Stocks are among the most popular investment options. Before you start investing, it’s crucial to understand what stocks are, how their value is affected, and how to assess them. This knowledge will assist you in deciding whether to purchase shares in a specific company.
What are Stocks?
When you purchase stocks, you become a shareholder and gain certain rights, such as voting in company meetings or receiving a portion of the company’s profits. Companies divide their ownership into numerous small parts called shares, which are traded on the stock exchange, facilitating easy buying and selling by the public.
Investing in stocks should be viewed as owning a piece of a business. If you believe the business will expand, it makes sense to own some of it. If not, selling your shares, potentially at a loss, might be wiser to avoid further risks.
Which Type of Stocks Exist?
Shares come in various types based on their characteristics:
- Common Shares: These provide voting rights at company meetings and a share in the profits, known as dividends.
- Preferred Shares: These shares receive priority in dividend payments but typically lack voting rights.
- Limited Voting Shares: These shares offer restricted voting rights as defined upon issue.
- Convertible Shares: Typically preferred shares that can be converted into a specified number of common shares.
- Treasury Shares: Shares owned by the company itself.
- Shares with Nominal Value: The value of these shares is clearly stated upon issuance.
- Shares without Nominal Value: The value of these shares is determined by market forces.
What Rights do Shares Give?
As a common shareholder, you are entitled to several rights:
- Right to share in the company’s profits through dividends.
- Right to information about the company.
- Right to vote in company meetings.
- Right to sell your shares.
- Priority to purchase new shares if the company issues more (Capital increase)
Do shares provide fixed or variable income?
Shares are a source of variable income through dividends. However, not all shares come with dividends; this is at the issuing company’s discretion.
Why do Companies Choose to Get Listed on the Stock Exchange?
Companies need funds for expansion, investment, and other purposes, such as debt repayment. To raise money, companies issue stock and list their shares on the stock exchange.
Being listed also helps a company attract more customers and investors by enhancing trust; listed companies must adhere to strict regulations, promoting transparency and fairness.
What Determines the Value of a Share?
The value of a share is set by supply and demand. If more people want to buy than sell, the price increases. Conversely, if there are insufficient buyers, the price decreases.
How Can I Analyse a Stock?
There are two main ways to evaluate a stock:
- Fundamental analysis: Involves studying publicly available information about a company, such as financial reports and industry trends. Long-term investors typically use it to identify undervalued stocks.
- Technical analysis: This involves using charts and other tools to analyse stock price trends and is often used for timing purchases.
For long-term investment, it’s important to use fundamental analysis. This helps you understand which companies are a good fit for your investment. You also get to decide what a fair price for the company’s share might be.
Technical analysis can help fine-tune your purchase timing. Both types of analysis are useful and can work together.
How to Buy Stocks?
To start investing, you’ll need to open an account with a broker. Be aware that brokers charge different fees, which can impact your overall returns. Here are some tips:
Here are some quick tips:
- Choose a broker that is highly regulated.
- Opt for a broker with low commissions.
- Use a broker with an easy-to-use platform.
👉 Best Brokers for long-term investing in shares
Where to find information about listed companies?
Before investing, it’s advisable to perform a fundamental analysis of the company’s financial statements, available on the company’s website under “Investor Relations”. Information can also be found on financial news websites and the London Stock Exchange website.
Conclusion
Investing in stocks can be rewarding but complex, requiring understanding of the market, analyses, and specifics of each company. The key is to educate yourself, pick a suitable broker, and remain mindful of costs that might reduce your returns. Now that you know what stocks or shares are, find out how the stock market works and the follow our comprehensive guide on investing in the stock market.