Learn About Investing
What are stocks and shares?
A share represents ownership of one fraction of a business. All the shares together make up the stock of the business. If a company has issued a million shares and you own one share, you are a proud owner of one-millionth of that business. The two words (stocks and shares) are often used interchangeably and commonly also called equities.
Buying shares in companies is a classic way of investing and has a long history. Holding shares is not the same as owning bonds in the same company. Bonds are a form of debt and have different features.
In the past share certificates were pieces of paper, some of which were printed in elaborate fashion. Nowadays, shareholder registers can be purely digital, shifting much like music did from LPs to mp3 and the like.
Shares in public companies can be bought and sold on stock exchanges around the world. But it’s worth remembering that most companies are actually in private hands, meaning their shares are not publicly traded and thus unavailable to outside investors. Big companies do tend to be public, but there are exceptions such as supermarket chain Lidl, which is privately owned.
Shares typically come with voting rights, which at least in theory give the shareholder a say in how the company is run. In practice though, small-scale investors are unlikely to force any changes.
What are dividends and yield?
Some of the profit made by a company can be divided up and distributed amongst shareholders. These are dividends.
The size of the dividend relative to the share price is the yield. Or put it another way: if a share costing £1 paid a 5p dividend one year, the yield is 5%.
Some shares may come with additional benefits. For example, an airline might give shareholders a discount on its flights.
Why invest in shares and how risky are they?
For shareholders, investment returns are made up of any increase in share price (known as capital growth) plus dividends acquired along the way. Dividends can’t be negative, but share prices can and do go down as well as up.
As with any investment, shares are assets you hope will increase in value over time. They can be at the riskier end of the investment spectrum, but in the past they have generally delivered better returns than holding cash, bonds or property. Of course there is no way of knowing if this will hold true in future though.
While shares may offer tempting returns over the long term, they are also more volatile. This makes them prone to bigger swings in price, both up and down, along the way. Happily, there are ways to reduce the risks associated with shares, such as accessing them via funds and other forms of diversification. Another method is cost price averaging.
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One of the oldest and most traditional ways to invest is to buy stocks and shares in a company. These form the asset class more commonly known as equities.