What are stocks and shares?

by 10 Apr, 2018

Putting money away for a rainy day? Stock markets can offer a greater return on your savings.

What are stocks and shares?

For all intents and purposes, the two words (stocks and shares) are practically interchangeable. A stock or share is a piece of a company, which an investor purchases. The purchasing of shares makes the investor a shareholder or stockholder of that particular firm.

Being a shareholder in a business gives the investor a slice of the company’s success. As the share price of the company’s stock rises, so does the value of the investor’s initial investment. As a bonus, most companies also pay dividends at the end of each quarter during a financial year. A dividend is a cash payment from a company’s earnings.

Why should we buy them?

The stock market can provide healthy returns on an investment. This means that by putting your money into stocks, you have the potential to turn an attractive profit on top of the amount you initially put in.

Many savers may choose to simply put their hard-earned cash into a savings account with a bank, which pays them interest, however we are living in an era of low interest rates, so the potential returns are generally miniscule compared to the opportunities the stock market presents.

The caveat is that the stock market can be more risky as opposed to other investment vehicles (the term refers to other modes of investment ‘instruments’) like bonds. This is because stock prices are usually prone to higher levels of volatility as they are tied to the fortunes of individual businesses, but are also subject to external forces in the global economy which can prove to be less predictable.

What makes stock prices go up and down?

The price (or value) of a stock is related to several factors. Primarily, it is tied to the financial success of the particular company which has issued the shares, but there are more variables at play. These variables may include the health of the sector the company belongs to (i.e. healthcare, or technology), as well as the health of the global economy as whole.

In broad terms, if the market deems a company to be successful or valuable, the price will rise accordingly, while the reverse is also true.

Price changes are related to market sentiment (how other investors feel about the stock). This is why negative news about a company may cause its share price to fall, while positive news will make its share price rise. It is feeling and sentiment which drives stock markets.

If the share price increases above the value at which the investor initially bought the stock, they will start to make a profit on top of their initial investment. The reverse is also true.

What is a share broker?

You may hear this term often when researching how to invest. A share broker (or stockbroker) is an individual or institution who buys and sells stocks or other securities through a market on behalf of a client for a fee or commission.

Fortunately, with the advent of online trading, the days of having to communicate with an individual broker are a thing of the past.

What is fractional share trading?

Fractional share ownership refers to a process whereby investors can choose to purchase parts of a share, as opposed to paying the full share price.

This is a particularly attractive option for beginners to the financial markets, who may want to invest in their favourite businesses, but do not yet feel totally comfortable with paying the full market price for a share of a major company such as Amazon. This is understandable given that purchasing a single share of Amazon would cost an investor just over $1450 at the time of writing.

At Invstr we have lowered the financial barriers to entry for new investors, by creating the Invstr Portfolio in association with our partners at US brokerage firm DriveWealth.

The Invstr Portfolio allows investors to start investing in US listed equities quickly and easily, with a simple sign-up process. From there, investors can choose to buy whole shares or just parts of them in order to kick start their investment portfolios.

We have also designed our investment game in the app so that Invstr users can compete for the chance to win weekly cash vouchers to grow their own portfolios. The investment game uses virtual capital only, allowing beginners to get a feel for the markets, but the rewards for great performance are very real!

What are stock fundamentals?

Looking at the fundamentals of a stock involves analysing the core features of a business to determine whether it is a good or bad potential investment. 

Usually, fundamentals refers to the key financial metrics of the business itself, in other words, how well it is performing financially. This may include its earnings data and cash flow, stock valuation data, balance sheet and income statements and dividend data.

Financial statements are integral to fundamental analysis, but they are not the only factor to look at. What’s also important is the statements the firms management makes. When a company releases an earnings statement, this may contain forecasts for future growth and the key reasons for why it has performed at a certain level.

Looking at the fundamentals of a stock is important because it allows investors to understand a firm’s historical and current strengths and weaknesses, as well as how it may perform into the future.

What is an initial public offering (or IPO)?

An IPO is when a company issues stock for the first time to the public, offering its shares through a listed exchange, such as the New York or Hong Kong stock exchanges.

Some recent famous IPO’s include Snapchat which went public in March last year. Shares floated on the US stock exchange opening at $24 (£19.62) a share, reaching  $24.48 (£20) by market close – a 44 percent jump valuing the company at $28 billion (£23 billion).

The largest IPO of all time came from ecommerce giant Alibaba. Its 2014 listing on the New York Stock Exchange raised $21 billion for the company and investors.

Some hotly anticipated IPO’s to watch out for include AirBnB, Dropbox and Lyft.

Want to learn more about the markets and how to become a better investor?

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ALL RIGHTS RESERVED © INVSTR LTD. 2018

Risk Disclosure:
Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order.
Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.
Brokerage services are provided by the following:
US-traded securities, including fractional trading, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here.
India account traded securities are provided by SIC Stocks & Services PVT Ltd. SIC does not make any personal recommendations to buy, sell or otherwise deal in investments. Investors make their own investment decisions. The services and securities provided by SIC may not be suitable for all customers and, if you have any doubts, you should seek advice from an independent financial adviser. For more information and disclaimers, click here.

 

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