Investment in shares of companies is one of the many ways through which you can invest your hard-earned money and the stock market can offer investors several benefits, including the potential for investors to earn dividends and even annualized returns of 10%, which is often more than the interest rate offered by banks on savings accounts.
The stock market can be a very volatile field with prices fluctuating drastically and this means that returns are not guaranteed. However, there is always hope and investors can safeguard themselves by ensuring that they diversify their portfolios, decreasing their investment risk.
But how do investors go about choosing the right shares for their portfolios in 2021? Keep reading to find out how you can choose the right shares.
Understanding Share Investment
What are shares?
Shares, also known as equity or stocks, represent legal ownership in a certain company whose shares you purchase. By buying a share, or several shares, you become a part owner of that company.
Depending on the type of shares that you own, you may have voting rights, or you can be eligible to receive dividends every quarter. Companies issue shares to raise money during their Initial Public Offering (IPO) when they are listed on a stock exchange.
There are two different types of shares that investors can buy, either common shares or preferred shares. Common shares are what investors typically purchase and they entitle a shareholder to proportionate share of the profits or losses of the company in which they have invested.
Preferred shares, on the other hand, come with predetermined dividend payments.
To understand how share prices fluctuate, the stock market can be viewed as an auction with different buyers and sellers consisting of participants such as individuals, corporations, and even governments.
Prices on shares decrease when there are more sellers than there are buyers (decrease in demand, increases in supply), and the price will increase when there are more buyers than there are sellers (decrease in supply, increases in demand).
The performance of a company cannot directly influence share prices but the reactions of investors to the performance of that company will determine the value of those shares. When companies perform well, more investors will show interest in that specific company and the opposite is true if the company underperforms.
There are many factors that drive investors to buy or sell their shares, such as news announcements, trends, the opinions of influential people, and several others.
The market capitalisation of a company, often referred to as the market cap, is the sum of the total shares that are outstanding, multiplied by the share price. If a company has a market cap of $100 million, it means that there are one million outstanding shares of $100 per share.
This may seem simple, but it is important that investors realise that market cap has a deeper meaning other than the share price. By evaluating the market cap of a company, investors can evaluate a company in relation to other companies of the same size, or market cap, in a specific industry.
Small cap companies, for instance, cannot be compared to large cap companies and investors must compare companies of the same size according to their industry.
Market cap measures the worth of a company on the open market along with the perception of the market relating to the company’s prospects, which reflect what investors are willing to pay for shares.
- Large-cap companies are those who have a market value of $10 billion or more. These companies are well-known for producing quality goods and services and they have a history of consistent dividend payments and steady growth.
- Mid-cap companies are those who have a market value between $2 billion and $10 billion. These companies are established in industries that experience, or are expected to experience, rapid growth.
- Small-cap companies are those that have a market value of $300 million to $2 billion. These are often young companies that service niche markets or emerging industries. Among the three categories, small-cap companies are aggressive and risky as they are more susceptible to business or economic downturn.
What are Stock Splits?
A stock split is when a company’s outstanding share count is multiplied or divided, without changing its overall market value or capitalisation.
For example, a company doubles its share count by giving investors an additional share for each that they own. Each shareholder will subsequently own twice as many shares, but the overall value of all outstanding shares does not change as there is no additional capital paid into the company.
The most common stock split is a forward split, which means that share counts are increased by issuing new shares to existing investors. Reverse splits work the opposite way as shares owned by existing investors are replaced with proportionally smaller number of shares.
Picking the right shares for your investment portfolio
Before you make any type of investment, you must first realise what the purpose behind your investment is. In other words, Is it towards a retirement fund, towards long-term growth, or to gain return on investment that you would not gain with a normal savings account?
Despite the reason behind the investment, there is always the goal to make money, grow wealth, or generating income supplement during retirement. Every investment goal is equipped with its own strategy and to proceed, you must understand what type of investor you are.
What type of investor are you?
There are three main types of investor including:
- Income-orientated investors – focussing on the buying and holding of shares in companies who pay regular dividends, such as those who are solid but low-growth companies found in sectors such as utilities.
- Investors aimed at wealth preservation, who have lower risk tolerance either by nature or as result of their unique circumstances. Investors such as these prefer blue-chip organisations, and these investors are known to zero in on consumer staples.
- Investors want capital appreciation who consider companies which are still in early growth years such as many small-cap companies. Investors such as these have higher risk tolerance, and they are also willing to take risks to gain larger returns.
Diversify your portfolio
These investor types can employ either one or several different types of investment strategies, which is at the heart of portfolio diversification. There are many conservative investors who prefer to devote a small portion of their portfolio to growth stocks, while more aggressive investors tend to earmark a percentage for blue-chip stocks which allow for losses to be offset.
The important thing for investors to remember, especially when they are still deciding on their stocks, is to stay updated on market news, certain economic events, and the opinions of both analysts and experts.
Investors can gain a significant amount of insight from financial news, especially on the companies that they wish to invest in. Investors can also follow industry blogs of financial writers as an effective form of passive research.
Finding a company to invest in
Investors can conduct thorough research on companies that they are interested in, either by finding exchange-traded funds (ETFs) which track the performance of certain industries, and by viewing the individual shares that these funds are interested in.
Alternatively, investors can use a market screener to filter certain shares according to a set of criteria. These market screeners offer investors with additional features including the ability to sort companies according to their dividend yield, market cap, and several other metrics.
Investors can also use the blogosphere, financial news releases, stock analyst articles, reviews, comments, and several other mediums and channels to source information on companies. However, it is crucial that investors are critical of what they discover and read, ensuring that they can analyse both sides of the argument before they decide to pick a specific share.
Once an investor is convinced that the industry in which they are interested offers a solid investment, investors can familiarise themselves with the largest participants and turn their attention towards investor presentations provided under “Investor Relations” of these companies.
Corporate presentations provide investors with an overview of how companies make their money and even though presentations are not as comprehensive as financial statements, they are much easier to absorb than complex financial reports.
These presentations also offer investors with valuable insight and information on the expected direction of the company and the overall industry in which it operates.
Why Should You Invest in Stocks?
It does not require large amounts of capital
You can get started in share investment by registering a live account with any reputable broker that offers trade in a stock exchange that lists the companies that you what to invest in.
However, even if share prices are in your favour and you can purchase several, you must consider that there are broker fees involved such as commissions, minimum deposits, deposit/withdrawal fees, and other factors.
You can outpace inflation
This is one of the main benefits of share investment and even if you are not guaranteed to make a return, they are well-known to outpace inflation. The average historic inflation rate is lower than 5% in several countries and it may not sound like much, but it can decrease the purchasing power of your money over time.
For this reason, many people have turned towards share investment and some investors can see annual growth of up to 10% on their investment.
Grow you money
Investment in shares is one of the best ways to grow your wealth, with stock market returns often higher than that of savings accounts with banks.
Shares are designed to increase in value
There are significant investments which are made in shares monthly which pushes the price on shares up. In addition to this, most larger indexes are updated periodically, with underperforming companies being removed from indexes and replaced with those whose shares are being traded more.
You do not need a degree to become successful
While experienced investors know how to grow their money faster, it does not mean that share investment is limited to experienced, educated investors. You also do not need to be a portfolio manager, financial analyst, or the next Warren Buffett to successfully invest in shares.
Use tutorials and guides, such as this one, to help you decide on the right shares to pick to diversify and grow your portfolio, manage your risk, and help you grow your wealth long-term.
Share investment has many pros and cons that must be considered before investors start putting capital towards it.
Pros and Cons of Share Investment
|Shares take advantage of a growing economy||There are significant risks involved and returns are not guaranteed|
|It is one of the best ways to stay ahead of inflation||Common shareholders are paid last|
|Easy to buy shares||It can be time-consuming to research and evaluate companies and share performance|
|Investors can use short- or long-term strategies to make money||Emotional rollercoaster as the market can be volatile|
|Easy to sell shares at any time||Professional competition from institutional investors and professional traders who have more time, knowledge, and capital|
What are shares?
Shares represent a unit of ownership in a company, with two main types of shares namely common and preferred.
Can I hold more than one share?
Yes, you can hold more than one share in a company, or across several companies and industries. You can also consider investing in ETFs, Mutual Funds, and investment in market-related indices.
Is it expensive to buy shares?
No, there are cheap shares that you can buy with a small investment.
How can I purchase shares?
You can purchase shares through a stockbroker which is regulated by reputable entities such as the FCA, CySEC, ASIC, FSCA, and several others.
Can I make a profit from buying shares?
Yes, you can make a profit from buying shares when they are cheap and selling when the price increases, or you can make long-term returns by holding shares over an extended period.
Can I buy shares from $50?
Yes, there are many shares from popular companies which can be bought for $50 and less.
Can I buy shares through a broker?
Yes, it is the most popular way to buy shares.