How Shares Work - Benefits, risks & considerations when buying Shares (2024)

FAQs

What are the benefits and risks of buying shares? ›

Shares present risks and benefits. The chief risks being capital loss, price volatility and no guarantee of dividends. Benefits of shares include the opportunity for capital growth, dividend income, flexibility and control. The price of anything that can be bought or sold is unpredictable to some extent.

Bottom Line. Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.

When you buy or invest in shares, you are purchasing the underlying share itself, and seeking to hold it over the long term. If a company grows and its value increases, then the value of its shares will also rise, and you can sell your holding for a profit.

Volatility risk

Share prices can rise and fall rapidly. When investing in the share market you need to be aware that the value of your shares may fluctuate substantially.

Share prices can rise and fall rapidly and investors must accept the fact that the value of their shares may fluctuate significantly. Market risk can impact some sectors more than others. Specific risk can relate to the performance of an individual share.

People aim to make money from investing in shares through one, or both, of the following ways: An increase in share price. Usually known as 'capital growth' or 'capital gain', all this means is that you make money by buying your shares for one price and selling them for a higher price.

Shares are units of stocks issued by a corporation that represent ownership. They are sold to investors and traders to raise capital for the company. Many businesses issue stocks and shares when they need funds for research and development, expansion, or other growth opportunities.

Investing in the stock market is a long-term strategy that should yield better returns than a savings account over five or ten years. And the longer you spend in the market, the higher your returns should be – especially if you manage your risks by investing in diverse sectors.

Benefits of Owning Shares

Potential for Capital Appreciation: Shareholders can benefit from an increase in the stock's price over time, resulting in capital gains. Dividend Income: Companies may pay out a part of their profits to shareholders in the form of dividends, providing a source of regular income.

What are the disadvantages of using shares? ›

Stock prices are risky and volatile. Prices can be erratic, rising and declining quickly, often in relation to companies' policies, which individual investors do not influence. Stocks represent ownership of a business, and hence investors are the last to get paid, like all other owners.

Profits made by companies limited by shares are often distributed to their members (shareholders) in the form of cash dividend payments. Dividends are issued to all members whose shares provide dividend rights, which most do.

In this case, the investor's money goes to the company concerned, which issues shares to the investor in exchange. Here, the market is bringing together those who have capital (the investors) and those who need capital (the company).

To invest in stocks, open an online brokerage account, add money to the account, and purchase stocks or stock-based funds from there. You can also invest in stocks through a robo-advisor or a financial advisor. If you're ready to invest in stocks yourself, this six-step process may help you get started.

Beat inflation and facilitate wealth creation

Investing in equities allows you to earn a high return rate that can potentially beat the inflation rate by a large margin. This is how equities facilitate wealth creation in the long term.

High-risk investments may offer the chance of higher returns than other investments might produce, but they put your money at higher risk. This means that if things go well, high-risk investments can produce high returns. But if things go badly, you could lose all of the money you invested.