When discussing trading or investing, people often focus on share trading, a traditional and widely popular way for individuals to engage with financial markets. But what exactly are shares, and how do they work?
What are Shares?
A share represents a unit of ownership in a company. When individuals purchase shares, they become shareholders and own a portion of the company proportional to their shareholding. Shares are traded on stock exchanges and allow companies to raise capital for growth and operations. Shareholders may receive benefits such as dividends, which are portions of the company's profits, and they have the potential to earn returns through increases in the share's market value.
How does it work?
If a business is valued at £10,000 and has issued 2,000 shares, each share would initially be worth £5 (£10,000 ÷ 2,000). As share prices fluctuate, so does the company’s overall valuation. Investors buy shares with the expectation that the company will grow in value, allowing them to sell the shares at a higher price and make a profit. For businesses, selling shares is a way to raise capital for projects like expanding operations or developing new products. If the funds are used effectively, the company becomes more profitable, driving up the share price and benefiting shareholders.
What influences share prices？
Share prices are determined by supply and demand, which are influenced by several factors:
- Earnings: These are the profits a company generates. Positive earnings results can boost a company’s share price, while disappointing earnings often lead to declines. Companies typically release earnings reports on a quarterly or annual basis, creating potential price swings around these announcements. Investors use tools like economic calendars to anticipate these movements.
- Market Sentiment: Perception of a company’s future performance plays a critical role in pricing. Factors like industry changes, economic conditions, or confidence in leadership can influence demand for shares.
Ultimately, if demand for a company’s shares exceeds the available supply, prices rise. Conversely, an oversupply leads to falling prices. This dynamic creates volatility that makes share trading both challenging and potentially rewarding.
Did you know?
An Exchange-Traded Fund (ETF) is an investment fund traded on stock exchanges, much like shares. ETFs pool money from investors to invest in a diversified portfolio of assets, such as stocks, bonds, or commodities, and are designed to track the performance of an index, sector, or specific strategy. Similar to shares, ETFs can be bought and sold during market hours at fluctuating prices. However, unlike individual shares, ETFs provide diversification by offering exposure to multiple assets in one investment.
