The Basics of Share Trading

The Market

The buying and selling of shares in a company can be done privately. This entails registering the change of ownership with the company registrar and avoids all charges (except, where applicable, stamp duty). It is, however, more commonly and more conveniently done through a stock exchange, an authorised central clearing house which matches buyers and sellers. The price at which buyer and seller agree to trade is known as the market price of the share, and usually moves up and down over a trading day, reflecting supply and demand. The closing price, ie, the price agreed when the exchange closed, is printed in various financial newspapers, such as the Financial Times, and can also be found on Teletext.

Until very recently, the market was principally the floor of the London Stock Exchange (there are also regional stock exchanges in Belfast, Birmingham, Glasgow and Manchester) where brokers met jobbers (the latter now known as market makers) to buy and sell shares. Today, virtually all trading is conducted on computer screens and telephones and the floor of the Stock Exchange is deserted. This change has meant that a market maker does not have to answer his telephone when the going gets tough. In the three days of the great market crash of October 1987, there were numerous complaints from investors that they could not get through to their brokers, nor brokers to the market makers.

There is a constant struggle between the bulls, those who think share prices are too cheap and who want to buy stock, and the bears, those who think share prices are too high and who want to sell their shares. Professional traders may change their position, buy or sell, within a few days, or even within a few hours.

The constant struggle between the bulls and the bears is marked by the age-old human emotions of fear and greed. This means that it is possible to apply mob psychology to stock market behaviour.

Bankruptcy

If a company goes bankrupt, its remaining assets will be sold to pay off its creditors, particularly the banks. Ordinary shareholders come last in the queue and quite often get nothing back at all (preference shareholders may be luckier).

On the other hand, the principle of limited liability ensures that shareholders cannot lose more than the value of their shareholdings. Despite being the owners of the business, they are not liable personally for the company's debts.

Sources of Information

Cover, net yield, P/E ratios and share prices for almost all companies (and many foreign ones) can be found in the pages of the Financial Times and other financial newspapers. In addition many current share prices can be monitored on Ceefax or Teletext.

There are also a number of telephone dialling systems which furnish share prices and market reports, usually at elevated charge rates (typically 45p/min cheap rate and 60p/min at peak times).