Our main goal here, at Forex Trading Hub, is to help traders find the best stock brokers UK. In order to achieve this, our team of experts has created a thorough guide with all the information that investors should know.
Read on to learn stock market concepts for trading, such as the difference between stocks and shares, CFDs, shorting, and how to choose the best online UK stock brokers.
Stock Market for Dummies
The stock exchange is the market where stocks are traded. In a nutshell, stocks represent ownership fractions of a company. The total number of stocks represents a company’s market value. Also, traders should keep in mind that stocks and shares represent the same thing.
For example, when a trader buys 10 Apple Inc stocks, they own a small part of the company, and are entitled to receive dividends and voting rights. In addition, when the company launches a new product, generally their share price goes up, as investors see added value in it.
Stock market trading
Over a long period of time, investing in stocks offers traders the highest returns, as compared to other asset classes. The returns come in the form of capital gains and dividends. Some investors, such as pensioners, prefer to buy shares that have a history of high dividend pay-outs, as they use the money to increase their income. Thus, the dividend policy of a company is especially important.
For example, Royal Dutch Shell offers the same dividend since the end of World War II. On the other hand, companies such as Alphabet Inc, the parent company of Google, do not give dividends, as they prefer to reinvest their money, offering to investors in exchange a strong capital gain.
What are dividends?
Dividends are the firm’s distribution of profits to its shareholders. A company that has profits has two options: distribute it entirely or partly in the form of dividends or retain it in the business to re-invest. In addition, a company can issue dividends from retained earnings from previous years.
Capital gain is the positive difference between the purchasing and the selling price of a share. For example, an investor that bought one Alphabet share at the company incorporation in 2004 paid around USD 54, while currently they trade for USD 1500. Thus, the capital gain in the abovementioned case is USD 1446.
Initial Public Offering – IPO
An initial public offering (IPO) represents the moment when a private company decides to become public and get listed on a stock exchange. In this process the company provides its business information in a prospectus, so investors can make an informed decision. Generally, when a company starts floating (after the IPO is ready), the share price increases in the first week of trading.
Primary versus secondary markets
There are two types of markets available for UK traders: primary and secondary. The former is where securities (stocks, bonds) are created, while the latter is where they are traded, including any stock exchange. For example, the Alibaba IPO was a primary market transaction, as investors bought the shares directly from the company. Currently, if traders want to buy Alibaba shares, they have to go to the secondary markets, such as NYSE.
The most important stock markets are:
London Stock exchange
Founded in 1571, the London Stock Exchange (LSE) is the oldest stock market in the world. The total market value of listed companies on the LSE is over USD 3 trillion, with the most important companies included in its main three indices: FTSE100, FTSE250, and FTSE350. Some of the most known publicly traded firms are: Vodafone Group Plc (VOD), Lloyds Banking Group Plc (LLOY), and BP Plc (BP).
New York Stock Exchange
Established in 1792, the New York Stock Exchange (NYSE) is one of the oldest and important stock markets. It is the highest capitalised market in the world, with over USD 35 trillion. Its main indices are: S&P 500, Dow Jones Industrial Average, and NYSE Composite. Some of the most famous firms listed on NYSE are: General Electric (GE), Walt Disney (DIS), and Bank of America (BAC).
Founded in 1971, NASDAQ is the place where technology conglomerates from all over the globe are listed. It is the second highest capitalised stock exchange in the world, with over USD 10 trillion. Its main market indices are Nasdaq-100 Index and NASDAQ Composite. A few of the tech giants listed on this stock exchange are: Apple Inc (AAPL), Tesla Inc (TSLA), Facebook Inc (FB), and Amazon Inc (AMZN).
Market value of a company
The market value of a publicly traded company is the number of shares multiplied with its current share price. For example, Facebook Inc (FB) has 2.879 billion shares available, while the current share price is USD 268, giving them a market value over USD 770 billion.
Stock market indices
In the UK there are three main indices that traders follow:
- FTSE 100 is comprised of the first 100 companies listed of the London Stock Exchange by total market value.
- FTSE 250 is composed of the next largest 250 companies listed on the London Stock Exchange by total market value.
- FTSE 350 contains the combined FTSE 100 and FTSE 250 companies.
It is very important for companies that are part of indexes to maintain their place and value, as nowadays there are many fixed index funds that follow specific equities, such as the constituent companies of an index.
Some indices have more equities available than the number of companies listed. This is caused by the fact that some companies have dual equity classes. For example, British traders can buy two different equities for Royal Dutch Shell Plc: RDSA and RDSB.
When does the stock market open
All major stock exchanges are open from Monday to Friday, except for local holidays:
- London Stock Exchange is open between 08:00 AM and 04:30 PM,
- New York Stock Exchange is open between 09:30 AM (EDT) and 04:00 PM (EDT),
- NASDAQ is open between 09:30 AM (EDT) and 04:00 PM (EDT).
When does the stock market close
Stock markets around the world are closed during weekends and on local bank holidays. During business days trading is closed at slightly different times each day by an automated system, in order to prevent market manipulation.
Common stocks vs Preferred stocks
A common stock is a type of security that is also known as an equity share or ordinary share. It represents a fraction of a company, and it holds dividend and voting rights. On the other side, a preferred stock is a hybrid instrument, being a mix between a stock and a bond. It is different from ordinary equity as it has priority on dividend payments and in case of company liquidation. However, it does not hold the voting rights that common stock owners have.
Share classes are designation that are given to a specific type of instrument, such as common stocks. The difference between asset classes is generally given by the number of voting rights that each share has, and sometimes their price. This dual class share structure is used generally by companies that go public where the management or the owners still want to keep the control over the firm. For example, Berkshire Hathaway, the holding company of Warren Buffet, has two asset classes: Class A that is traded around USD 300k, and Class B that is traded around USD 200, with the latter having considerably less voting rights.
Bonds are fixed income instruments that take the form of a loan granted by an investor to a borrower (generally a corporation or government). The bond owners are known as creditors, or debtholders. Some of the most important details that traders need to check before buying a bond are: coupon rate, type of interest, and maturity. The coupon rate is the interest that the bond issuer will pay on the face value of the bond, shown as a percentage. Maturity date represents the date on which the bond will be mature, and thus pay the principal back to the debtholder.
Liquidity represents the degree to which an asset can be converted to cash without negatively impacting its value. Cash is considered to be the most liquid asset, while other assets, such as fine art, are relatively illiquid. Investors that hold positions for short periods of time should orientate to high liquidity stocks. For example, Amazon Inc and Apple Inc are considered to be highly liquid shares, with large daily trading volumes.
For UK investors the free-float is the number of shares available for traders, calculated as a percentage from the total number of existing shares. To calculate this, traders have to subtract, from the total number of stocks, the ones locked-in, such as shares owned by governments, company offices, and institutional investors with controlling stakes.
Beta represents the measure of volatility (systematic risk) of a security or portfolio as compared to the whole market. Beta values on individual stocks highlights how much risk they will bring to a portfolio. For example, a company such as Apple Inc, has an average Beta of 1.23, meaning that when markets go up, this stock outperforms others with a lower beta. However, when the market goes down, the company will go lower than the market. A beta that follows the market performance exactly will always have the value of 1.
Stock buybacks is an operation that involves companies buying back the shares that were sold to investors. When the company decides to buy back the shares, the investors will receive the market value of the assets they hold.
The main reasons for stock buyback are:
- Ownership consolidation of the company, by reducing the number of shares available.
- Increasing the equity value of the firm during market downturn (such as a financial crisis)
- Attracting more investors by improving the financial indicators of the company, such as: P/E, Dividend yield and share price.
The bottom line
Investing in the stock market is a long-term strategy that pays off as compared to other available assets, such as bonds.
Stock market today offers a wide variety of companies to invest in. Traders from the UK should keep in mind that stock trading can be challenging, especially for beginners. We recommend traders to choose the best stock brokers that fulfill their needs, after reading our in-depth reviews.
Below our team of experts has prepared a list with the best online stock broker UK.