Methods of investing: owning shares

Buying shares is the process of literally taking a stake in a company, and providing it with capital to help it go about its daily business.

Of course, since most companies have large numbers of shares and a private individual will have a relatively small amount, you will only have a tiny, tiny amount of the total share capital, but some you will have nonetheless, and therefore in a sense the future good of the company is in your interest: the better it does, the more you are likely to receive assuming the fact the company is strong gets reflected by an increase in share price, or at least the continued flow, or even increase, of a healthy dividend.

Shares are also called equities. And it is quite easy to work out how much a share is worth (or one of the other two figures below) from having two of the three. So, if there are (to make the maths simple) 100 shares in issue, and the market capitalisation of a company is Ł1000, then each share is worth Ł10, because you simply divide the market cap of the company by the number of shares to get the price of a share. Clearly from any two of these you can simply rearrange the equation to get the third, in the way that you did at school re-arranging speed = distance / time to work out one from the other two!

When a company makes a profit, it can decide what to do with them (apart from of course the mandatory amounts that go in tax to the government etc!) Often it will decide to give some of these to those that have shares, and this is called a dividend. This is often done twice yearly, at the midpoint of the financial year and at the end, these are called the interim and final dividend respectively.

The rate of dividend varies massively from company to company, and some pay none at all. Microsoft was famous for never paying a dividend, preferring to reinvest the cash in the business.

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Methods of investing: owning shares

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