What are stocks and shares?

Buying shares has historically given a better chance of making your money grow over a long period than other investments, but with that potential comes a higher risk of losses.

Companies issue shares to raise money. When investors buy those shares, they effectively get a stake in the business and the chance to make a profit if the company does well.

When you become a shareholder in a business you usually acquire certain voting rights, although only very large shareholders have any real say in how the company is run.

Shares are sometimes also known as equities, securities, or stocks.

 

What are the benefits?

Shares can rise in value over time and you may be able to sell them for more than you bought them, with the difference in those prices known as your capital growth.

If you buy $1,000 worth of shares and you sell them for $3,000, then your capital has grown by $2,000, prior to capital gains tax.

Another way you can make money by investing in shares is through dividends.

When a company makes a profit, it may choose to distribute a portion to its shareholders through dividend payments.

Companies are not obliged to pay dividends but if they decide to, they will typically announce the size of the dividend in tandem with their full or half year financial results.

Larger, well established companies are generally more likely to pay dividends than smaller, newer companies.

It's important to remember that just like share price growth, past dividend payments are no guarantee of future ones.

 

What are the risks?

Shares are considered to be the most risky of the asset classes.

The price of shares can fall as well as rise, which means you could lose money. In the worst case scenario, you could lose all the money you invested in the shares of a company if it goes bust, as shareholders are last in the queue to get their money back.

Again, larger, more established companies are considered less risky than smaller, start-up companies as they are less likely to go out of business, but the disintegration of Lehman Brothers in the US, proved that it can still happen.

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