LSE Shares can be a great asset to have in a trading account or investment portfolio. Let’s firstly look at what are LSE shares and which form of holding or selling LSE shares is optimal.
LSE stands for the London Stock Exchange and is the exchange on which UK pubic listed companies are usually traded, as LSE shares. There are various other stock exchanges located in the UK but these are predominantly UK overseas territories and not major indexes.
LSE History – A brief history of one of the oldest stock exchanges in the world.
The London Stock Exchange first opened its’ doors in 1571 under the guise of the ‘Royal Exchange’, and is the one of the oldest stock exchanges in the world. It’s current location in Paternoster Square was not always its’ home but having been through 2 wars, an IRA bombing and the Great Fire of London (amongst other things in its’ long history), the LSE made it to the present location in 2004.
1973 was the year that the previous 12 total British and Irish exchanges merged with the London Stock Exchange to create a single main market. It was only later, in 1995 that the AIM market was added by the LSE to provide an entry market for smaller companies to list and gain opportunities of international expansion.
There was a failed merger with Deutsche Borse in 2000 before the LSE finally merged with Borsa Italiana in 2007. Whilst still operating as separate entities, the two exchanges now exist under the brand of London Stock Exchange Group.
With a vast array of securities tradeable on the LSE, including bonds, ETFs, warrants and derivatives we will be narrowing in on this article on the common stock, or LSE shares.
How many LSE shares and companies are there?
The LSE now counts more than 2600 shares on its’ various markets with approximately 1400 on the Main LSE market. There are north of 1100 on the AIM market, with the remainder covered on the Professional Securities Market and the Specialist Fund Market.
The main currency used to no surprise is the Pounds Sterling (GBP) but the shares are actually listed there in pence. Simply take the value of the share being traded and divide by 100 to get the GBP value.
What is the difference between FTSE 100, 250 and LSE Shares?
The FTSE is short for the Financial Times Stock Exchange. Essentially it is just a group of LSE listed shares based on total value and not an exchange in of itself. FTSE 100 is an index of the top 100 most valuable company listed on the LSE, whereas the FTSE 250 and 350 are taking into account the most valuable 250 and 350 companies respectively.
The London Stock Exchange is the exchange on which the shares are listed but the FTSE is an index (or group) of shares, whose value is combined to give a net total value. It is easier to look at the performance of an ‘index’/group than the full value of all securities listed on the exchange.
Therefore it can be said that if you are buying or trading FTSE shares, you are always trading on the LSE. If you are buying LSE shares you are not always buying into the FTSE…. I think we can move on.
How can I buy LSE Shares?
You have a few different options in how you buy LSE shares and we are going to look here at trading vs buying shares to cover all the bases. Each way to invest or trade into LSE shares has its’ benefits and downsides. By placing these side by side below we hope to make your choice a little easier.
|Buy LSE Shares||Trade LSE Shares|
|Usual Hold Period||long||short|
|Buy partial shares||no||yes|
|How to profit||up||up or downward movements|
|Tax||usually*||no (if traded as spread betting)|
|How to buy/sell||broker, bank||broker or online via CFD/ spreadbetting|
Buying Shares via a stock broker
This is the more traditional method of buying LSE shares and would usually be done via a stock broker (could be a person or online only), via a brokerage account which can be provided by most UK banks, or into a stocks & shares ISAs.
The benefits of buying shares this way is that you are able to invest into the long-term growth of the underlying company and share in their dividend program if one is offered. You will have a share ownership document (mostly certificates are just digital registrations these days but they mean the same thing) and be a partial owner of the business you select.
The transaction fees for buying and selling shares are typically one off charges when the action is made and either a flat rate charge or a % of the total buy/sell value (or whichever is higher). A typical transaction cost to buy shares with an online stock broker starts from £9.90 but there are various different models offered depending on your choice of broker. We have some information on the different online stock brokers and their charging/fees here.
Unlike in trading, you can only profit if the share rises in price over your holding period and the total number of shares you own is your direct exposure (so no leverage would be used). When you realise a profit either from a direct sale order or from dividend payments, you would pay capital gains tax (CGT) on a portion of your profit once you have reached an annual threshold.
If, however you buy the shares in a stocks & shares ISA wrapper (UK residents only) you will be able to benefit from the gains experienced without the tax deduction.
So, if your intention is to buy some LSE shares and hold them for the long-term, either because you believe in the underlying company model or you are planning to buy LSE shares for your retirement planning then this is definitely the model to take. If your goal is to experience more short term profits, or you believe that a particular LSE share is going to decrease in value, you need to read on about trading stocks.
Trading Share CFDs or spread-betting
When are you trading shares as a CFD you have the option to take either side of the trade buy buying or selling the LSE share you have a view on. Being able to profit from the drop or rise in a share may seem unusual if you don’t own the stocks in the first place but essentially what you are doing is making a commitment to purchase the share at a predefined price or to sell it at a predefined price.
Let’s take a look at an example where we are buying or selling 100 shares of a stock priced at 1000p (£10) using a leverage of 1:5 and the price moves up or down by 50p. In both examples our cost for the trade would be £200 (as we are using leverage and reducing our initial capital outlay). When the sell order is made without owning the stock initially you must buy at the committed original price and sell simultaneously.
Price Increases 50p
Bought – Total Value of sale would be £1050 – original committed value of £1000 (including leverage value). Result is £50 profit (25% of actual outlay trade value of £200)
Sold – Total value of sale would be £1000 (originally committed value of sell order). As you would not yet own the shares you would have to buy at the higher price in order to sell. Total buy value – £1050. Result = £50 loss (-25% of trade value)
Price Decreases 50p
Bought – Total value of sale would be £950 with an original purchase of £1000. Net loss = £50 (-25%)
Sold – Total value of sell order is £1000 but as the shares have dropped in price you can now buy them for £950 and use this to clear your sell order. Net profit = £50 (+25%)
Now we know how it works, what are the other advantages to trading vs buying shares?
We have included leverage in our example above and as you can see, the effects of the movement amplify the result by the multiple of the lever. In the example above we used 1:5 which gives the net result of 5x the actual movement of 5% in either direction (thus helping confident traders to profit greatly from smaller moves in the markets).
You will also have the option to make a trade smaller than the value of the share. If we were looking to benefit from movement in one of the more expensive LSE shares AstraZeneca, these currently have a value of more than £7500. If you were to do this via buying stock, you need a pretty large deposit size of at least £7500 to buy 1 share in the company.
If you undertake in trading the same stock, you can trade as low as the minimum trade size offered by the broker (usually from £10 or less) and experience the same % growth movement as with the larger investment but with a lower initial capital outlay. It could then be said that trading provides the option to both increase and decrease your risk depending on how you use it!
Cost to trade LSE shares
The cost to trade shares via this method can be reduced to £0 with brokers like eToro and others who are offering no commission stock trades (if 0 leverage is used). The brokers in this case usually just have a difference in ‘spread’ between the ask and the sell side of the deal so they make a small margin on the difference in price there rather than by charging users a transaction fee.
Especially if you are planning to be trading small amounts, not having to pay £9+ on both your buy and sell can make a huge difference to your result. A £100 stock purchase would incur £20 in transaction fees via some stock brokers whereas a trade of the same value could effectively cost you a few pennies.
The flip side here is if you are planning to hold the shares for the long-term and use leverage where the other transactional or margin fees can potentially all add up.
Tax liabilities on trading profit are treated under CGT as standard if beingd derived by CFDs. These liabilities can be completely eliminated however if you choose to trade via one of the spread betting brokers in the UK.
Brokers that are targeting the UK market are beginning to add spread betting more and more recently.
Summary – To buy or to trade LSE shares?
As we have covered above, there are many different advantages to both types of share acquisition and most of us could benefit from both with different stocks, goals and investment sizes in mind.
Whilst trading undoubtedly provides a greater deal of flexibility and lower costs, buying will give more of a long-term dividend upside and more security. The choice if yours.
Still need additional help? See our list of best trading platforms in the UK and evaluate our detailed review of who you might want to use for this.