Shares are one of the most rewarding long-term investment tools in the financial market. When you buy a share of a company, you’re buying a small portion of the ownership of the company. Along with other shareholders, you have voting rights, as well as accessing the potential financial gains of the company over time. However, before you get started with share investing, there are some essential things you need to know in order to successfully balance risk with reward…
What causes share prices to move?
Share prices are influenced by supply and demand. Share prices tend to rise if the future prospect of a company is good and fall if the performance is not promising. If a company is making profit or is growing and is likely to make a profit in the future, investors will buy the shares and the price will rise. For instance, Asos, a world leading online fashion retailer, recently announced that it would increase investment in people, technology, marketing, and logistics, including expanding its fulfillment center in the US. Stunning sales growth has also sent Asos shares up at 5.219 pence in November 2013 as compared to a share price of 4 pence in 2003.
Share prices are also affected by economic conditions. When the economy is doing well, companies are more likely to perform well and deliver strong profits. Investors are more confident in buying the shares of these companies. However, if the economic condition is poor or unstable, the companies’ performance will suffer. Investors may fear about future profits and hence reduce the demand for shares. Share prices will fall as a result.
Why invest in shares?
Although buying shares involves risks, the returns are high over the longer term. Shares tend to perform better than bonds, property and cash accounts. As shareholder, you benefit from a share in the profits of the company in the form of dividend payments, which are normally paid twice a year. Furthermore, shareholders have the opportunity of capital growth when share increases in value over time. It’s still important to note that neither of these returns is guaranteed.
Which shares are good investments?
Stock picking means you have to do your research. Find out about the fundamentals of the company by looking at its operation and economic health, including assets, liabilities, profits, losses, debts, and future growth. Read finance news and company annual reports to make an informed choice. Whichever companies you choose to invest in, it’s important to diversity your investments and spread your risk by holding a portfolio which includes shares of companies in different business sectors. The earnings of defensive sectors such as healthcare and telecoms are relatively stable and predictable during both good and bad economic times. Cyclic sectors, on the other hand, such as finance and construction are more susceptible to adverse economic impacts. A diversified portfolio helps to ensure that if one sector is not performing well, you will reduce your overall losses by spreading your money over other sectors that may be doing better.
Before deciding how much to invest, you must assess your investment profile based on your investment objectives, time horizon and risk tolerance level. Think about how much of a profit you’re aiming for, how long you expect to be on the market and how much you’re prepared to risk. You can then enter the trading floor armed with a good amount of knowledge and forethought.
Image by Andreas Poike, used under Creative Comms license