Buying shares is a way of diversifying your savings if you are looking for an investment that pays more than regular savings accounts. It may be a wise choice for investors seeking diversification of their portfolio with a long investment horizon. Namely, five years minimum, according to the recommendations, in order not to be too exposed to stock market fluctuations. Even so, buying shares is not without risk. Before getting started, you should master the functioning of the stock market and understand its hazards. Moreover, as with any investment, the rule of caution requires investing only the sums of money that you are willing to lose.
Who Can Buy Shares?
Buying shares is easier than ever. You can buy publicly traded securities on two types of markets:
- the primary market, at which a company offers shares at an issue price for the first time. The price reflects the agreement with the authorities responsible for regulating the market.
- the secondary market, where investors trade stocks at a price that fluctuates with supply/demand
The investor has two means to buy the shares of a company: invest directly, via securities account, or go through collective investment, through a manager who is responsible for setting up and managing a portfolio within the framework of a UCITS (Undertakings for the Collective Investment in Transferable Securities).
Direct Stock Purchase
If you choose to buy shares directly, you will be in charge of your stock market portfolio. This strategy is time-consuming and involves keeping abreast of economic activity in the broad sense and that of the targeted companies in particular. Since a share is only a part of the capital of a company, buying shares amounts to investing in a company and, therefore, receiving dividends if it makes a profit—the reason why finance guru, Warren Buffett, recommends investing only in what you know. In terms of the budget, the investor wishing to buy shares directly must have an account open with a financial institution (bank, broker, etc.).
Be aware that, like life insurance, securities accounts involve account maintenance fees, which you should take into account when choosing the best offer. Likewise, brokerage fees are charged to the investor for each stock market order placed to the intermediary, which is to say each request to buy or sell a specific share. But the collective investment also incurs costs since the investor must then pay entry fees and ongoing charges.
Types of Brokerage Accounts For Buying Shares
There are two main types of accounts for buying shares. A cash account obliges the investor to pay the full amount for stocks purchased. In a cash account, the investors not allowed to borrow from the broker to cover the cost of the account’s transactions.
Another type is the margin account. It is a type of brokerage account in which brokerage firms can lend you money. In that case, the securities from your portfolio serve as collateral for borrowed money. If you buy securities on margin, you will sustain interest costs, as with any other loan type. Buying shares on margin involve risks. For instance, if your stocks’ value decreases and you buy on margin, your broker can demand you to deposit cash immediately on your account. In case of any shortfall, a brokerage firm can sell any of your securities to cover the loss. Even if there is a certain period to cover the gap, the broker can sell securities before the end of that period.
Buying Shares Through a Low-Cost Broker
With the growth of the role of the Internet, comes the emergence of low-cost online brokers. You can access their services online from a computer or smartphone. Most of these brokers have meager commissions, usually less than $ 10. Some even offer to purchase shares at no additional cost under certain conditions. Low-cost online brokers allow individual traders to manage their portfolios. In that way, traders benefit from advice and tools to help speculation and search for securities. However, it is necessary to create an account and to make a deposit. The broker will invest a deposit in the securities chosen by his client. The minimum amount of this deposit depends on the broker you chose. It may vary from $500 to $1000.
Be aware that the intermediary chosen must have a license and be authorized to operate in the country you reside in. Before subscribing, make sure that it listed on the registers of financial institutions.
Full-service brokers offer services identical to those of their low-cost counterparts. However, paid on commission, they have every interest in encouraging their clients to buy or sell shares. Even if this is not necessarily in their interest. You must be extremely vigilant, despite the advantages that full-tile brokers offer (market analysis, streaming tools making it possible to see the evolution of stocks in real-time, etc.). Beginning shareholders, in particular, are advised to exercise the utmost caution.
