Shares in a company are usually bought and sold on the stock market. Shares are also known as equities or stocks.
When buying shares as an investment the aim is for the value of your shares to grow, over time, as the value of the company increases in line with its profitability.
In addition to any increase in the share price (or value of your shares), you may also receive a dividend, which is an income paid out of a company’s profits. Longer established companies usually pay dividends, whilst growing companies tend to pay lower, or no, dividends. With an investment in a smaller, growing company you would typically be hoping for a better opportunity for capital growth.
You can either buy new shares when a company starts up and sells them to raise money (through an Initial Public Offering), or you can buy existing shares in a company which are traded on the stock market. These examples of when and how you can acquire shares are also known as buying on the primary market and on the secondary market.
When you invest in the shares of a company, you are buying a part of that company and you become a shareholder, which usually means you have the right to vote on certain issues that affect the company.
Buying and selling shares
Shares are usually bought and sold through a stockbroker. You can ask a financial adviser or investment manager to buy or sell shares for you, but they would still need to go through a stockbroker, who will ‘go to the market’ and arrange the transaction (or trade).
Alternatively, you can have access to investing in shares via a pooled investment.
Before you make any decisions about buying or selling shares, you should find out as much as you can about the company in question, either by doing your own research or by seeking professional advice.
If you are contacted 'out of the blue' by somebody inviting you to invest in shares, be very careful - this may be a type of share scam, also known as a boiler room.
If you invest in shares you should be fully aware that the value of your investment may go down, as well as up, and you should be comfortable with this.
Investing in shares is viewed as being a fairly high risk form of investing. By way of an example of the risks that can exist when investing in shares, if you have put all of your money into the shares of one company and that company becomes insolvent then you will probably lose most, if not all, of the money you invested.
In the short term, shares tend to go up and down in value and these movements in share price can occasionally be very significant, for example in uncertain economic times when stock markets can move very rapidly in one direction or another.
Remember however that if you hold a wide range of shares in different companies from different sectors of the economy or different geographic locations (otherwise known as diversification). This can greatly help to reduce the likelihood of losing all or most of your money.
As outlined above, shares can be a risky investment in the short to medium term, but if you hold your shares for over ten years for example, you may reduce the risk of ending up with less than you started. It is important therefore to stress that you need to be looking to the long term when investing in shares - at least five years, but preferably longer.
The generally held view is that over the longer term, investments in shares should provide better returns than investments in other asset classes. This is far from guaranteed and it should always be remembered that investing directly in shares carries a fairly significant degree of risk.
Shares are generally the most volatile of the main asset classes. That means that their value tends to go up and down more frequently than the value of other types of assets.
The level of a stock market goes up or down as the prices of the shares that are the constituents of that market go up or down. The main factor that determines the price of a share is the perception of its current value to its owner.
Another factor that can affect the price of a share is a change in opinion as to how well the company is performing or could perform in the future. Opinions such as these are frequently based on predictions about the economic conditions in which a company is operating, which is why it might seem that stock markets go up or down depending on economic conditions.