Investing in Stocks & Shares

Investments » Stocks & Shares

Stock Market Investing Explained

Types of Investments

Referred to as stocks, shares or equities, such an investment gives you part ownership of a business. The size of your stake is determined by the number of shares that you own, so the more you buy, the more control you will have.

The reward for your shares, and for investing in the business, is presented in the form of dividends, which are a proportion of the company's profits after taxes have been deducted, and other benefits. Shares that pay dividends are known as 'Income' stocks. Shareholders can receive other rewards for their investments such as buying back their shares, which increases the value of those shares still in circulation.

The two main types of shares are known as ordinary and preference. With ordinary shares you may vote at shareholder meetings and receive dividends, but owning preference shares will give you priority over ordinary shareholders in the calculation of dividends and the claim for company assets if the business closes.

Which type you choose will be determined by your motivation for investing:

  • Are you seeking a high return from shares whose value increases rapidly?
  • Do you want to augment your personal income through dividends?
  • Are you prepared to take some risk with falling values as well as rising?

More than 2300 shares are listed on the main UK market and 700 on AIM so there is a huge amount of choice on offer.

Given the recent global financial crisis, many of today's investors will testify that share ownership has its risks:

  • As share prices fall, so does the value of your investment
  • If other investors decide that the company value is less than when you invested, for example if it is losing market share, and enough investors agree, your investment will be devalued
  • In an economy entering a recession, profits will shrink and the value of shares will fall.

The most sensible option is to create a stocks and shares portfolio with shares spread across different companies, industry sectors and countries.

Even in a company whose share price has fallen may recover over time. You might exercise patience and hold onto shares that have fallen until their value recovers but occasionally you may need to cut your losses and invest in a company with more favourable prospects.

 

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