What Is a Share and How to Invest in Them?
Let’s talk about What Is a Share and How to Invest in Them? Investing in the stock market can be a great way to grow your money over time. However, if you’re just starting out, the idea of buying shares might feel confusing or overwhelming. This guide will explain what a share is and show you step by step how to invest in them, using simple language and real-life examples. By the end, you’ll know what to do if you want to start investing.
What Is a Share?
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Definition:
Shares, also called equity, are the basic units of ownership in a company. Companies issue shares to raise capital for growth, operations, or other financial needs. The total shares issued by a company constitute its equity or capital stock. Shareholders have rights such as voting on key company matters and receiving dividends when declared. Shares are traded on stock exchanges, making them easily transferable -
Shares vs. Stocks:
The words “share” and “stock” are often used the same way. “Stock” is a general term for owning part of one or more companies, while “share” refers to one of those individual pieces. -
Types of Shares:
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Common Shares:
They usually come with voting rights and the chance to earn dividends (a share of the company’s profits). However, if the company fails, common shareholders are the last to get any money back. -
Preferred Shares:
They usually don’t come with voting rights but offer steady dividends. They also get paid before common shareholders if the company has trouble. -
Treasury Shares: Shares repurchased by the company, which can be reissued or retired.
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Voting and Non-voting Shares: Some shares carry voting rights, while others do not.
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Why Invest in Shares?
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Grow Your Wealth:
Over time, successful companies tend to increase in value. If you buy shares at a low price and sell later at a higher price, you make a profit. -
Receive Dividends:
Some companies pay part of their earnings to shareholders regularly. This extra income can help boost your overall returns. -
Beat Inflation:
While keeping money in a bank might seem safe, the value of cash can drop over time due to inflation. Investing in shares may help your money grow faster than inflation increases costs. -
Real-Life Example:
Imagine buying 100 shares of a company at £10 each, costing you £1,000. After a few years, the share price rises to £25 each. You can sell for £2,500, earning a profit of £1,500 (plus any dividends you received along the way).
Bull Markets and Bear Markets: What They Mean for Investors
When you start investing in shares, you’ll often hear the terms “bull market” and “bear market.” These phrases describe the overall direction of the stock market over a period of time. Let’s break down what each term means and look at examples so you can better understand how they affect investing.
What Is a Bull Market?
A bull market is a period when share prices are generally rising, and investors are feeling confident about the economy and companies’ future prospects. Think of it as when everyone is optimistic and buying shares, which pushes prices up.
Key Points of a Bull Market:
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Rising Prices: Most companies see their share prices climb steadily.
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Investor Confidence: People expect businesses to grow, so they are more willing to invest.
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Economic Optimism: A strong economy, low unemployment, and robust business profits help fuel a bull market.
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Long-Term Growth: Bull markets often last for several years as confidence builds over time.
Example:
Imagine that in early 2010, the overall share market is low, and many companies are still recovering from a previous downturn. Over the next several years, as the economy grows and companies start posting strong profits, share prices begin to rise gradually. By 2019, many investors who bought shares during the lower price period see their investments grow significantly in value. This period from 2010 to 2019 is an example of a bull market—optimism, increased buying, and overall upward movement in the market.
What Is a Bear Market?
A bear market is the opposite of a bull market. It’s a period when share prices are falling, and investors become pessimistic about the market’s future. During a bear market, people are more likely to sell their shares, which further drives prices downward.
Key Points of a Bear Market:
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Falling Prices: The majority of stocks see a downward trend in prices.
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Investor Pessimism: Many investors worry about further losses and lose confidence.
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Economic Uncertainty: Often, a bear market occurs during economic slowdowns, recessions, or when major crises occur.
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Opportunity to Buy: While prices fall, some long-term investors see bear markets as an opportunity to buy shares at lower prices.
Example:
Consider the period during the financial crisis of 2008–2009. As banks and businesses struggled, share prices of many companies dropped dramatically. Investors were worried and sold off their investments, leading to even lower prices. Someone who was able to keep a steady hand during that time—perhaps buying shares of solid companies when prices were really low—could later see strong gains once the market recovered. That period of widespread fear and falling prices is what we call a bear market.
How Do Bull and Bear Markets Affect Your Investments?
During a Bull Market:
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Growth: Your investments likely grow in value, and you might earn dividends as companies increase their profits.
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Long-Term Gains: Investors who buy early in a bull market and hold on for many years can see substantial capital gains.
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Confidence: The rising market tends to boost investor morale, encouraging more people to invest.
During a Bear Market:
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Risk of Loss: Share prices can drop quickly, which might be nerve-wracking if you need your money soon.
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Buying Opportunity: Savvy investors can take advantage of lower prices by buying shares at a discount. Remember the saying “buy low, sell high.”
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Emotional Impact: Bear markets can lead to panic selling if investors focus on short-term losses instead of long-term growth.
Real-Life Tips on Navigating Both Markets
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Stay Focused on Your Goals:
Whether the market is bullish or bearish, stick to your long-term financial goals. Avoid making impulsive decisions based on short-term market movements. -
Diversify Your Investments:
By spreading your money across different companies and sectors, you can reduce the risk. During a bear market, diversification helps because not all sectors or companies may decline at the same time. -
Consider Dollar-Cost Averaging:
Instead of investing one big lump sum, invest a fixed amount regularly. This strategy helps you buy more shares when prices are low and fewer when prices are high. -
Keep Emotions in Check:
Bull markets can make you overly excited, and bear markets might cause panic. The key is to maintain a disciplined approach. If you’re investing for the long term (for example, retirement), try not to worry too much about daily fluctuations. -
Have an Emergency Fund:
Before investing, make sure you have cash saved for unexpected needs so you’re not forced to sell shares during a bear market.
How to Start Investing in Shares
1. Prepare Your Finances
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Save for Emergencies:
Before investing, make sure you have enough saved up to cover 3–6 months of living expenses. This is your safety net if something unexpected happens. -
Pay Off High-Interest Debt:
If you owe money on credit cards or loans with high interest, try to pay these down first so you don’t lose more money than you gain. -
Set Your Goals:
Think about what you’re investing for, whether it’s retirement, a house down payment, or something else. Your goals will help decide your risk level and how long you keep your money invested.
2. Understand the Basic Terms
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Brokerage Account:
An account with a company (broker) that lets you buy and sell shares. -
Dividend:
Money paid by a company to its shareholders from its profits. -
Index Fund/ETF:
A fund that automatically buys shares from many companies so your money is spread out (diversified), which can lower your risk. -
Market Order & Limit Order:
A market order buys shares immediately at the current price. A limit order sets a price at which you want to buy or sell; the order is filled only if the share reaches that price.
3. Choose Your Investment Strategy
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Individual Shares vs. Funds:
If picking individual companies seems too challenging at first, consider investing in an index fund or ETF. This way, your money is spread across many companies. -
Dollar-Cost Averaging:
Invest a fixed amount regularly (like monthly). This means when share prices are low, your money buys more, and when they’re high, it buys less. Over time, this can lower your overall cost.
4. Open a Brokerage Account
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Find a Broker:
Research online brokers that offer low fees, no minimum deposit, and even allow you to buy fractional shares (if you have only a little to invest). -
Set Up Your Account:
Fill out a simple online application, verify your identity, and link your bank account. Once funded, you’re ready to start investing.
5. Research Before You Buy
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Learn About Companies:
Read up on a company’s products, how it makes money, and its future prospects. -
Study the Financials:
Look at numbers like the company’s earnings per share (EPS) and price-to-earnings (P/E) ratio, which can tell you if the shares might be a good buy. -
Diversify:
Don’t put all your money into one company or one type of industry. Spread your investments around to reduce risk.
6. Making Your First Purchase
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Decide How Much to Spend:
Start with an amount you’re comfortable with. For example, you might invest £100 to buy shares or fractions of shares. -
Place an Order:
Use your brokerage’s trading platform to place either a market order (buy immediately) or a limit order (buy at a set price). -
Confirm Your Purchase:
Once your order is completed, your shares will appear in your account. That’s it—you’ve just made your first investment!
7. Monitor Your Investments
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Don’t Panic with Every Dip:
Share prices go up and down. Instead of checking your account constantly, review it periodically (like once a month or quarter). -
Rebalance Your Portfolio:
Over time, some investments might grow faster than others. Adjust your holdings if necessary to keep your investments spread out. -
Keep Learning:
The more you learn about the market, the better you can make smart decisions. Read books, listen to podcasts, or take free online courses.
Common Mistakes to Avoid
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Chasing “Hot Stocks”:
Don’t buy a stock just because everyone else is talking about it. Do your own research. -
Lack of Diversification:
Avoid putting all your money in one investment. Spread it across different companies and sectors. -
Trying to Time the Market:
It’s very hard to predict exactly when prices will go up or down. A long-term “buy and hold” strategy works best. -
Ignoring Fees:
Be aware of trading fees or fund management fees, as they can reduce your profits over time. -
Emotional Investing:
Don’t let fear or excitement guide your decisions. Stick to your plan even when the market moves unexpectedly.
Tips for Long-Term Success
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Set Clear Financial Goals:
Know why you’re investing—whether it’s for retirement, a home, or something else—and let those goals guide you. -
Invest Regularly:
Keep adding money to your investments over time. This steady approach helps smooth out the ups and downs. -
Reinvest Dividends:
If your shares pay dividends, consider buying more shares with that money. This helps your investment grow faster. -
Stay Patient:
Remember that investing is a long-term journey. Don’t worry about small market changes and trust that your strategy will pay off. -
Keep Educating Yourself:
The more you know, the better your decisions will be. Look for resources like books by Peter Lynch or John C. Bogle, or sites like Investopedia.
A Real-Life Example
Meet Sita:
Sita is a young professional in Kathmandu who loves a popular local coffee chain called “Nepali Brew.” Here’s how she began investing in its shares:
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Prepare Your Finances:
Sita first makes sure she has an emergency fund and some extra savings—let’s say NPR 50,000—that she can comfortably invest. -
Open a Brokerage Account:
She signs up for an online brokerage account through a local provider, which allows her to easily buy and sell shares. -
Buy the Shares:
At the time of purchase, Nepali Brew’s share price is NPR 500. Sita decides to invest NPR 10,000, so she buys 20 shares (since 20 × NPR 500 = NPR 10,000). -
Watch the Growth:
Over the course of the year, Nepali Brew’s share price rises to NPR 750. If Sita decides to sell her 20 shares at this new price, she would earn:
20 × NPR 750 = NPR 15,000.
This means Sita makes a profit of NPR 5,000 (plus any dividends she might have received) on her original investment.
Investing in shares is about slowly building your financial future. Start small, educate yourself, and stick to a long-term plan. Remember:
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A share gives you a small ownership in a company.
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Investing can grow your wealth through rising share prices and dividends.
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Begin with a clear plan and focus on diversification.
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Regular investments, even if small, can add up over time.
By following these easy steps, you can join the world of investing without feeling overwhelmed. Every investor starts somewhere, and even a little investment today can make a big difference in the future.