esoteriic.com

Here we provide a summary of the stock market and what it means to invest there. Why should anyone consider in shares (US English: stocks) in the first place? Are there any advantages? What are the risks? All good questions and ones I will address in this post. It is aimed at the layman with no experience investing and is hopefully easy but interesting to read.

The stock exchange, such as the one in London (LSE), lists all the potential companies that are publically traded. Those that feature on the exchange are companies that you can buy a piece of. When you buy a share, you will (perhaps unobviously) own a part of the company. This gives the possibility of shaping how the company is run.

When a company first appears on a stock exchange the process is called ‘floating‘ and also called the Initial Public Offering (IPO) . All shares purchased at this time come directly from the company. You give the company some money and they give you a percentage ownership of their company. Unlike a loan the money does not have an end date for when it should be paid back, nor is there a guarantee of interest being paid. Hence buying shares is seen as more risky. You may not get any of your money back.

The reason any of us would want to take such a risk is the possibility of (1) receiving a share of the companies profits (also called dividend) and (2) the price of the share going higher. The latter case only matter if you decide to sell the shares you own. Dividends are important and can generate a lot of wealth. Any company that doesn’t pay a dividend should be treated with suspicion.

Dividends can be paid out couple of months (or once a year) in a similar manner to interest generated in a cash savings account. The greater the percentage you own in a company, the larger the fraction of the profit that you can take. Over a long time this return can be better than a savings account. This effect combined with a rising share price can see the value of your investment increase many times. It is entirely possibly for shares to double your the value of your investment and more.

The inherent risk of investing must be accepted if you wish to get such high returns on your investment. Cash just doesn’t provide the same return on investment. Providing a loan to a company (that is, buying a corporate bond) provides a lower rate of return but also lower risk.

Once a company has floated and its shares are out there in the market, then if you come to buy a share in that company than your money does not necessarily go to that company. If Ross buys his shares from Tom then he is giving his money to Tom, not the company. The part ownership (share) of the company that Tom used to own now belongs to Ross. A company doest not tend to float (offer) all of its shares at the time of IPO. The directors of the company may buy or simply own vast amounts (especially if they found the company). Furthermore, a company may buy back its shares if the directors believe that their own company is for sale at a good price.