The essentials
- A share is a small part of a company; investors earn from dividends and price growth.
- Share prices swing with news and sentiment, but over long periods follow company profits.
- Most beginners get broad exposure through index funds rather than picking single shares.
What a share is
When a company issues shares, it sells slices of ownership. Shareholders are entitled to a portion of the profits the company chooses to pay out as dividends, and usually to vote on major decisions. If the company grows and its profits rise, investors tend to value each share more highly.
Where shares are bought and sold
After a company lists through an initial public offering, its shares trade between investors on an exchange. You buy through a broker, which places your order on the exchange or another regulated venue. The company itself does not receive money when shares change hands later.
Two sources of return
- Capital growth: the change in the share price.
- Income: dividends, which many investors reinvest. See dividend investing basics.
The combination, with dividends reinvested, is called total return, and it is what index figures with "TR" in the name measure.
Why prices move
In the short run, share prices respond to results, news, interest rates and mood. Over longer periods they tend to follow the profits companies actually earn. That is why daily moves say little about whether an investment is working.
Single shares or funds
| Single shares | Index funds / ETFs | |
|---|---|---|
| Diversification | Low unless you buy many | Hundreds or thousands of companies |
| Research needed | High | Low: understand the index and costs |
| Company-specific risk | Can lose most of the investment | Spread across the market |
| Ongoing cost | Dealing costs only | Annual fund charge, often low |
Risks worth naming
- Markets can fall 30% or more and take years to recover.
- Individual companies can go bankrupt.
- Selling in a panic locks in losses.
- Foreign shares add currency risk; see the forex guide.
Continue with investing in US stocks or diversification.
The world share market is far bigger than any one country. US companies make up the largest part of global indices, but Europe, Japan, the UK and emerging markets together hold a large share of the world's listed companies.
Reader questions
How much money do I need to start investing in shares?
Many brokers allow small amounts, and some offer fractional shares. The priority is to invest money you will not need for several years.
Is the stock market like gambling?
Short-term speculation can resemble it. Owning a diversified set of businesses for many years is different, because returns come from company profits, though losses are still possible.