Investing 101: What Is a Share? 🤷♂️
The world of investing is shrouded in confusing terminology that can leave most of us feeling totally alienated. And that's not fair. We believe that regardless of whether you feel investing is just for the rich or is maybe just too confusing, you should at least be aware of the potential benefits that can be offered by a meaningful strategy.
What is a share?
A share is a fraction of a business. For example, Victor and Alex each own 50% of the Fruit Trading Company and have 50 shares each. They then decide to sell Elise 10 shares. Through her shares Elise now owns 10% of the Fruit Trading Company and is a share-holder in the company. 😎
What about stocks?
You may have noticed that the words stocks and shares are mentioned together or are used interchangeably. But they're a little different.
When Fruit Trading Company decides to sell shares it issues stock, which it offers for sale. An investor can buy or sell shares of that stock. So, shares are just individual units of a company's stock.
So, now I own a company?
As a shareholder you now own some of the company. The main benefit of this is that if the company makes a profit you may now share in that profit (a dividend). It can be distributed as cash, or in the form of additional, or fractional shares. 🤑
The second major advantage of investing your money in shares, is that it is no longer stored as cash—which can lose some of its value over time. This is due to inflation, whereby the real price of goods and services increases to account for the fact that a currency can lose actual spending power over a prolonged period. Inflation explains the phenomenon behind why that can of Coke that cost 20p when you were a kid is now £1, or why the average house price for your parents was £20,000... whereas for you it's more like £200,000. 🤯
Investing your money could be one of the best ways to make sure it keeps pace with inflation, or if the stocks you invested in perform well, hopefully exceeds it! By investing, your money could be worth more in the future.
Where should I invest?
That really is the million-dollar question... and unfortunately there is no right answer—this decision should be guided by the level of risk you feel is right for you.
Historically, investing in stocks and shares has been one of the best places to invest. If you invested in the S&P 500 (an index of the 500 largest companies listed in the US) from 1950–2009, you would have seen an average annual return of 7%. 📈 Remember though that past performance does not necessarily indicate future results!
The big difference between having your money in cash and investing, is that investments can go down as well as up. 📉 So, while the S&P 500 from 1950–2009 has averaged a rate of return of 7%, in some years it experienced negative returns. This means that while you wouldn't have seen consistent growth, if you left your money in the markets, you would have benefited from growth over the long-term.
This is why long-term investing could be one of the best things you can do to help build your wealth and plan for your future. Remember when investing that your capital is at risk, and that the value of your investment can go up as well as down.
You can learn more about Plum, and how we can help you take your first steps into the world of investing by visiting our website.