- Buying shares allows you to share in the success of the company you invest in
- Listed companies are traded constantly
Starting out in the world of stock market investing can be daunting – the investment options available are almost limitless, and the financial services industry isn’t always helpful. That is why we have put together a series of guides to help you navigate stock market make your money work for you.
In this guide, we’ll be taking you to the very heart of the investment world: companies.
Back to basics: Investing in companies
When you buy a share, you become a part owner of the company. You share in the company’s successes and failures and you technically get a say in how it is run.
Not all companies are open to ownership by anyone. Companies choose to sell parts of themselves to the public if they want to raise money or their profile. When a company goes public, they sell a handful of shares onto the stock market in what is called an initial public offering (IPO).
Once a company’s shares are listed, they are traded constantly. Stock markets operate much as any other market does: buyers pay their money in exchange for shares, sellers offer their shares to other buyers, traders help facilitate the transactions.
Price is based on supply and demand. Put simply, if a company is performing well, demand for its shares will be high and the price will rise. If a company is performing badly, demand for its shares will fall and current owners might want to sell their shares, meaning the price will fall.
Investors can buy the shares of companies that are listed on public stock markets either directly or indirectly via funds (more on that in another guide). As a basic rule of thumb, direct investment is a better option for investors with a large pot of savings which can be split across multiple companies – you don’t want all your fortunes tied to the success of just one company. Indirect investment is a cheap and easy way of allowing you to spread your money across multiple companies and industries.
How can companies make me money?
There are two keys ways your wealth can accumulate when you invest in companies: capital growth and dividends.
Capital growth refers to the increasing value of your investment. For example, if you bought a company share at 10p and the company performs well, demand for its shares might increase, raising the value of your share to 15p. If you then sell that share at 15p, you will have made a 50% return.
Overall, the value of public companies listed in London has risen 20 per cent over the last ten years.
The second way companies can add to your wealth is in the payment of dividends. This is when highly profitable companies pay extra cash they have generated back to their shareholders, usually twice a year. In the UK, dividend account for a lot of the total investor return: in 2019, the FTSE All Share generated capital growth of 13 per cent and a total return of 19 per cent when dividend income was added.
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Which companies can I invest in?
In the UK, most public companies are listed on the London Stock Exchange – the UK’s (and indeed, Europe’s) biggest market for buying and selling company shares. The London Stock Exchange (LSE) was formed in 1773 when all the regional stock markets in the UK merged. Today, much of the LSE’s trading is done online, but the organisation still has a physical presence in the City of London.
The London Stock Exchange is made up of two different markets: The Main Market – home of larger, better established companies – and AIM – the junior market, which was formed in 1995 as a home for smaller, fast growth companies.
Similar stock exchanges and markets exist all over the world. In the US, the largest market is called the New York Stock Exchange (NYSE) which houses companies with a total value of over $18trn. NASDAQ – the world’s first purely electronic market – is also found in New York and is home to many fast growing, innovative technology companies.
UK investors can buy and sell shares from almost any public market in the world.
Your questions, answered
Do you have questions about investing in investment trusts? Chances are, someone has asked the question before. The articles in the links below can help you learn from other people's portfolio management. Or submit your own portfolio and have it analysed by Chris Dillow, Investors Chronicle economist, and other selected top industry experts.
Daniel and his wife (49) have investments in funds, shares and residential. They are considering whether higher exposure to equities is the way to go to acheive their goal to retire at £250,000 per year at the age of 65 with no mortgage.
Jeff (43) and Claire (41) have Isas and pensions invested in funds and shares. They both work and have three children under the age of 10 and don't have much time for investment, but are considering increasing their exposure to direct equities.