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How to Buy Stocks in 2021

How to Buy Stocks in 2021

Author: Tony Loton

If you’re new to the world of investing, this guide will tell you what you need to know about buying stocks. Not only how to buy stocks, but also why you might want to. And if you’re a more seasoned trader of other financial assets (such as cryptocurrencies), you can use this guide as a quick conversion course for investing in equities.

How to Buy Stocks in 5 Easy Steps

  1. 1
    Visit eToro through the link below and sign up by entering your details in the required fields.
  2. 2
    Provide all your personal data and fill out a basic questionnaire for informational purposes.
  3. 3
    Click 'Deposit', choose your favourite payment method and follow the instructions to fund your account.
  4. 4
    Search for your favourite stock and see the main stats. Once you're ready to invest, click on 'Trade'.
  5. 5
    Enter the amount you want to invest and configure your trade to buy the stock.

How Do You Find the Best Broker?

There’s a lot to learn about buying stocks from a theoretical perspective, and when you move from theory to practice you’ll need to find the right stockbroker for you. Although many brokers offer almost identical services, some differences might make one broker more appealing than another. Let’s look at some of those differences.

1. Regulation

Just as you wouldn’t trust a bank that wasn’t regulated by your country’s financial regulator, the same thing should be true for your stockbroker. In the UK, for example, you’ll want to ensure your broker is regulated by the Financial Conduct Authority, and that your investments and uninvested cash are protected — up to £85,000 at the time of writing — by the Financial Services Compensation Scheme (FSCS). Note, however, that the FSCS protection is per person and per firm, so you won’t benefit from twice the protection if you choose two brokers or banks that happen to be part of the same group.

2. Fees, Commissions, and Charges

Investing in stocks comes at a cost. There are several fees, commission, and charges that can eat into your investment returns:

  • A per-transaction dealing fee that can vary between £0 and £20 (typically for telephone dealing) is applied by the broker to each stock purchase you make. Some brokers charge lower fees when you make more trades, but long-term traders needn’t be too concerned about dealing fees provided they’re not too high.
  • Stamp Duty Reserve Tax (SDRT) of 0.5% is charged by the UK government on share/stock purchases, which once again favours long-term investing over short-term trading.
  • While ordinary share dealing accounts shouldn’t have annual management fees, some special kinds of accounts such as a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP) may incur a flat rate or percentage (of your portfolio) annual fee.
  • Investment fund fees of up to 1% (typically) will be charged by the fund manager if you buy funds of stocks rather than individual stock through your broker.
  • Although it’s unusual for UK brokers, some international investment platforms charge withdrawal fees to get your money back, although this might depend on which mechanism and currency you choose when withdrawing your money.

This non-exhaustive list indicates the kinds of fees you may be subjected to by your broker, and the trick — of course — is to minimise them as much as possible. This said, there’s “no such thing as a free lunch” because companies that claim to charge no per-transaction commissions must make their money in some other way. One such way is to impose a wider bid-ask spread, which is the difference between the price you pay when you buy stocks and the price you get when you sell them back to the broker.

3. Payment Methods

Most brokers allow you to deposit cash (to be invested) by credit/debit card or bank transfer, with the former typically being applied immediately and the latter taking from two hours to three days to appear in your account. Some brokers also allow you to deposit cash via other convenient methods such as PayPal.

The same methods should be available for withdrawals but most brokers will want you to confirm you’re the owner of a debit card or bank account before they’ll send money back to it. They may ask you, for example, to send in or upload a bank statement showing your original deposit.

When depositing or withdrawing cash in other currencies, you need to be aware of the exchange rate and any currency conversion charges.

4. How Many Stocks Are Available?

Not all stockbrokers and other stock trading platforms offer all stocks. For example, some platforms are limited to offering big-name “blue chip” stocks (like those listed in the FTSE 100 index) but not the small-cap stocks such as those traded on the UK’s alternative investment market (AIM).

Your choice of stocks to buy could also be constricted by the kind of account you have. For example, a stock and shares ISA or SIPP might limit you to investing in UK companies. 

Make sure your preferred broker allows you to buy the stocks you want before you sign up.

Learn the Basics

Before buying your first stock, you’ll need to become familiar with the basics about stocks, stock markets, stock ownership, and stock price movements.

What Are Stocks?

Stocks are also referred to as shares or equities. In simple terms, stocks are the companies you will have heard of (and some that you haven’t) such as Telsa, BP, and AB Dynamics. Stocks are one of the “asset classes” you can invest in, alongside other asset classes such as commodities like gold and oil. 

How Does the Stock Market Work?

A stock market acts like any other market in the sense that it is a place to buy or sell goods. In this case, the goods being shares of a company’s stock.

Just as there are several markets in your town, country, and continent, there are several stock markets in the UK, USA, and around the world. Some of the stock markets you may have heard of are the London Stock Exchange (LSE), the New York Stock Exchange (NYSE), and the Nasdaq.

Under the covers, “market makers” ensure that there are (almost) always shares available for you to buy and (almost) always someone for your shares to be sold to, so buyers and sellers don’t have to be matched up for every single trade. Put simply, they provide liquidity in the market.

Note that there’s a difference between a stock index and a stock market. The FTSE 100 index isn’t a stock market; it is a list of the top 100 companies traded on the London Stock Exchange. The Dow Jones isn’t a stock market; it is a list of the top 30 companies traded via US stock exchanges. Some stockbrokers and trading platforms make things a little confusing by referring to the FTSE 100, Dow Jones, and other stock indices as “markets” that you can trade.

What Does it Mean to Own Stocks?

When you buy stocks, you’re buying part-ownership of a company such as Apple or BP, which means you’re entitled to a share of that company’s profits in the form of dividends (if any are declared and paid) as well as standing to benefit from any share price appreciation. In contrast, investing in other kinds of assets such as commodities (e.g., gold or oil) only allows you to benefit from price appreciation because there are no “profits” to be paid out.

Being a stockholder also theoretically entitles you to certain perks — such as discounted books from Bloomsbury publishers — and the ability to vote at company meetings, but this depends on the type of stock you hold. As a retail investor, you will hold shares of common stock rather than preferred stock, which means you’re lower down the line when it comes to being paid dividends or claiming company assets in the event of its bankruptcy.

What Moves a Company’s Stock Price?

In theory, a stock’s price (i.e., its share price) is a measure of the company’s intrinsic value. Therefore, a company’s stock price should go up if it makes higher profits while selling more products and services.

In practice, a stock’s price also has a speculative component which depends on how popular the stock is among investors who think the price will go up and they can simply sell their shares to a “greater fool” in the future.

From day to day, a stock’s price can be moved by news (e.g., a new product or profit announcement), world events (e.g., the outbreak of war), currency exchange rates, and technical factors such as traders seeing a pattern on a price chart which they believe portends a big price move.

Beware that stock prices do not always move in an intuitive direction. For example, if a company announces higher quarterly earnings, its share price may counter-intuitively stay flat or even fall rather than rise, because market participants had already “priced in” the expected level of earnings. In this case, the earnings would have to be better than expected to send the share price higher. 

What Should You Consider Before Buying Stocks?

There are a few things you need to consider before buying stocks. Here is a handy checklist to ensure you’ve thought about the important things:

  • Determine your goals so that you know what you’re investing for (e.g., retirement or just for fun) and how much you can afford to invest now or regularly without affecting your standard of living.
  • Determine your risk appetite to match your goals, because saving for retirement is much more serious than playing the markets for fun. If you lost all your money invested in risky “penny stocks”, would it leave you in poverty as a pensioner or just be a temporary financial setback?
  • Focus on the long term (at least 5+ years) is a good idea when investing in stocks because, despite occasional crashes and bear markets, the stock market has so far always bounced back in the end.
  • Diversify your portfolio to further protect your investment. Even if the overall market always bounces back, individual companies can and do go bust, so spread your risk across several stocks in different sectors.
  • Only invest in businesses you understand from a fundamental (see next point), technical (price charts), or consumer (you like the company’s products) point of view. Do your research before reaching into your wallet!
  • Learn the basic metrics and concepts for evaluating stocks such as the P/E ratio, dividend yield, and other company “fundamentals”.
  • Consider robo investing or copy trading, which means benefitting from the expertise of seasoned traders whose trades and investments are replicated automatically in your portfolio.

Expert Tip to Trade Stocks

Whereas long-term investors should focus on company fundamentals to determine the intrinsic but unrealised value of their prospective stockholdings, don’t discount looking at the share price charts to see how a stock’s price has performed over time. You might see a cycle that helps you time your stock purchase, or you might see that the stock price is in consolidation (i.e., not falling) at an all-time low price that suggests more speculative upside than downside.
- Tony Loton
Ready to Invest in Stocks?

Why Buy Stocks?

As well as understanding how to buy stocks, you will want to know why you should be buying stocks at all. Here are some of the things that make investing in stocks such a good idea.

Beat Inflation

Stock investing is often described as a hedge against inflation, but what does this actually mean?

Inflation can be defined as a reduction in the purchasing power per unit of money, which simply means that the prices of most goods and services go up over time. When you deposit money in a bank account, the purchasing power of that money will decrease as the years go by unless the interest rate on the account is greater than the country’s rate of inflation. The erosive effect of inflation is even worse if you simply put your money under your mattress and don’t get any interest.

In theory, stocks are a good hedge against inflation because buying shares gives you a share of a company’s revenues and those revenues should track consumer prices. In other words, as prices rise, the companies you invest in should make more money by selling their products and services.

Compound Returns

When interest is paid into your bank deposit account, that interest itself accrues more interest in future years as long as you don’t withdraw it. This is called compounding and is what Albert Einstein described as “the eighth wonder of the world”.

The bad news is that stocks don’t pay interest. The good news is that many of them do pay dividends, which you can think of as a similar thing. You can benefit from compounding if you reinvest your dividends — in the same or different stocks — rather than withdrawing them.

Passive Income

Achieving compounded returns by reinvesting dividends is an example of “passive income”, which is money you receive for doing absolutely nothing apart from picking the right stocks to buy. Not going out to get a wage for every hour you work or every piece you produce is something that many people crave, and it is possible — if not easy — through stock investing. It’s also not limited by the number of hours you can work or the number of pieces you can produce per hour, so it’s scalable as you buy more stocks.

Note that we’re talking here about securing a passive income from long-term investments with reinvested dividends. Day trading doesn’t count as passive income because you have to do it actively to bank many small profits during the trading day.

How Do You Make Money from Buying Stocks?

There are two ways to make money from stocks: capital gains from an appreciating share price, and your share of a company’s profits paid out as dividends. Let’s take each of these in turn.

1. Capital Gains

A capital gain is the money you make when you sell a stock for more money than you paid for it because its share price has gone up in the meantime. This is the only way for short-term traders to make money from stocks, and long-term investors can make even more money by holding on for even bigger share price appreciation.

If you had bought Tesla stock in December 2019 and then sold your stock in January 2021, you would have made a capital gain. However, you don’t make a capital gain from the price appreciation until you actually sell your shares.

When you make a capital gain, you typically have to tell the tax authorities about it so that you can pay some capital gains tax. However, UK investors can avoid — not evade! — paying capital gains tax to Her Majesty’s Revenue and Customs (HMRC) by holding stock investments in a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP).

Some investors even hold long-term stock investments in the form of spread bets, which class as gambling transactions, so they don’t incur capital gains tax. However, this option is only feasible for advanced investors who have learned about the dangers of leverage.

2. Dividends

Stock investing pays dividends, both metaphorically and literally.

Companies typically pay out a share of their profits twice-yearly as dividends. But some companies don’t because they are not mature enough to have predictable profits and they choose to retain any profits to fund future growth.

If the company you’ve chosen to invest in does pay dividends, you can think of them as similar to the interest you’d receive if you put your investment funds into a bank deposit account instead of buying stocks with it. In this context, a stock’s “dividend yield” will give you a good idea of how much you could achieve in investment returns compared with simply putting your money in the bank and receiving interest.

Two things you should keep in mind about dividends are:

  • They provide income in addition to any capital gains from share price appreciation.

  • Your personal dividend yield depends on the price you paid for the stock, so a 200p-per-share stock with a published 5% dividend yield will actually be paying you a yield of 10% if you bought the stock when it was priced at 100p-per-share.

How to Find the Best Stocks?

You might decide that you want to buy stocks that have a high dividend yield, or stocks that are at an all-time low price, or simply stocks from a certain sector (such as financial services) that you think are undervalued. Whatever your criteria for selecting certain kinds of stocks, you can use a “stock screener” provided by your stockbroker or one of the leading financial websites to come up with a list of matching stocks.

Once you’ve derived your candidate list of stocks, you can click each one for more detail, to check that it fits your fundamental (e.g., dividend yield) or technical (i.e., price) criteria. And if you use your stockbroker’s screener, you can typically click a button to buy the stock. 

What Should I Do Next to Buy Stocks?

This guide has taught you how to buy stocks via a stockbroker, and why you might want to as a way of securing a passive income or building a pension pot. But what should you do next?

If you’re ready to invest right now, you need to sign up for a stockbroker’s share dealing account, filter the available stocks for the ones you’re interested in, and place orders to buy each of the stocks you want in your diversified portfolio.

If you’re not ready to invest right now, you can read our other guides to get more comfortable with investing, and maybe make a start by “paper trading” using a stockbroker’s demo account until you are comfortable.

Frequently Asked Questions

  1. Commissions have come down in recent years, so you can typically buy stocks for a few pounds or dollars per trade. Some brokers even sell stocks commission-free, but it’s always worth checking if there is a catch in the form of a wide bid-ask spread or extra fees for withdrawing the money you make on your investments.

  2. Typically, you will buy stocks via a stockbroker’s nominee account, which means that the stockbroker has bought the shares on your behalf. Although the broker is the legal owner of the stocks (so its name appears on the register of shareholders) you are the beneficiary so that your invested funds are protected if the broker goes bust.

  3. You can only buy stocks during the market trading hours of the country where the stock is listed. For example, you can buy UK stocks from 8 a.m. to 4:30 p.m. on weekdays (excluding bank holidays). You can place orders out-of-hours to buy stocks when the market next opens, but you should do this using a “limit order” that ensures you don’t pay more for your shares than you really want to.

  4. Not all stocks pay dividends in their early years when their share prices and profits tend to be volatile. More mature companies that have been around for many years in established industries are the ones that pay dividends.

  5. Stocks are popular for different reasons at different times. For example, when interest rates are low, the potential returns from owning stocks seems more attractive than putting money into a bank deposit account. In the 1980s, stock ownership gained popularity in the UK when the government privatised previously nationalised companies, so ordinary people could own shares in familiar companies such as British Gas and British Telecom.

  6. Leverage basically means buying stocks with borrowed money, which can amplify your gains (great!) but also your losses (not so great). You shouldn’t need to worry about leverage when buying stocks through a traditional stockbroker, but be wary of inadvertently taking a leveraged position in a stock — via a contract for difference (CFD) or a spread bet — when using an online trading platform.

  7. Spread bets and contracts for difference (CFDs) are leveraged bets on whether a stock’s share price will go up or down. These are called “derivatives” because they are financial instruments derived from stocks but are not the same as owning stocks. Derivatives are dangerous if you don’t know what you’re doing.

  8. Besides stocks (also known as “equities”) there are other asset classes you can invest in. For example, a stockbroker should allow you to invest in “funds” which are diversified pooled investments in equities that are offered by fund managers for a fee. Other assets include commodities such as gold, but a stockbroker typically won’t let you invest in these except via an exchange-traded commodity (ETC) or by buying a gold mining stock for indirect exposure to the gold price.

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