Now it’s time to learn about investing in shares.
But, first things first. Just what is a share, anyway? And how exactly do you make money by investing in them?
What is a share?
Quite simply, a share is a tiny piece of a big business.
Companies sell shares to the public in order to raise funds for expansion and growth.
Pause for a moment and think about a company that produces something you use every day or week.
You might buy your groceries at Shoprite.
Or maybe you’re a Safaricom subscriber.
Perhaps you enjoy a Guinness while watching the big football match.
All three of these companies, Shoprite, Safaricom, and Guinness Nigeria, consist of hundreds of millions of shares owned by tens of thousands of investors.
The exact share count of each company is in the table below:
So, the moment you buy one share of a company like Shoprite, you suddenly own a tiny little piece of every Shoprite store, truck, and cash register. You own a tiny little piece of every item of food sitting on the shelves. You even own an itty-bitty piece of the stapler that sits on the CEO’s desk.
Pretty cool, right?
As a shareholder, you really are a part-owner of a business. The most successful investors never lose sight of this.
How do you earn money investing in shares?
You can make money from shares in two basic ways — dividends and price appreciation.
Dividends are periodic cash payments that a company makes to its shareholders. They are the excess profit that the company has earned in the course of its financial year and are either deposited directly into a shareholder’s bank or trading account or mailed to them in the form of a check.
Here’s the dividend that Shoprite, Safaricom, and Guinness Nigeria currently pay for each share of stock.
|Dividend per Share|
Typically, the dividend payment is pretty small compared to the price that you pay for a share. It’s usually in the range of 1 – 5% of the share’s current price. But if the company is growing and profitable, the amount of the dividend will increase steadily with each passing year.
Keep in mind, however, that not all companies pay dividends. Some young companies decide to use all of their extra cash to grow and expand. Other companies are forced to reduce their dividend or stop paying it altogether if they fall on hard times. So, dividends are never a sure thing.
The most consistent dividend-paying companies tend to be big and well-established. Their profits are so large that they can fund both growth and a dividend.
The other big reason to invest in shares is because of their potential to increase in value over time.
Share prices rise and fall from day to day. They are determined by the lowest price that any one shareholder is willing to sell his or her shares for.
So, if a company is doing very well or if its future looks promising, its share price will tend to rise. Conversely, if the company’s performance is poor or if it encounters a big obstacle to growth, its share price will tend to fall.
Here’s how the share prices of the companies mentioned earlier have changed from five years ago.
But, like dividends, there are no guarantees that a share’s price will rise. A share that’s worth R100 today might be worth R500 five years from now, but it might also be worth zero if the company fails. It all depends on the performance of the underlying business and investors’ expectations about its future potential.
As an investor, the key is to buy shares of a good company at a fair price. Do this and there’s a very good chance that the value of your shares will rise over the long-term. Then, at some point in the future, you can sell them for a healthy profit.
For more background on shares (and why companies sell them to investors in the first place) check out the story of Boniface.
It’s Your Turn
What questions do you have about shares? Let’s hear them in the comments! And stay tuned for future articles as we explore exactly how the stock market works.