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What are Shares?

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 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 depends on how many shares are changing hands. For example, it is easy to buy or sell shares in FTSE 100 companies such as BP or Vodafone because many people want to trade them.  But it can be harder to find buyers and sellers for shares in very small companies.

When a company wishes to be listed on a stock exchange for the first time there is an initial public offering, or IPO.  The company will have one or more market makers, banks or brokerages responsible for bringing the company to that market. Market makers will usually own a substantial parcel of company shares.  With small companies (‘small caps’), however, it may be that there’s little stock available when you want to buy it, or few buyers when you want to sell.

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.  This is called ‘gapping’ and 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, i.e. investors who want a regular payout as a form of income through dividends.  Dividends are paid by companies as a way to reward shareholders for their loyalty with a share of the businesses profits.

For investors who do not need the income, a regular dividend combined with share price growth provides exposure to compounding. Compounding can be a very powerful way to build wealth over the longer term. However, dividends are not guaranteed – while some large companies are consistent dividends payers it ultimately depends on the profits of that company.

Shares and Exchanges

The world’s biggest market for shares is the US, which also has some of the largest publicly traded companies. Historically most share trading happened 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.

Other major share markets include London and Tokyo, followed by a range of regional exchanges in Australia, France, Germany, Hong Kong and Singapore, for example. Some companies are only available to trade on a single exchange, while others will have multiple listings, with shares available in multiple markets and multiple currencies.

How to invest in shares

The best way to invest in shares directly is via a regulated stock broker. Some brokers charge you a commission based on the size of your trade, while others 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 offer 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 may seem low it is better to wait until you see a decent opportunity, than lose money just for the sake of being invested.

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