How do stocks and trading work?
For many years dabbling in the stock markets was seen as an activity for the rich and powerful and ordinary man and woman in the street was excluded from what was potentially a very lucrative way to make money from what seemed to be very little effort. But in the early 1980s the then Prime Minister Margaret Thatcher announced her intention to encourage everyone to be shareholders, a move which she then set in motion by bringing about the privatisation of a number of publically-owned businesses including British Gas and British Telecom as well as ones in which the Government had a major stake like British Airways.
But, despite Mrs Thatcher’s best efforts, it did seem that share trading was destined to remain a niche activity as today it’s estimated that just 11% of Britons hold shares. However the growth of online share trading today is certainly transforming it into an activity that is more easily within the reach of many than it ever has been in the past.
Understanding the stock market
But before we get into the ins and outs of online share trading it’s worth giving a brief explanation of exactly how the stock market works. At some point in many companies’ existences, especially when they first need to raise funds for expansion or development, they will sell shares in themselves as part of what is known as an Initial Private Offering. The price and value of the shares is dependent on the estimated value of the company and the number of shares being made available.
Once these shares go on sale it is open to individuals and institutions such as pension funds to buy them. Then the value of these shares will fluctuate depending on the demand for them. This will be driven by many factors including the overall economic outlook as well as how well the business is doing overall. For the investors, i.e. shareholders, the idea is to buy the shares at a lower price and then to sell them at a higher one, netting a tidy profit.
In the traditional set-up a broker will handle the buying and selling on behalf of clients while claiming a fee as well as commission on each sale. They may also be in the position to offer tips and advice about which shares look like good propositions as well as when to sell existing stock.
The difference behind online share dealing
Online share dealing, on the other hand, largely does away with the broker leaving the investor to make their own decisions and arrange their buying and selling, although some do still offer broker advice as part of their service. With so many online broking services available from it pays to be methodical when choosing to ensure that you are using one that best suits your needs. As to which shares to invest in you’ll also find no end of helpful information online as well as in the business and finance pages of most newspapers.
Like all investments it’s also important to remember that its value can fall as well as rise so it’s important to think carefully about any decisions. But by taking a cautious approach and following advice that you feel you can trust there’s no reason why you can’t join the share-owning population yourself. Happy investing!
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