Investing in Stocks and Shares - A Beginners Guide
When you buy a company's shares it gives you, the buyer, a stake in the company and the right to be paid a proportion of its profits in a payment known as the dividend. As it gives you a stake in the company, it also means that any money you invest in that company grows or contracts in sympathy with the fortunes of that company.
Dividends are payments made to shareholders by a company from its earnings. These are normally paid twice a year but may be paid more or less often.
There are two things to consider when understanding how money invested in stocks appreciates in value - capital growth, and growth from dividends reinvested. A review of investment returns by Barclays Capital Gilt Equity shows how vital dividends are.
Capital Growth: £100 invested at the end of 1945 would have grown to £277 by the end of 2011 in real terms, i.e., after accounting for the effect of inflation - assuming you spent the dividends.
Growth with dividends reinvested: £100 invested at the end of 1945 would have grown to £4027 by the end of 2011 in real terms, i.e., after accounting for the effect of inflation. In this scenario dividend payments are used to buy more stock.
The above examples show how shares generally grow over the long term and also how powerful compound interest can be. There are many peaks and troughs along the way - the 1970s were a torrid period for share growth; the 1990s was an exceptional growth period. Of course, individual shares may grow more or less than this. Some companies go bankrupt, and under this situation you will lose all of your money invested. Buying a diverse portfolio of shares is a good way to reduce your risk. See Best Investment Strategy for more information.
Albert Einstein - "The most powerful force in the universe is compound interest"
It used to be that the only way that you could buy shares was by visiting a share shop which sold share certificates, or through a stockbroker. In the age of the internet, shares can be bought and sold at the push of a button. It must be remembered that a Nominee Account, which is how shares will be bought if you decide to purchase them electronically, will give you none of the voting rights normally associated with being a shareholder. To learn more about buying your shares using the internet and choosing an online stockbroker go to, Getting an Online Share Dealer.
One way to buy shares, and perhaps the way in which the majority of people buy shares, is not to buy them individually but buy them in a 'pooled' resource of multiple investment assets. This way you do not have to bother about choosing which stock to pick but let someone else do that job for you. You can usually choose how much risk you want to take. See Investment Funds for more information.