Understanding shares

What are shares?

By buying a share in a company you are, for better or worse, tying the fate of the investment to the performance of that company. In effect you are buying a part of that company and its future profits, or if the company doesn’t perform well, a share of its losses. If the company performs well, you will receive a share of it’s profit in the form of a dividend payment – you could also benefit from a future rise in the company’s share price. However, the value of shares can go down as well as up.

Investing in shares may be more suited to someone willing to accept medium or high risk, as they are regarded as riskier than some other investment vehicles such as bonds. Stock markets can be divided into two separate categories – primary and secondary.

The primary market:
This consists of shares in two types of companies: those issuing shares for the first time (an initial public offering or IPO) and those who are already public and are looking to raise new funds by offering new shares.

The secondary market:
Existing company shares are traded on a daily basis. Movement in these prices indicate the relative performance of the company over time.

The share price
Share prices in the secondary market reflect the supply and demand for the individual share. Many factors will influence the value investors place on a share. The dominant factors affecting the demand for shares can be broadly categorised as follows:

Macro factors

  • political events
  • legislative changes
  • unexpected events (terrorism/natural disasters)
  • interest movements
  • inflation forecasts

Micro factors

  • company profit forecasts/warnings
  • company’s dividend history/policy
  • merger and acquisition activity
  • changes in management
  • valuation of shares