Shares can be a great investment to make money and grow your wealth. But what are shares exactly? It is important to know they work before investing. Are you looking to invest in shares and wondering how they work? In this post we’ll be exploring what are shares and how do they work? We’ll also look at some of the top share trading platforms.
What Are Shares?
Shares are simply a unit of equity ownership of a business. They can be privately held or traded publicly on a stock exchange. Whenever you buy shares of a business you are now a part owner of that business.
Each share belongs to a ‘class’ – there are several classes of shares with each having different rights attached to them. The two most common classes of shares are common shares and preferred shares. Both types of classes can be traded on a stock exchange.
Common shares are the type that most people invest in and usually carry voting rights. Although there are a few exceptions as some companies can have two classes of common stock. These are sometimes also referred to as ordinary or equity shares depending on which country you reside. Share prices will fluctuate with the financial performance and profits of the company.
By having voting rights, a shareholder is entitled to vote on such things as; electing directors, remuneration policies, dividend payments and other corporate actions. These allow shareholders a certain level of control over the company by allowing a say in how it is run.
Shareholders of common shares are entitled to a proportion of any distributed dividend if applicable. Not all companies pay dividends and some may distribute profits in other ways such as stock buybacks or stock splits.
There are multiple types of dividend a company can pay including cash, property and more. Read this post for more information on the different types of dividends.
Preference shares are shares of a company’s stock that are given preferential treatment with respect to dividends and asset sales. The holders of preference shares are typically paid dividends before common shareholders and they are also paid first if the company is sold or liquidated. However, preference shares typically do not have voting rights and they may be redeemable by the company at a predetermined price.
The main advantage of preference shares for investors is that they offer a higher level of dividend income than common shares. They also offer some downside protection in the event of a company sale or liquidation. However, the lack of voting rights and the possibility of redemption can make preference shares a less attractive investment than common shares.
What is The Difference Between Stocks And Shares?
You may also have heard the term stocks used when referring to investments. The words stocks and shares are used interchangeably when referring to equities and generally mean the same thing.
Although technically there is a slight difference in the two terms. Stocks tends to refer to the general ownership of multiple companies. Whereas shares is the ownership of one specific company.
Different Categories Of Shares
Company shares are often classified into different categories by investors. These group similar types of stocks together according to certain characteristics they have such as; growth, value or defensive for example. We’ll list some of the common categories below.
Growth shares are shares of companies that are expected to grow at a faster rate than the average market growth. They usually don’t pay dividends or only pay a low dividend. Instead cash is re-invested into the business in order to help rapidly grow revenues and profits. This helps drive up the share price in the process.
Both large and small companies across different sectors can be classed as growth stocks. They are more often associated with companies in the technology sector or who hold a technological advantage over the competition. An example of this is Amazon that used it’s technology to dominate the retail sector.
Growth shares often trade at quite high P/E valuations in anticipation of rapid growth. This also makes them more risky – if expected growth isn’t achieved this could result in rapid declines in share price.
Companies classed as value shares usually trade at very low and depressed valuations. Even often below the value of it’s fundamentals such as it’s; earnings, dividends or assets.
They are usually trading at bargain prices due to falling out of favor with investors who have taken a more negative view of it’s longer term prospects. This can be due to several factors such as poor earnings, legal problems or negative publicity.
Value stocks can appear cheap and often have high dividend yields through trading at depressed valuations. But they do bear the risk of taking longer than expected to recover. And in some cases may never recover at all and continue trading cheaply.
Defensive shares are those of companies that provide stable earnings whatever the state of the stock market. They are usually companies that provide vital products and services such as food and beverages or healthcare. These are things that continue to be essential and unlikely to be cut back on even during the most serious economic downturn.
The stability of earnings allows these companies to provide a consistent dividend at times when others may have to cut them to conserve cash. This makes them lower risk but also lower growth potential in a rising market.
Cyclical shares will follow the ups and downs of the market cycle. These will usually perform well in times of economic strength and poorly in times of economic weakness. They are considered the opposite of defensive shares.
Examples of cyclical businesses are hotels, travel, automotive and clothing. When the economy is doing well and people have more discretionary income, these sectors perform well. But in financial downturns, this discretionary spending is often the first thing to be cut by consumers meaning these types of businesses perform poorly.
Income shares are classified as those that pay out regular and increasing dividends. These usually have lower volatility and high dividend yields. These are companies that have steady but limited future growth. Which means excess cash is often paid out to shareholders rather than to fund future growth. Examples of income stocks are banks, utilities and property shares such as REITs.
How Are Shares Traded?
Shares are usually traded on a stock exchange such as the Nasdaq or NYSE, although they can also be traded privately. To buy and sell through a stock exchange you will first require a brokerage account. There are lots of online brokerage services utilizing technology to make it cheaper and easier than ever to invest. These can often be managed through apps.
Best Share Trading Platforms
The share trading platforms you choose will depend on what your needs and objectives are. Are you confident in making your own investments decisions? Or would you prefer to leave it to the services of a professional? Do you plan to be actively trading or using a more hands off approach?
Every investor and trader is different and there are a large number of share trading platforms to cater to each individual. Whether you wish to invest in shares for the long term or make quick profits through active trading, or dabble in alternative or complex investments, it is important to find the right provider. Use a price comparison site like Supermoney to easily compare the best share trading platforms.
What Are Shares? – Conclusion
To recap, what are shares? Shares are a unit of ownership in a business and can be both private or publicly traded on stock exchanges. Investing in the stock market can be a great way to grow your wealth over time.
There are many different investing styles and strategies. We always recommend reading a good investment book to understand more about them before investing.
View more investing and personal finance posts on our blog. Further reading you might like;
- What are the different types of dividend?
- Make money investing in luxury goods.
- 10 investment ideas to build wealth.
- Alternative investments to diversify a portfolio.
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