Ready Steady Go — 4 easy steps to make your first investment
Many of our followers have been asking us how to get ready to make an investment in a company’s shares. We've set out the process below, but first lets review some fundamental terminology.
The Stockmarket
The shares which you can view on our app are all traded on public stock exchanges. A stock exchange is an organised and regulated marketplace where you can buy or sell shares. However, only licensed stockbrokers can access the stockmarket directly — this ensures that the stockmarket operates smoothly and in a financially orderly way.
So if you wish to make an investment (ie buy shares), you first need to open an account with a stockbroker.
Stockbrokers
Most stockbrokers charge a fee or commission to buy and sell shares on your behalf. This may be expressed as a % of the value of the transaction, or a fixed $ amount, or a combination of both. With most brokers there will be a minimum fee regardless of the transaction size like $9.95 or $19.95 etc.
There are broadly two types of stockbrokers — execution only brokers and full service brokers.
As the name suggests, execution only brokers simply provide a facility for buying and selling shares — this is usually done over an electronic platform. They do not provide any additional services (or limited services), and in particular they do not provide advice or recommendations. The tradeoff for the limited services is that brokerage commissions are lower than full service brokers.
In contrast, full service brokers provide research, advice and recommendations and as a result commissions will be higher. Again they will usually provide an electronic trading platform, however they may execute transactions via phone also. You will also usually have access to a stockbroker who will make recommendations for you.
4 easy steps
Once you've settled on a company you like the look of, follow these 4 easy steps to be on your way to your first investment.
- Select a stockbroker
- Open an account and deposit cash
- Decide on suitable amount to buy
- Execute the trade
Remember — if you are investing for the long term (5+ years) don’t feel the need to rush, the opportunity is unlikely to change in the next week.
1. Selecting a stockbroker
While we don’t recommend a particular broker, you should ask a few key questions when selecting a broker;
How financially sound is the broker? — don’t forget your broker will be holding your cash, so the financial security of the broker is an important consideration (yes, there have been many examples of brokers going out of business and clients losing their cash). We recommend financially secure brokers, for example those who have a large parent company (like a Bank).
What are the fees and charges? — while brokerage commissions should be relatively small (unless you are a very active investor), costs can nevertheless add up quickly. Make sure you understand all the fees and charges that you may have to pay. Cheapest is not always best though, so consider the whole package.
What services are provided? — like any business, brokers must compete for your business, so many offer additional value added services like access to research, news feeds and analytical tools.
Here are some quick links to compare brokers in the US, UK and Australia:
- US: http://www.stockbrokers.com/compare
- UK: http://www.moneysupermarket.com/shares/
- Aus: Click to sign up with Halifax — our preferred Australian online broker.
2. Open an account and deposit cash
Once you have selected a broker, you will need to open an account and deposit cash into the account before you can buy shares. This cash is then available to buy shares (less the commission).
Opening an account online is a straightforward process, if you get stuck the broker will be more than happy to help you out.
3. Decide on suitable amount to buy
In terms of how much to invest, that is dependant on your personal circumstances and financial resources. We strongly recommend that you only invest cash that is left over after you comfortably meet all your living expenses and commitments. There is an old adage that you should only invest an amount that you are prepared to lose, and while this may be a little exaggerated, it makes the right point.
In terms of actual dollar amounts, remember that you should be planning ahead to continue investing and diversify. Set yourself a target of 3–5 share purchases over the next 6 months or year. (more on this in our next blog)
- Less than $500(£300) per trade is not usually worthwhile
- Plan to diversify, so no more than $3,000 (£2,000) in one stock
4. Execute the trade
Now you are ready to pull the trigger, take a deep breath, and remember you are buying for the long term, so don’t worry about trying to ‘time’ your purchase with minor changes in share price. In the long term it will make negligible difference.
- Find the appropriate listing for the company shares you wish to buy, e.g. “The Berkeley Group” (exchange/ ticker symbol: “LSE:BKG”);
- You will need to specify with an amount (e.g. in dollars) you wish to buy, or a quantity. Usually specifying an amount is the easier way and the nearest whole quantity is automatically calculated;
- Once you've found the correct listing, lookup or request a quote. This quote is typically only valid for short period of time (~15 seconds);
- Click confirm, relax, grab a beer (if you’re not at work!).
In our next blog we’ll discuss how to select your first investment using our app.
As always please email feedback@simplywallst.com with any questions.
