The beginner’s guide to understanding shares: Everything you need to know

By Kesaobaka Pelokgale

“*Never invest in stocks with borrowed money or a faint heart. Both are fatal”*

Shares, also known as stocks, are a popular form of investment that has the potential to bring in significant returns. However, many people find the world of shares confusing and intimidating. If you’re new to investing or just starting to explore your options, understanding shares is a crucial first step. In this beginner’s guide, we’ll cover everything you need to know about shares, from the basics of what they are to how to start investing in them. We’ll explain key concepts such as dividends, stock prices, and market capitalization, and provide practical tips for selecting and managing your share portfolio. By the end of this guide, you’ll have a solid understanding of shares and be well on your way to making informed investment decisions.

*“Everybody is a long-term investor till the market drops by 10% or more.”*

What are shares?

If you’re new to the world of investing, understanding shares is a great place to start. Essentially, shares represent ownership in a company. When a company decides to go public, it will issue shares of stock that can be bought and sold by investors.

By buying shares, investors are buying a portion of the company and become a shareholder. As a shareholder, you have certain rights and privileges, such as the ability to vote on company decisions and receive a portion of the company’s profits in the form of dividends.

*“Stock analysis and investing is not rocket*
*science, but it needs a little conscience.”*

Types of shares

When it comes to shares, there are several types you should be aware of. The most common types of shares are ordinary shares, preference shares, and cumulative preference shares.

•Ordinary shares: These are the most basic type of shares and they give shareholders the right to vote on company matters at general meetings. They also have the potential to receive dividends, but this is not guaranteed.

•Preference shares: On the other hand, give shareholders priority over ordinary shareholders when it comes to dividends. They may also have other special rights, such as the ability to convert their shares into ordinary shares or the right to vote on certain matters.

•Cumulative preference shares: A type of preference share where any unpaid dividends accumulate and must be paid before any dividends can be paid to ordinary shareholders.

There are also other types of shares, such as redeemable shares, which can be bought back by the company at a later date, and non-voting shares, which do not give shareholders the right to vote on company matters.

*“Knowing when to sell is much harder than knowing when to buy.”*

It’s important to understand the different types of shares so that you can make informed decisions when investing in a company. Each type of share has its own advantages and disadvantages, so it’s important to consider your investment goals and risk tolerance before making any decisions.

*“In a marketplace, perception is more powerful than reality.”*

How do shares work?

Shares represent ownership in a company. When you purchase a share of a company’s stock, you are essentially buying a small piece of ownership in that company. The more shares you own, the larger your ownership stake in the company. Shares are bought and sold on stock exchanges, such as the Botswana Stock Exchange, New York Stock Exchange , NASDAQ( National Association of Securities Dealers Automated Quotations) to mention a few. When a company goes public, it issues a certain number of shares to the public in an initial public offering (IPO). After the IPO, these shares can be bought and sold by investors on the stock exchange.

*“Stock market is all about ‘not to make mistakes’ …. You still will, but making same mistake again is absolutely sacrilegious in this Market where you are swimming with Sharks.”*

The price of shares is determined by supply and demand. If a company is doing well and investors believe it will continue to grow and make profits, the demand for its shares will increase and the price will go up. Conversely, if a company is struggling, the demand for its shares will decrease and the price will go down.
Shareholders have the potential to earn money in two ways: through capital appreciation and dividends. Capital appreciation is when the value of the shares increases over time, allowing the shareholder to sell their shares for a profit. Dividends are payments made by the company to its shareholders, usually on a quarterly basis, as a portion of the company’s profits. Not all companies pay dividends, but those that do can provide a regular source of income for shareholders.

*“Millions wish for financial freedom, but only those that make it a priority have millions.”*

Why people invest in shares

Shares are a popular investment option for many people around the world. There are several reasons why people choose to invest in shares. Firstly, shares can provide a good return on investment, with the potential for higher returns than other asset classes such as bonds or savings accounts. This is because shares represent ownership in a company, and if the company performs well, the value of the shares can increase, leading to capital growth for the investor. Additionally, many companies pay dividends to their shareholders, which can provide a regular income stream for investors.

*“Over the long term, and I mean a very long term, markets are efficient.”*

Another reason why people invest in shares is to diversify their investment portfolios. By investing in shares, investors can spread their risk across a range of companies and sectors, which can help to protect their wealth against market fluctuations. Shares can also provide a hedge against inflation, as the value of shares can increase in line with the general increase in prices over time.
Finally, investing in shares can offer investors the opportunity to participate in the growth of the economy. As companies grow and expand, they often require additional capital to fund their growth, which can be raised through the sale of shares. By investing in these shares, investors can help to fund the growth of the economy and potentially benefit from the resulting increase in the value of their shares. Overall, investing in shares can be a smart and effective way to grow your wealth over the long-term.

*“Markets will always remain Imperfectly Perfect, the time you get to know correct valuation, the opportunity becomes out of reach, or vice versa.”*

The benefits of investing in shares

Investing in shares can be a great way to grow your wealth over the long term. Here are some benefits of investing in shares that you should consider:

1. Potential for high returns: Shares have the potential to provide higher returns than other investment options over the long term. Historically, the stock market has outperformed other asset classes like bonds, cash, and property.

2. Diversification: Investing in shares can help diversify your investment portfolio. By investing in different companies across various sectors, you can spread your risk and protect yourself from the impact of a single company or sector.

3. Access to dividends: Many companies pay dividends to their shareholders, which can provide a regular income stream. Dividends can be reinvested to buy more shares, which can lead to compound growth over time.

4. Liquidity: Shares are highly liquid, which means they can be bought and sold quickly and easily. Unlike property or other investments, you can sell your shares at any time during market hours.

5. Ownership: When you invest in shares, you become a part-owner of the company. This can give you the right to vote at shareholder meetings and influence the company’s decisions.

*“In concentrated portfolios, market fluctuations are magnified. All market noises look like real events.”*

The risks of investing in shares

Investing in shares is an excellent way to grow your wealth, but it also comes with some risks. It’s essential to understand that the value of shares can go up or down, sometimes quite dramatically, and there are a lot of factors that can cause this. Here are some of the risks you should be aware of before investing your hard-earned money in shares:

1. Market risk – this is the risk that the entire stock market will decline, and your shares will lose value as a result.

2. Company risk – this is the risk that the company you’ve invested in will perform poorly, and the value of your shares will decrease.

3. Industry risk – this is the risk that the industry that the company operates in will decline, and the value of your shares will decrease as a result.

4. Liquidity risk – this is the risk that you won’t be able to sell your shares when you want to because there isn’t enough demand for them.

5. Currency risk – if you invest in shares in a foreign currency, there’s a risk that changes in exchange rates could affect the value of your investment.

*“Markets have strange tendencies to prove you wrong either way.”*

It’s important to remember that while investing in shares can be rewarding, it’s not a get-rich-quick scheme, and there is always a risk involved. It’s crucial to do your research, diversify your investments, and only invest money that you can afford to lose. By understanding the risks involved, you can make informed decisions and create a successful investment portfolio.

*“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are right”*

I hope that this beginner’s guide to understanding shares has helped you gain a better understanding of this complex topic. Investing in shares can seem overwhelming at first, but with the little knowledge shared in this article, you can confidently start your journey towards building wealth through investments. Remember to always do your research and work with a professional advisor to make informed decisions about your investments. Best of luck to you all