Many people are interested in investing in the stock market but do not know all the complexities surrounding it. This guide provides an overview of how it works and what the investor is buying into.
When an investor buys shares in a company or organisation, they are effectively buying part of that company or organisation, or a share of it if you will. Subsequently, the performance of the company will determine the value of the share, and the overall investment. As the performance of the share is profit related, a company which performs well will see the share rise in value, with the opposite taking effect in relation to an underperforming company.
Investors in a company are called shareholders, and they receive payouts in the form of dividend payments which fluctuate on the performance of the company overall.
Investments in shares are also known as ‘stocks’ and ‘equities’, and the stock market falls into two separate categories, the primary market and the secondary market.
Company Motives
There is but one reason for a company to sell shares and that is to raise capital to expand it. Companies do this in two ways.
Primary Market
Issuing shares on the stock market for the first time, also known as ‘floating’.
Companies which have already floated and are offering new shares to raise capital.
Secondary Market
Most investment in shares is within the secondary market, where company shares are traded daily. Movement in the price is relative to the company’s performance over time and the demand for the shares can also drive the price of a share upwards.
Share Price
Share price is reflected by supply and demand.
Share prices rise when the demand for a particular share is high. In other words when more investors wish to buy a share in a company rather than sell one.
The share price will decrease when more people wish to sell shares in a company than there are buyers. The lower share price makes a share more attractive to buyers.
There are other factors involved in determining the price of the share with events in the wider world playing a part, as well as the psychology of investors.
The factors which determine share price are broken down into geopolitical and economic factors (Macro), and factors associated with the company (Micro)
Macro Factors include political events, unexpected events such as terrorism or natural disasters, forecasts, interest movements, and legislative changes, while micro factors centre on company profits, merger and acquisitions, competition activity, share valuation, and management changes.
If you are considering investing in stocks and shares the golden rule is to spread the risk and not put all your eggs in the one basket.
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