Shares 101: the beginner's guide to ownership

Your complete guide to understanding shares

When you hear people talk about trading or investing, they're usually talking about shares. It's the most popular way to trade financial markets, especially among individual investors.

If you've got a pension plan, chances are you're already investing in shares without realising it. But what exactly are shares? And how do they actually work?

Let's break it down into five essential steps.

Step 1: Understand what you're buying 🏢

A share is simply a unit of ownership in a company.

Think of it like this: if a company is worth $10,000 and has issued 2000 shares, each share would be worth $5 ($10,000 ÷ 2000).

✅ Key insight: When you buy shares, you're buying a tiny slice of that business. As the company grows in value, so does your share.

Step 2: Know why companies offer shares 💰

Companies sell shares for one main reason: to raise money.

By allowing investors to buy part of the company, management can raise capital to:

• Expand into new territories
• Launch new products
• Invest in research and development
• Acquire other businesses

🔄 The relationship: Companies need shareholders to raise funds and shareholders hope the company will use their investment to grow the business profitably.

Step 3: Learn what moves share prices 📈

Share prices can be stable or volatile. Price movements boil down to supply and demand: more buyers than sellers means prices rise, and more sellers than buyers means prices fall.

Two key factors:

• Earnings 📊: Profits a business makes. Better-than-expected earnings push prices up, while disappointing results send them down.
• Sentiment 🧠: Expectations about the company's future, influenced by industry legislation, management performance, economic conditions, and market confidence.

Step 4: Understand how shares are traded 🏛️

Most major shares are traded on stock exchanges - highly regulated marketplaces where buyers and sellers meet.

Major exchanges include:

• London Stock Exchange (LSE) - UK shares
• New York Stock Exchange (NYSE) - US shares
• NASDAQ - US tech shares
• Australian Securities Exchange (ASX) - Australian shares

Three types of brokers:

1. Full-service: Create and execute strategy on your behalf (high commission)
2. Advisory: Provide advice but you make final decisions (medium commission)
3. Execution-only: Simply carry out your instructions (low commission)

⏰ Trading times: Shares are only traded during exchange opening hours, which vary by location and season.

Step 5: Discover the bonus benefits 💵

Beyond price appreciation, shares offer dividends, payments representing a portion of company profits.

How dividends work:

• Company makes profit
• Management decides how much to reinvest vs pay shareholders
• Dividend provides income even if share price doesn't move much

Two company types:

• Growth companies: Reinvest all profits, no dividends, higher expected share price
• Mature companies: Pay regular dividends, steadier share price growth

🎯 Going public: Private companies can launch an initial public offering (IPO) to list on exchanges and raise capital from ordinary investors.