Investing in shares

When you buy a share you, quite literally, buy a share of a business. No matter how huge the company, owning even a single share makes you one of the owners of that company. 

Shares are often called ‘equity’ as they represent the value of a company divided into equal parts. In theory, if a company was wound up and all its interests and property were sold off then the outcome would be shared between all the shareholders, based on how many shares they hold. 

Shareholders are also entitled to a share of the company profits. These are regularly paid through a payment known as a ‘dividend’. This is one of the most important benefits of owning a share – in the long term, dividend payments could make a big difference to your return. 

However, owning a share also means sharing the risk of a company not doing well. If a company fails to succeed, then there will be no profits, and its shares are likely to fall in value and could even become worthless. 

If you are thinking about investing in shares, then it’s important to understand some of the risks that come with it. 

Share prices can go up and down unpredictably 

Investors call this ‘volatility’. At any one time it can be hard to predict how much your investments might be worth in the future. Even if you are confident that your investments will grow in value, it can be difficult to say what its precise value may be at any one time, even for experts. 

There is no guarantee that a company will be successful 

While many companies are successful, many fail even if they look good on paper and investors lose out. This can also afflict specific sectors – for example, where all investors suddenly lose faith in oil companies or banks – or across the entire share market when people think the economy is going to do badly.  

Sometimes this can be a matter of holding your nerve and waiting until markets recover. At other times accepting a loss and investing elsewhere cold be the right move..  

Share prices are publicy available and can be found on the internet, through apps on your phone or published every day in many newspapers.  

They are an important part of investing: buying a share when the price is low and selling when the price is high is one of the main ways that investors hope to make money. For this reason, it’s very important to understand what a share price represents. 

The share price you see quoted is the last price that an investor paid for a share. This is a very important point: a share price is not like a price in a shop. It’s simply the value that two parties agree upon at any one time. 

Share prices tend to be driven by basic supply and demand. If demand for a particular stock outweighs supply, its price will go up; on the other hand, if there are more sellers than buyers, then prices will fall. 

Demand for a share can rise when investors think that a company’s fortunes are improving. For example, the company has launched a new product, is being bought up by another company, or the economic backdrop has changed to favour its product or service.  

Similarly, bad news can see demand for shares fall. For example, if a company suffers an unsuccessful product launch or fails to meet its sales targets. 

You can’t completely avoid these types of risk, but many investors spread their money across lots of different shares, only risking a small amount of their investments on any single company. 

One of the more efficient ways of doing this is by investing in an equity fund. When you invest in a fund you pool your money with other investors and a fund manager then invests this collective sum into a wide variety of shares. 

It is important to see investing as a long-term commitment. Generally speaking, the quality of a company’s business has historically been the main contributor to share price movements over the longer term. Companies that have good products, that are well run and are able to adapt to changing times are the ones that have done well. 

In the short term, share prices can rise and fall based on incomplete information, bad publicity or anxiety caused by things beyond a company’s control. Short-term unpredictably like this can be unnerving but it’s important to see investing in terms of years rather than weeks or months, let alone day-to-day moves in share prices.