What Are Shares And How Do They Work?

Shares can be a great investment to make money and grow your wealth. But 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 apps and 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

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.

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.

Preferred Shares

Preferred shares are a form of fixed income security that pays out either a fixed or variable dividend. This ensures the investor a regular income but the share price is unlikely to fluctuate and grow as much as with common shares.

What Are Shares And How Do They Work?
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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

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

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.

Value

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 favour 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

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

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

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.

Best share trading apps and platforms
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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 utilising technology to make it cheaper and easier than ever to invest. These can often be managed through apps.

Best Share Trading Apps And Platforms

The share trading platform 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?

For those that are aiming to invest over the longer term we’d recommend Titan. They are an award winning investment manager offering a low cost premium managed investment experience for the everyday investor. Simply pick one of 4 fund types and leave the rest to their expert investment managers. Each fund takes a long term approach and doesn’t participate in short-selling or short term trading. View more information at Titan.

If you prefer to be more active and want to interact with and learn from others then there are some great social trading apps like Public. These apps offer plenty of commission free share trading plus access to other assets like cryptocurrency.

What Are Shares? – Conclusion

To recap, 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.

Find top investing books here.

View more investing and personal finance posts on our blog. Further reading you might like;

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