What are shares? Before one decides to invest in shares it is important to understand what shares actually are. As simple as this question might sound, you should not invest if you are not entirely aware of what shares are, what you are doing and what the risks and responsibilities are if you own shares. Let’s break it down.
If someone refers to shares, stocks or equities he is referring to the same thing. These three expressions are synonyms and in the context of investing refer to one “piece” or “share” of a company. There are many reasons why someone would choose to buy shares of a company. The most common reason is to buy a share is the expectation of capital gain in the future. That means you buy a part of the business as you hope the value fo the business – and therefore its shares – increase in value over time. In this sense capital gain can either be achieved through capital growth of the investment or through dividends.
If you buy a share or several shares of a company, you practically own a part of the business. Instead of starting your own business, you can simply buy into an already established business. If the company is publicly listed on the stock exchange you can simply buy a certain portion of that company and therewith become an investor.
In times of computers, high-speed trading, and virtual transactions, many investors forget that they actually own a part of the business and that it is more than just a digital number on the screen. If you decide to invest in a business, we generally recommend that you know everything about the business that you are about to invest in and that it is in line with your investment objectives. A short-term trader might see this differently as he simply looks for chart patterns such as support and resistance levels and potentially doesn’t care what the business does and what the fundamental future outlook is. Also, make sure that you understand the risks and rewards of buying shares.
You can buy a share of any business as long as the business allows you to do so. In order to understand this we need to distinguish between public and private companies.
Public vs Private Companies
It is considerably straightforward to buy shares in a publicly listed company which is listed on any of the major stock exchanges. Those companies have raised proceeds in the initial public offering (IPO) and are now trading on the secondary exchange, in other words on the stock exchange. These companies have deliberately gone public and are now offering shares of their business to the general public. Those companies have a quote market value and especially large companies have high liquidity which allows investors to buy or sell shares instantly.
If the company is not publicly listed, you will not be able to buy shares on the stock exchange, however there might still be ways to invest in the business privately. Raising money from private investors is a common way to raise capital if the company does not intend to list on the stock exchange for whatever reason that might be. Some companies allow you to simply buy into the company or alternatively offer asset purchases or entirely foreign ownerships. Generally the investment horizon for private investments is longer than for public companies, as they are rather illiquid and terms and conditions need to be determined before any transactions can be made. As there are fewer investors, the influence on the direction of the business might potentially be greater.
Ordinary shares generally come with one voting right for each ordinary share. Most shares on the Australian Securities Exchange (ASX) are ordinary shares with no special rights. However the holder is entitled to vote at the Annual General Meeting (AGM) of the company and receive dividend payments if applicable. The more shares you own the more votes you have. Preferences shares may have voting rights attached too, however this might depend on the terms of the shares.
Any other types of investments such as options or contracts for difference (CFD’s) typically don’t come with voting rights.
The fee for buying or selling shares is commonly known as ‘brokerage’ fee and is charged by an agent to execute the transaction on your behalf. The fee may vary depending on your broker, the size of your position or any other relevant reason. The fee can either be a flat fee or a percentage relative to your position size.
You have to buy or sell shares through an agent, commonly referred to as “broker” or “stockbroker”. If you want more information on how to buy shares in a publicly listed company refer to our education article ‘how to buy shares’.