What Are Shares and How Do They Work?

What are shares?

A share represents partial ownership in a company and is also commonly referred to as an equity, stock, or security. When you invest in shares, you buy an ownership stake in a business or financial asset and become a shareholder.

As a shareholder, you participate in the company’s financial performance. This may include benefiting from share price appreciation and, where declared, receiving income in the form of dividends. Shares are typically bought and sold on regulated stock exchanges.

Why invest in shares?

Investing in shares offers several potential advantages:

• Growth and income potential: Shares may deliver capital growth over time and, in some cases, regular income through dividends.
• Global diversification: Shares provide access to a wide range of industries, sectors, and economies worldwide.
• Liquidity: Most listed shares can be bought or sold during market hours, subject to market liquidity.

Buying and selling shares on stock exchanges

Publicly listed shares are bought and sold on stock exchanges. A stock exchange is a regulated marketplace where investors can buy and sell a broad range of financial instruments, including shares, bonds, and funds.

For a company’s shares to be traded, they must be listed on an exchange. Each exchange applies specific listing requirements, which may include minimum financial performance thresholds, governance standards, or a minimum number of shares in public circulation.

Dual-listed shares

Some companies choose to list their shares on more than one exchange, known as dual listing. This can offer several potential benefits:

• Increased liquidity by expanding the pool of available investors
• Broader investor access across regions and time zones
• Eligibility for inclusion in additional stock market indices, which may increase demand from index tracking funds

However, maintaining multiple listings also increases regulatory and administrative costs for the issuing company.

Understanding liquidity

Liquidity refers to how easily a share can be bought or sold without significantly affecting its price. Shares with high trading volumes are typically more liquid, making it easier for investors to enter or exit positions. Shares that trade infrequently may be considered illiquid and can be harder to sell quickly at a desired price.

Key investment risks

While shares can offer attractive long term returns, investing in the stock market involves risk. Share prices can fluctuate, and the value of investments may fall as well as rise. Past performance is not a reliable indicator of future performance.

Some of the key risks include:

• Risk of Capital Loss: The share price may fall below the price which you originally paid for the share or may even fall to zero.
• Market risk: Broader market movements, influenced by factors such as economic conditions or interest rate changes, can affect the value of all securities.
• Sector specific risk: Certain industries may experience periods of underperformance due to economic, regulatory, or geopolitical events.
• Stock specific risk: Individual companies may suffer share price declines due to weak financial performance, adverse news, or changing investor sentiment.
• Currency risk: Investments denominated in foreign currencies may be impacted by exchange rate movements when returns are converted back to your base currency.

Conclusion

Shares can be a valuable part of a long term investment portfolio. Over long periods, shares have historically delivered average returns of around 7–9% per year, helping investors grow their money ahead of inflation. While share prices can rise and fall in the short term, staying invested for the long term has typically rewarded patient investors. It’s important to understand that higher returns can come with higher ups and downs, and past performance does not guarantee future results.

For many investors, using a fund rather than buying individual shares can be a sensible approach. A fund invests in a wide range of companies, spreading risk and reducing reliance on the performance of any single business.

Find out more about trading with Davy Select. Visit our how to buy shares online guide.