What Is Share Dealing and How Does It Work?

Understanding Share Dealing

Share dealing involves the buying and selling of company stocks. This activity enables individuals to participate directly in financial markets. Participants aim to generate financial returns by acquiring shares and later selling them, ideally at a higher price.

Understanding Shares

A share represents a unit of ownership in a company, granting the holder a proportionate claim on its assets and earnings. As the company performs well, the value of its shares can increase, benefiting shareholders. Conversely, poor company performance may lead to a decrease in share value.

There are two primary types of shares: common stock and preferred stock. Common stock typically grants shareholders voting rights, allowing them to influence corporate decisions. Common shareholders also have the potential for capital appreciation and may receive dividends.

Preferred stock generally does not come with voting rights. However, preferred shareholders usually receive fixed dividend payments, often paid before common shareholders. In the event of a company’s liquidation, preferred shareholders typically have a higher claim on the company’s assets than common shareholders.

A share’s value is influenced by factors including the issuing company’s financial performance, growth prospects, and market demand. Broader economic conditions, such as interest rates, inflation, and GDP growth, also play a significant role in determining how shares are valued. Investor sentiment and news events related to the company or its industry can further impact a share’s price.

The Mechanics of Share Dealing

Engaging in share dealing requires an intermediary, such as a brokerage firm or an online trading platform, to facilitate transactions. Individuals must first establish a brokerage account. The process usually involves selecting a broker, completing an application, and then funding the account with capital.

To open an account, individuals generally need to provide personal information such as their Social Security number, address, and employment details. Once approved, funds can be transferred into the account through common methods. Brokerage accounts in the United States are often protected by the Securities Investor Protection Corporation (SIPC) for up to $500,000.

After funding the account, investors can place orders to buy or sell shares. Two common types of orders are market orders and limit orders. A market order instructs the broker to execute the trade immediately at the best available price, prioritizing speed.

A limit order allows an investor to specify a maximum price they are willing to pay when buying shares or a minimum price when selling. The order will only be executed if the market price reaches or improves upon the specified limit price. This offers more control over the execution price but risks the order not being filled if the market price is not met.

Once an order is placed, the brokerage system routes it to the appropriate exchange for execution. Upon execution, the trade enters the settlement process. In the United States, equity trades typically settle on a T+2 basis, meaning the transfer of ownership and payment occurs two business days after the trade date. This period allows for administrative and legal processes to complete the transaction.

Approaches to Share Dealing

Share dealing encompasses distinct approaches that reflect different financial objectives and time horizons. One primary approach is investing, characterized by a long-term perspective. Individuals who adopt an investing approach typically aim to build wealth over many years, focusing on fundamental company growth and income generated through dividends.

Investors generally seek to benefit from compounding returns and ride out short-term market fluctuations. They often conduct thorough research into a company’s financial health, management, and industry outlook. The goal of investing is often aligned with long-term financial planning.

In contrast, trading represents a more short-term approach to share dealing. Traders aim to profit from price fluctuations over shorter periods, from days to months. This approach involves more frequent buying and selling of shares to capitalize on market volatility and momentum.

Traders often rely on technical analysis to identify potential entry and exit points. Their objective is to generate quicker returns by anticipating and reacting to market movements. While both investing and trading involve buying and selling shares, their intent and timeframes differ, catering to varying risk appetites and financial goals.