Understanding Investments: Stocks and Shares
Stocks and shares may be one of the topics you require financial advice about from your adviser. After all, it is difficult to know which shares to purchase, and how to go about doing it. There are many factors to consider such as current and future market conditions. Your financial adviser is of course best placed to guide you on your journey into stocks and shares, but it doesn’t hurt to have a bit of background information before you sit down with them.
What is a share?
It is likely that you have seen news items on the stock market (such as the London Stock Exchange); these often include current prices with arrows indicating whether they have fallen or risen. By purchasing a share, you are buying into a company and are then dependent on the performance of that organisation. This means that you may either receive a share of the company’s profits, or a share of its losses.
Share prices
Existing company shares are traded on the stock market each day. The prices, like many goods and services outside the stock market, reflect supply and demand. So if more people want to purchase a particular share, it is likely that the share price will rise. On the flip side, if more people want to sell that particular share, the price of the share is likely to decrease.
Short term changes in the prices of shares can also be attributed to other (macro and micro) factors, which should be considered before purchasing shares. These factors can affect the psychology of investors in the short term; this is commonly referred to as the “herd mentality”.
Macro factors
- Political events
- Forecasts/warnings
- Legislative changes
- History/policy
- Unexpected events
(terrorism/natural disasters) - Interest movements
- Inflation forecasts
Micro factors
- Company profit
- Company’s dividend
- Merger and acquisition activity
- Changes in Management
- Activity in competition
- Valuation of shares
Investing in shares
Many experts would suggest spreading the risk of your shares by investing in different companies, markets and geographic areas. This plan may help to minimise losses if a certain market faces strains. The stock market can change quite dramatically from one day to the next, so it is important to remember that investing in stocks for a long-term approach may be more appropriate.
Your financial adviser will gauge your attitude to risk, as well as offering you further advice about stocks and shares before you need to make the big decision about where to invest.
