In its simplest form, a share is a percentage of ownership in a company or a financial asset. Investors who hold shares of any company are known as shareholders.
Companies obviously vary in size and in the number of shares that they have available to buy or sell – demand in the market is measured as liquidity and will depend on how much stock is changing hands in any one day. For example, it is easy to buy or sell shares in FTSE 100 companies like BP or Vodafone, but can be harder if the company is very small.
Companies will have one or more market makers, banks or brokerages that are responsible for bringing the company to the market in the first place, via an initial public offering, or IPO. Market makers will usually be in possession of a substantial parcel of company shares, but it can be possible that for small companies (‘small caps’) there may not be much stock available when you want to buy it, or buyers that want it when you decide to sell it.
Share markets have specific trading hours, so it is not possible to trade shares 24 hours a day. If you place a trade out of hours, your broker will need to wait until the market opens before executing the trade. Be aware that prices can change substantially overnight, called ‘gapping’. This reflects the placing of large trades by investors while the market is closed, and the scramble to buy and sell the moment it is open. Prices can change quite suddenly to reflect overnight news.
Shares to match your investing strategy
Investors will choose shares based on their characteristics. Smaller company shares are generally recognised as offering greater levels of potential capital growth, as profits increase and the share price rises. However, with this greater potential reward, there can also be greater risk of loss as small companies can be more volatile than a larger company with established revenue pipelines and operations.
Larger companies can be seen as more attractive to income seekers, ie investors that look to receive a regular payout as a form of income through dividends which are paid by the company as a way to reward shareholders for their loyaly with a share of the businesses profits.
For those investors that do not need the income, a regular dividend combined with share price growth provides exposure to compounding which can be a very powerful way to build wealth over the longer term. However, dividends are not guaranteed – while some large companies can be consistent in the payment of dividends, this ultimately depends on the profits of that company.
Shares and Exchanges
The biggest market for shares in the world is the US, which also has some of the world’s largest publicly traded companies. Traditionally, most of the share trading activity took place on the New York Stock Exchange, but now there are a number of different exchanges competing with each other. Larger companies like Amazon or Facebook, for example, are traded on the NASDAQ exchange.
The other major share markets in the world include London and Tokyo, followed by a range of regional exchanges like Australia, France, Germany, Hong Kong and Singapore. Some companies will only be available to trade on a single exchange, while others will have multiple listings – with shares available in more than one market, and in more than one currency.
How to invest in shares
The best way to invest in shares directly is via a regulated stock broker. Some brokers will charge you a commission based on the size of your trade, while others will only levy a fixed fee per transaction. The business of stock broking is becoming ever more competitive, so it is worth shopping around between the reputable brokers doing business in your market to see what fees they are offering. Brokerage accounts also come with an annual fee to cover holding your stock. Shares must be held with a custodian bank – traditionally banks held paper share certificates, but now these are mostly electronic.
Share investing can be risky, so it is important that you spread that risk by not placing all your money with one share trade – yes, the profits can be substantial, but so can be the losses. Professional money managers will often have over a dozen positions at any one time, and private investors should try to keep risk diversified too. While returns on cash are very low at the moment, it is better to wait until you see a decent opportunity, than lose money for the sake of being invested.