Learning about shares is a good idea, because:
- You can become a part owner in a company you believe in
- It’s a common investment type, and makes up other common investments such as ETFs and managed funds
- More people are investing in the stock market than ever before
Who buys shares?
If you’ve been thinking about buying shares, you’re not alone. Studies showed that as at 2022 almost half of all Aussies own investments outside their superannuation, and of these, 16% invest in shares.
What is a share?
A share is an amount of ownership in a company. The more shares you have, the more of the company you own. Shares are also known as stocks.
If you buy a share, you become what’s known as a shareholder. Being a shareholder of a company gives you certain benefits, and can allow you to make money.
Where do people buy shares?
Shares are listed on stock exchanges, such as the ASX or NASDAQ, and are available for people to buy and sell during the business hours relevant to the timezone they’re based in.
Why do people buy shares?
When a person buys a share in a company, they’re buying a share in the performance of that company.
There are two main ways the performance is realised:
- Through dividends, which are a distribution of a company’s earnings to its shareholders
- Through share price growth, which is when a company’s stock price rises over time, and the shareholder can sell their share of the company at a profit. This is known as capital growth.
Of course, not all companies pay dividends, and not all stock prices rise.
How do people buy shares?
People buy shares through intermediaries known as stockbrokers. They’re commonly called ‘brokers’.
Brokers can be individual people, or businesses such as online brokers.
Generally, you’ll need a broker so you can buy and sell stocks. You’ll pay a fee, known as a brokerage fee, that will be different depending on where you go.
There are many places you can buy and sell stocks, particularly online, so you’ll need to do your research to find a reputable one. Things to look for include how much they charge, how accessible their customer service is should you have a problem, and most importantly, whether they’re licensed to handle your money.
MoneySmart has an overview of how to check if a broker is legitimate, including a list of companies you should not deal with.
How much does it cost to buy a share?
A company is initially listed on a stock exchange at a set price, and from there investors will buy and sell shares which will push the price up and down.
The price of a share is generally driven by how many people want to buy it, and how many people own it and want to sell it.
Generally, if more people want to buy shares in a company, this will drive the prices up. If more people want to sell shares in a company, this will drive the prices down.
Factors that can influence the price of a share include things like earnings reports, product releases, interest rates, and general market conditions.
When you multiply the number of total shares on offer, by the current share prices, you’ll get a company’s market cap.
How can you tell what a share is worth?
To work out what a share is worth, and therefore how much you should pay for it, you need to form a view on what the underlying company is worth.
Investors use different methods to come up with a company’s valuation and compare it against a company’s history and its peers.
These valuations can be combined into what’s known as ‘consensus estimates’. You can find a company’s consensus estimate by googling it.
It’s important to remember that just because a share looks cheap on paper, doesn’t make it a good buy.
Where can you learn more?
Keep learning about investing at Spaceship Learn or MoneySmart, because the more you know, the better choices you can make.
