A share represents a stake in a company, making “investing in shares” equivalent to an entitlement to participate in the company’s future profits.
A company divides its capital into shares that are offered for sale to raise capital. Thus, a share is an indivisible unit of capital and is used for equity financing, especially by larger companies. The current value of a share is called its par value or cash value. Often, a company distributes the profits generated in the form of dividends to return some of its capital to investors.
Higher yields than fixed-income investments
The yield on a stock is significantly higher than on fixed-income investments such as government bonds. A Yale University study found that stocks gained more than a hundredfold from 1900. A stock is calculated according to several principles, but there is the principle that the market determines the value of a stock. Furthermore, there is the so-called price-earnings ratio (P/E ratio), which indicates how much profit has been earned in the current year in relation to the share price. The lower the P/E ratio, the more profitable the share. Investing in shares is therefore a common form of investment to achieve a higher return than with other investments. The investor benefits on the one hand from dividends and on the other hand from possible price gains.
Of course, in return, the risk of a share is significantly higher than with fixed-interest investments. In the event of a poor economy or gloomy future prospects for a company, the share will fall in value. The investor accepts this higher risk in order to achieve a high return.
Furthermore, it is extremely advantageous with a share that the limit for investing is significantly lower compared to real estate, for example. While a real estate can be bought only with a capital of over 50000 euros or more, is already from 1000 euros in shares invest sensibly.
What to consider when investing in shares
Investing in shares requires, in order to guarantee success also a precise selection at the banks. The investor should make sure to choose a bank that offers low fees for trading in stocks. Often, online banks can offer much better rates than the established banks, which is why a conscious choice of financial institution is worthwhile.
In general, investors should proceed calmly and prudently when trading stocks. Even if a share falls in one day by several percent, this is still no reason for panic, because it will grow in the long term with good prior analysis. Conversely, investing in stocks also requires frequent monitoring of the markets. If the investor recognizes that a crisis is approaching, it may be better to sell his shares with slight losses in order to acquire them later at another time at a lower price.