🌈 A quick taster for you:
- Owning a share makes you a co-owner of the company that issued the share.
- Stock exchanges are market places where shares are traded.
- Diversifying your investment into different shares or funds can help to reduce risk.
🧐 Why do I care?
Our goal is that each ‘The Briefing’ helps you learn something new about the financial world — and shares are a big part of that world. So if you’d like to understand what shares actually are, then you’re in the right place.
🔍 What exactly is happening here?
- What are shares?
Shares are also called stocks or securities. You can own shares in a company or, more precisely, a stock corporation. For example: if you buy shares in Adidas for 1000€ then you become a shareholder and therefore a co-owner of Adidas. So you own a very small part of Adidas — yay! As an investor, you can expect your share to be worth more in the future than what you paid for it — double yay!
- How do shares work?
Shares are primarily traded on the stock exchange. Okay, sounds good. But what exactly happens on a stock exchange? Well, there are many different stock exchanges all around the world, and they are where sellers and buyers of shares come together. Appropriate prices for shares are decided, and these prices are determined by supply and demand — the ‘supply’ is how many sellers want to get rid of that particular share, and the ‘demand’ is how many buyers want to purchase them. If the supply is greater than the demand, the price will fall. If demand is high, but the supply is low, then the price will rise. And the stock exchange has regulations to ensure that prices and transactions are fair. For example: companies listed on the stock exchange need to disclose their financial information every 3 months, so that it’s easier for investors to decide whether or not to buy shares in that company.
- How do you make money with shares?
You can make money by buying shares, and then selling them for a higher price later on — and the profit you make is called return on investment. Buying shares is popular because the chances of profit are higher than with a deposit account or a savings account, where you get little to no interest. In addition, certain shares pay an annual dividend, where you receive a portion of the company profits.
- And what are the risks?
Investing in shares always involves a risk! If the share prices of a company fall, then your shares in that company are worth less. So if you sell when the price is lower than what you bought it for, then you’ll make a loss. There is also market risk to consider: political or economic events can affect stock prices. For a recent example, just look at what happened to stock prices when Covid–19 hit! Or think about the VW emissions scandal where, despite VW making good profits, share prices still fell as people wanted to sell their shares, and not many investors wanted to buy them.
🤓 What does this mean for me?
- Shares offer you the chance to earn money
By investing in individual shares, or in funds, you can earn money by making a profit when the share prices rise. Plus, you can receive dividends from certain shares.
- But be careful!
As a beginner it’s best not to purchase shares in only one company, because this involves a lot of risk. It’s wise to reduce the risks by diversification and spreading your money over different stocks, stock funds, or stock markets! That's why many beginners start by investing in ETFs or funds.
- Not 2 Fast and 2 Furious
Before you actively consider investing, spend some time carefully looking into the subject — because investing in shares isn’t about making a quick buck. It’s more about making investments for the long-term. This way you can also sit out a worldwide crisis. You can find more on this topic in our older articles.
- Fun Fact: Some people don’t buy shares to make a profit, but just to have a stake in a company that they like, so that they feel connected to that company.