A share (also called an equity or equity stock) in a company is exactly that: a share in the ownership of the company. With that comes a share of the profits and the risk that you will lose your money if the company goes bust.
Almost all companies have limited liability. This means that if you own a share and the company does go bankrupt your liability (i.e. what you owe to the creditors) is limited to the paid up value of your shares. That means that if you own share in a company that goes bust you will not lose your house because of that!
Is important to understand the ways shares can make you money. Generally shares pay a dividend to investor which is share of the companies profits. Not all companies pay dividends but instead hope to reward investors by increasing the price of the shares over time (this is called capital growth)
The advantages of investing in shares –
- Long Term Growth Potential – one of the biggest attractions of the stock market is the long term growth potential. The power of compounding your returns and your dividends can create considerable wealth over the long term.
- History Shows Stocks Beat Cash – If we look back through history, the stock market has shown it always beats cash in the long term and more importantly it always beats inflation
- Great opportunities -As you will undoubtedly be aware, the markets have been very volatile lately. There are two ways to look at this, you can be fearful or you can take advantage of the opportunities that arise.Personally, I love volatility, when the market is in “panic mode”, it moves on peoples emotions rather than logical economic fundamentals. This usually creates some fantastic bargains.
The disadvantages of investing in equities-
- The risk that the company will become bankrupt and your shares in that company will be worthless.
- The risk that the price of your shares will fall when you want to sell them so that you get back less than you paid for them.
- Returns are unknown so it can be hard to plan you finances in advance.