Shares are one of the more fundamental investment assets available, but that doesn’t mean everyone knows the ins and outs of how they work – so we’re going to try and help you wrap your head around them, and how you might go about buying and selling them.
What is a share?
A share is a unit of ownership in a company, mutual fund, financial asset, or trust – buying shares in a company provides the shareholder with equity in that company. Because you own a part of the company, as a shareholder you’re are entitled to a portion of the profits it makes, and these are paid out as dividends. This dividend income can be one of the ways in which shares generate returns for their holder(s).
Shares are issued by the company in question, and sold to investors for cash in an ‘initial public offer’ or ‘float’. After this initial sale, shares are then bought and sold on the stock market, unless bought back by the company at a point in the future.
Ordinary Vs preference shares
There are two main types of shares – common and preference. Both represent a shareholder owning a part of a company, but function in slightly different ways and give different rights to their holders.
Shareholders who hold ordinary shares are not guaranteed a dividend from the company, however ordinary shares generally appreciate in value over time, and they also carry voting privileges. Ordinary shareholders are last on the ladder in times of insolvency, meaning they may not receive a payout if a company liquidates.
Preference shares do not confer voting privileges by default to their owners, and tend to appreciate in value at a slower rate compared to ordinary shares. One of the key advantages is that they usually come with set payment criteria which guarantees them (subject to certain exceptions) regularly paid dividends. Preference shareholders are also prioritised ahead of ordinary shareholders; all preference shareholders must be paid before any ordinary shareholders can receive dividends. The same goes for instances of insolvency/liquidation.
How are shares bought and sold?
Shares are bought and traded on a stock exchange, and the majority of public shares are traded electronically these days- meaning buy and sell orders are placed using computers, and matched online by exchange-operated software. Buy and sell orders are the tools used by investors to move shares.
- A buy order is essentially an expression of interest in buying a certain quantity of shares in a certain company
- A sell order is the opposite – it’s signalling that the person who placed the order wants to sell a certain number of shares in a certain company
Once an order is filled (a buyer finds a seller or vice versa), the involved parties are then generally given a few days to conduct the transaction and move their respective funds/shares around.
You can buy and sell shares through one or both of two ways; either by engaging a full-service broker who’ll handle the majority of your business for you, or by using an online share trading platform such as CommSec, which represents a more hands-on DIY approach. You can compare a wide range of online share trading platforms with Canstar.
What are the benefits of shares?
The benefits of buying shares will vary depending on your investment goals, and whether you’re wanting to trade or invest.
Want to trade?
Trading shares rather than investing in them essentially means that you’re not looking to hold onto any shares you buy for the long-term – you’re trying to profit off a short-term change in their value, sometimes as short-term as days, or even hours.
While this can be inherently more risky than holding onto shares for the long-term, it can occasionally result in quick money for the canny investor. That being said, it can also be an easy way to lose money if your shares of choice go down in value rather than up. That’s why it’s important to not just jump in and start buying shares as soon as you’ve set up your trading account. Watch the market for a while, and keep an eye on any stocks you’re interested in. That way you’ll have a good idea of when they’re up and when they’re down.
Want to invest?
Investing in shares for the medium or long-term can mean some investors benefit from what many perceive to be the main strength of shares and the wider stock market – over a long enough period, the market generally tends to go up. Time in the market can create significant returns. Tiny amounts invested a century ago would be worth a great deal more now, and this chart from the Australian Securities Exchange (ASX) demonstrates that if you’d put a single dollar into Australian shares in January 1900, it would be worth nearly $300,000 now!
This is what can make shares an attractive option for those seeking to build their wealth, because on averageover a long enough period your investment can tend to grow, regardless of how many small drops in value your investments see over that period.
That being said, whether you’re looking to trade or invest, make sure you’ve done your own research and know exactly what you’re doing before jumping into shares.
If long-term wealth creation is your goal, you should also definitely make sure your super is in order. You can compare super funds and find the best one for you with Canstar.
The following table contains details of the superannuation funds rated by Canstar based on someone aged 40 – 49. This table has been sorted by one-year performance (highest to lowest).
Please note that the performance information shown in the table is for the investment option used by Canstar in rating of the superannuation product.
What shares should I buy, and how many?
We can’t tell you what shares to buy, or how many of them you should buy, but we can tell you about some common rules of thumb cited by people who know their stuff when it comes to shares.
Rule of thumb 1 – your time frame can help you decide whether you should invest in shares
A very fundamental and common rule is that the longer you have to invest, the greater the exposure you can have to growth assets like shares. This is because if you’ve got plenty of time on your side, you can ride out any potential losses in the short-term and wait for your investments to increase over the long term. If you only have a short timeframe, or will need your money for a specific goal like buying a house in a year or two, then shares may not be a good idea.
Rule of thumb 2 – watch the market
We mentioned this before, but it can’t hurt to say it again. If you’re looking at investing in one or several companies, watch how their stock performs for a little while before buying in. Keeping in mind that the market’s general trend is upwards, you can keep an eye on the shares you’re interested in and buy them when you personally think their price has become favourable to buyers. Although if you’re generally skittish about the risks of buying high, you could try making use of dollar cost averaging in order to reduce said risks.
Rule of thumb 3 – invest in companies you want to support
When you buy shares in a company, you’re essentially showing support for the company by tying your money to their performance and overall value. So why not invest in companies that you’re passionate about, or that have ethics you agree with? Whether it’s investing in tech companies like Apple because you’re a tech-head, or investing in renewable energy companies because you’re a bit of a greenie, you might be happier knowing that your money is tied to companies that you support.
You can compare online share trading platforms and find the best one for you with Canstar.