There can be a lot of misunderstandings surrounding company shares. Most people feel comfortable talking about ‘shares’ but many will do so without having spent any time considering what these actually are. There are plenty of movies and TV shows that have had storylines where people have made or lost their fortunes because of shares; how does it all happen though? What are shares and are they a good investment?
What are Shares?
The UK Government Business Link website (http://www.businesslink.gov.uk/bdotg/action/home) describes shares as representations of ownership in a company. Put more simply a share is a way to divide up the value of a company into units which can then be sold to interested parties. This should mean that if the value of the company goes up so will the value of share; likewise a fall in the value of the company will lead to a loss in the value of shares. Many people invest in shares because they believe that the value of them will rise in the future. For example, if an individual had bought shares in Google a few years ago they would now be very rich indeed.
How is the Value of Shares Determined?
In a perfect world the value of shares would be determined on the success of a business and the amount of property and other assets it owns. It is not always as simple as that though and market speculation can greatly affect the price of shares. It is usually the case that the value of shares will be determined by what the market predicts will be the company’s value rather than the actual value. If for some reason the market has a bad feeling about a company it could cause their share value to fall even though nothing has actually happened to the company. Rumours have been known to cause big changes in share prices.
Are Shares a Good Investment?
Some people view buying shares as being similar to gambling. You have no guarantee that the shares you buy will increase in value but you just hope that they will. Of course this hope can be based on some sound reasoning and good research. There are also some companies which are considered a safe bet, but you never really know what the future can bring. Many of those interested in this type of investment will have a portfolio of different shares so that all their eggs are not in one basket. As well as possibly making a profit if you were to sell your shares you should also make money from dividends; this is your share in the company’s profit/earnings. The main reason why people choose to invest in shares is that you can make a lot of money this way, but you can also lose a lot as well. The Australian Securities Exchange (http://www.asx.net.au/) points out that over the long-term shares do tend to be the best type of investment. There will always be a risk but the potential rewards make it worthwhile for many investors.