What is a share?
An introduction to shares investing
What is a share?
For the purpose of this article, we will take a 'share' to mean a part ownership in f a company (this ownership is referred to as equity). Each individual portion of this equity is a share.
Why should one consider investing in shares ?
There are many reasons for shares investing, but from an ISA investment point of view only two are really significant.
- You hope that the company will grow in value and that the price of its shares will increase in value so that when you come to sell them you can make a profit (this is referred to as 'capital gain').
- You are entitled to a share in any profits that the company decides to return to its shareholders in the form of a 'dividend' (this is income).
These two reasons are not mutually exclusive, although companies that exhibit the potential for greater growth tend to pay lower or no dividends.
Is shares investing risky?
In short - yes. You are buying into single companies. At the very worst, the company could go bust and the shares you hold would be valueless, i.e. you would lose all the money you invested in those particular shares.
Also there are a whole range of factors that can cause a share to increase or decrease in value, so the amount you get back from your investment can be a lot less than what you put in even if the company doesn’t go bust.
However, these risks need, to be weighed against the possibility of profits that are far higher than those you could get by just putting your money in a bank. We will look at ways of dealing with this risk in the coming weeks.
What should I consider when looking into shares investing?
Although not an exhaustive list, here are a few things that you could think about when looking to buy shares.
What are the general market conditions?
No company operates in a vacuum and so general economic conditions will affect a share's price to some degree.
For some, the current bleak economic outlook may discourage any investment in shares whatsoever as the risks are too high and the future too uncertain.
Other investors will view such a downturn as an opportunity to buy “cheap” shares.
Both approaches carry risk: for the former group the risk is missing out on significant gains if the market recovers, for the latter group it is that of incurring significant losses if the market deteriorates further.
Daily performance for the list of the FTSE 100 companies
Daily Risers and Fallers - highest gaining or losing shares
What does the company do?
Companies on the UK stock exchange are sorted by a system of categories or sectors according to what they do. E.G. General Retailers, Mobile Telecommunications, Banks, etc.
If you have an idea that a certain type of company will do well over a given time, then this category system will help you narrow down the list of companies that you might be interested in.
In addition, if you have specific knowledge of one of these categories it will help to focus your search.
What has been happening with the shares recently? Once you have created a shortlist of shares that you might be interested in buying, there is a great deal of information available on what has been happening to the shares recently. Some of the things you might want to look at are:
How has the price changed recently?
Whilst the history and moemntum of a share's price are no guide to how they will perform in the future, you can get a sense of the general market’s sentiment about a share by looking at how the price has changed recently.
Example: a share price chart for Vodafone (VOD)
When researching share price performance, remember to bare in mind the general state of the stock market over the time period you are observing and view the share in relation to this.
Are the directors of the company buying stock?
Significant purchases of stock by the company’s directors can be viewed as an indication of their confidence in the company’s prospects. Remember that unforeseen events can surprise even company directors and their stock purchases are in no way guarantees that the shares will perform well.
Diector Dealing for Vodafone (VOD) from Hemscott.com
Does the company pay regular dividends?
Income (dividends) from holding a stock whether you reinvest it in more of the same stock or take it as cash, can form an important part of your investment (we will look at reinvesting income in a later article).
Dividend data for Vodafone (VOD) from Hemscott Premium
It is also worth remembering that if a company decides to suspend payment of a dividend, this can often have a negative impact on the stock price.
