote in company meetings and share in the profits, which are called dividends.
- Preferred Shares: These shares get priority for dividend payments but usually don’t offer voting rights.
- Limited Voting Shares: These shares offer limited voting rights as defined when the shares are issued.
- Convertible Shares: These are usually preferred shares that can be converted into a specified number of common shares.
- Treasury Shares: These are shares owned by the company itself.
- Shares with Nominal Value: The value of these shares is stated clearly when the stock is issued (also known as par value or face value).
- Shares without Nominal Value: The value of these shares is determined by market forces (i.e., how much investors are willing to pay for them).
Do shares provide fixed or variable income?
Shares are a source of variable income in the form of dividend payments. However, not all shares come with dividends – it is up to the issuing company to decide the dividend policy (or lack thereof).
As a result, the money you make from owning a share varies. It depends on the company’s profits, which are not the same each year.
What rights do shares offer?
As a common shareholder, you have several rights:
- Right to share in the company’s profits through dividends.
- Right to information about the company.
- Right to vote in company meetings.
- Right to sell your shares.
- Priority to buy new shares if the company issues more.
Why do companies choose to get listed on the stock exchange?
Companies need funds for expansion and growth, investment, and others, including paying off debt. To raise money, companies issue stock and list their shares on the stock exchange.
In addition, being listed on the stock exchange can help a company attract more customers and investors. This enhances trust because companies must adhere to strict regulations, such as transparency and fairness, to qualify for listing on specific stock exchanges.
What determines the value of a share?
The value of a share is set by supply and demand. If more people want to buy than sell, the price goes up. If not enough people want to buy, the price goes down.
How can I analyse a stock?
There are two main ways to evaluate a stock:
- Fundamental analysis: This involves studying all publicly available information about a company, like its financial reports and industry trends. This type of analysis is often used by long-term investors to identify undervalued stocks (hence, those shares whose prices will go up in the future).
- Technical analysis: Technical analysis involves chart analysis, technical indicators analysis, and other tools to analyse the stock price trend.
For long-term investment, it’s important to use fundamental analysis. This helps you understand which companies are a good fit for your investment. You also get to decide what a fair price for the company’s share might be.
Technical analysis can help fine-tune your purchase timing. Both types of analysis are useful and can work together.
How to buy stocks?
To start investing, you’ll need to open an account with a broker. Be aware that brokers charge different fees, which can affect your overall returns. You could start by having a look at the best commission-free brokers and the best brokers for beginners.
Here are some quick tips:
- Choose a broker that is highly regulated.
- Opt for a broker with low commissions.
- Use a broker with an easy-to-use platform.
For instance, you could have a look at the following UK-regulated brokers:
- eToro review
- Pepperstone review
- ActivTrades review
- XTB review
- Interactive Brokers review
- IG review
- Trading 212 review
- DEGIRO review
Stocks as an alternative to other investments
Compared to Real Estate: Stocks are more liquid; you can buy and sell them more easily than property. Owning property also involves ongoing costs like taxes and maintenance, which you don’t have with stocks. You can even invest in real estate through Real Estate Investment Trusts (REITs) if you still want exposure to that sector.
Compared to Savings Accounts: Stocks often provide higher returns, especially those that pay dividends. However, stock prices can go up or down, so they are riskier than savings accounts. Many long-term investors prefer stocks instead of savings accounts, which often do not keep up with inflation. Also, many companies steadily increase their dividends over decades, such as dividend kings and dividend aristocrats.
Where to find information about listed companies?
Before investing in shares of listed companies, it’s highly advisable to conduct a fundamental analysis of their financial statements. These statements provide a snapshot of a company’s financial health, typically released annually with quarterly reports in between. The most significant statements are the balance sheet, income statement, and statement of cash flows. These can be found on each company’s website, typically under “Investor Relations”.
Overall, here is where you can information about companies listed on the London Stock Exchange (LSE):
- London Stock Exchange Website: The LSE’s own website provides comprehensive data on companies, including share prices, market capitalisation, and trading history. Some reports and filings may also be available.
- Company Websites: Most publicly traded companies have an “Investor Relations” section on their website where they publish annual reports, financial statements, and other key information.
- Financial News Websites: Websites like Bloomberg, Yahoo Finance, and the Financial Times offer profiles of companies listed on the LSE. These profiles often include financial data, news updates, and analysis.
- Chosen Broker: Many stock trading platforms provide information on LSE-listed companies, including current stock prices and historical data.
- Regulatory Filings: Companies House provides access to registered company information including company accounts, directors, and financial statements. Although this is not specific to LSE-listed companies, many will be registered and file information here.
Other stock market recommended articles
- A quick guide to global stock indices
- Dow Jones stocks with the best dividends
- Best dividend stocks
- Beginner’s guide to dividends
- Stock exchange hours
Stocks guide: summary
Investing in stocks can be a rewarding but complex opportunity. It involves understanding the market, different kinds of analyses, and the specifics of each company you’re interested in. The key is to educate yourself, pick a suitable broker, and remain aware of costs that might eat into your returns.
How do I start investing in stocks?
To start investing in stocks, you’ll first need to open an account with a broker. Make sure the broker is highly regulated, offers low commissions, and has an interface that you find easy to use.
What is the difference between fundamental and technical analysis?
Fundamental analysis looks at a company’s financials and overall health to estimate its value, helping you decide whether it’s a good long-term investment. Technical analysis, on the other hand, focuses on price patterns and market activity to predict future stock movements, which is more useful for short-term investment decisions.
What are commissions and why are they important?
Commissions are fees charged by brokers when you buy or sell stocks. High commissions can reduce your overall profitability, so it’s important to choose a broker with low fees that match your investment style.