What is a Company Share?

A share in a company is just that – you own part of the company. If it is a publicly quoted company, then yes, admittedly, your share in that company may not carry much control but you do own a share in the company with a right to attend and vote at the company’s Annual General Meeting, as well as the possibility to receive any dividend payable the company and the opportunity to make a “capital gain” is the share price increases.

When we talk about shares we are generally considering those shares in Public Limited Companies (PLC’s) which are quoted on the stock exchange or AIM (Alternative Investment Market – a market for shares in smaller companies).

How are Shares Valued?

A share is a tradable investment in a company and, as such, its price is not fixed but determined by the power of supply and demand within the marketplace.

If more people want to buy shares in Company A than sell shares in Company A, the price of the share will increase, until the number of people who are willing to sell their shares in the company matches the number of people wishing to buy shares in the company.

Conversely, if a lot of people wish to sell shares in a company, and there are too few buyers, the share price will fall – typically demand for any share will increase as the price falls as more and more people can afford to buy that share.

Why own a Share in A Company?

There are basically two ways in which a normal investor can benefit from owning a share in a company – capital growth and dividend income.

Capital growth occurs when the value of the share increases over time – many investors will review the stock market on the lookout for shares which they feel are currently undervalued, based on what they feel will be the future trading outlook for the company, and hence profitability, of the company in which they wish to invest.

For example, company X has a current share price of 90 pence – you have done your research and have concluded that company X has product Y at the research stage and when launched next year, product Y will increase the amount of money flowing into the company, with a corresponding increase in profits.

You feel that based on the information you have that the shares in Company X will be worth 130 pence in the next 12 months. You therefore buy the shares in company X today at 90 pence and hope that they will increase in value to 130 pence, at which point you plan to sell and make 40 pence profit (less any dealing costs and taxation which you might incur along the way).

Profiting through Dividends

The second way to benefit from investing in a company share is through receipt of a “dividend”. When a company makes a profit, the board of Directors will meet to discuss what proportion of the profits will be retained to help fund and grow the company, and what proportion of profits will be distributed to shareholders, in the form of a dividend, to provide the shareholder with a return on their investment.

Are there risks involved?

Yes – the price of the share is determined by the market (supply and demand) for the shares – if more people want to buy the shares than sell them the price will rise, and conversely, if more people wish to sell than buy the price will fall.

Firstly, if you buy a share in a company today for say 120 pence, there is no guarantee that that share price will be maintained at 120 pence – it could go down as well as up. All investors need to be aware of this before making an investment in a single company share – the investor needs to ask themselves “what effect on my wealth will it have if the share I am buying falls considerably in value?”.

Secondly, there is also the possibility that the company could “go bust” or cease trading. In this scenario, liquidators would be appointed to realise whatever they can from the assets of the company and to repay any debts the company owes, tax outstanding etc. Ordinarily shareholders in this respect fall way down the pecking order – it is not uncommon in the case of insolvency for the ordinary shareholders to receive just 1 penny in the pound on their investment, if anything.

Can I reduce the Risk?

Yes – if you have sufficient funds to invest you could buy a “portfolio” of shares in more than one company – by investing in a range of shares you are hedging your bets by not having “all your eggs in one basket” – some shares may rise in value, some may fall in value, some may go bust – your hope is that more of the shares will make you a profit than ones that make you a loss.

If the amount you have available to invest is rather modest then you could consider investing in a “mutual fund”. A fund manager runs the fund and takes money in from a large number of investors – the fund invests in a diversified portfolio of shares or assets in line with the investment objectives of the fund.

The investor in this scenario benefits from the active management of the fund by a professional management team as well as the ability to invest in a wide range of different companies thereby reducing the risk of their investment.

Learn more About Company Shares

“Investing in Shares for Dummies” is a great introduction to this fascinating topic. Buy now from Amazon.

To download this Article as a PDF, right-click on the symbol below and “Save Target As…” 

Fund Performance - Online Resources(321kb)

The importance of reviewing investment funds

Many people invest in pensions, ISA’s, investment bonds, endowments etc. without actually giving much thought to the funds in which they are investing.

Invariably we find that the money has simply been invested in a “managed” fund and little thought has been given historically to investing in a decent fund or portfolio of funds in line with the investor’s attitude to investment risk at the time the investment was taken out.

Over time, people’s attitudes to investment risk do change and it is vitally important that you regularly review what is happening with the funds in which you are invested.

Not Matching Attitude to Investment Risk

Many portfolio’s and funds are out of keeping with the spread/diversification of portfolio into which many people should be investing. For example, we tend to find that many “managed” funds are nothing more than equity funds – not necessarily investing 100% in stocks and shares, but certainly in a proportion which far outweighs what that person ideally should be invested in given their attitude to investment risk.

Poor Performance

Many funds are lacklustre – they have historically performed in a mediocre, if not, terrible fashion. Although many might argue that past performance is not a guide to the future we tend to believe that there may be a correlation between performance and such factors as fund manager, investment style, research methodology, liquidity of the fund etc.

This leads nicely into diversification…..

Funds not Diversified in line with Attitude to Investment Risk

Many people are unaware that under many pension and investment contracts you are not limited to investing in just one fund. Most modern plans will allow you to invest in up to 10 or more funds and a choice of both internal and external funds may be available. We strongly suggest that you contact your pension/investment provider to find out what fund(s) you are currently invested in as well as to obtain a list of the funds into which you can switch.

Also enquire as to whether there are any switching costs involved – most policies will allow some or all fund switches free of charge.

Reviewing Funds – Performance, Construction etc

In terms of reviewing your existing and potential investment funds there are several sites which you should consider taking a look at. The good thing is that the information they provide is free of charge!

Trustnet

Trustnet offers information on a very wide range of funds in terms of performance etc. The first tab on the site shows “Investments”. if you hover your mouse over the various sections – “Unit Trusts and OEIC’s”, “Investment Trusts”, “Pension Funds” etc – you will see a dropdown menu. We suggest initially that you click on “A-Z Group Factsheets” – this will show a list of pension/life companies for whom they hold fund information.

The information is updated on a regular basis is comprehensive in terms of what information is provider – such as performance, what is invested in the portfolio, charges, information on the manager, graphs showing performance against the sector average etc.

When you have found the fund in which you are invested you may be able to access the providers own fund factsheet by looking down the right-hand side of the screen.

Morningstar

Similar in make up to Trustnet – it really comes down to personal choice with regard to which site you prefer.

Summary

It is important that you review the funds in which you are invested on a regular basis and the above two sites will provide valuable, independent information in respect of your existing funds, as well as information on funds into which you may decide to switch within the universe of funds provided by your pension/life company.

Important: Before making any decision to switch we suggest that you consult an Independent Financial Adviser as to whether any choice of investment fund into which you may switch is suitable for you.

We would love to know what other online resources you use – please leave a comment below.