Investing in stocks and shares has become much more popular in recent years, because of the wealth of information available to prospective investors. It's easy to see why more and more people are so keen to invest in shares, as over time they have consistently outperformed all other investments.
The introduction of online stock brokers and investment facilitators has created a new generation of stock traders who are not intimidated or confused by stocks and shares, all in search of capital growth.
By owning a share, you essentially own a piece of a company, and in principle are entitled to your portion of the profits. These profits are delivered by annual or bi-annual dividends, which are distributed based on the performance of the company in that fiscal year. If the company is performing badly, your dividends may get smaller or even cease altogether.
Share prices fluctuate because the price is determined by the demand. If expectations about the company's future performance are strong, this leads more to try to acquire the shares, and pushes the prices up consequentially.
When less favourable performance results are published, prices will tend to fall but the entire market is also influenced by the general economic environment. The best returns tend to be made on medium to long-term investments.
The idea of getting a good return on an investment in shares, is to sell them when they are at their highest possible value. If they are worth more when you sell them than what you paid, then this is called 'Capital Growth' and is subject to capital gains tax if it exceeds a certain limit.
There are no magic tricks for stock market success, but spreading the risk as widely as possible is advisable. The riskier the investment, the bigger the dividends, providing that the company is making profits.
Significant capital growth is more likely to occur with medium to long term investments, there are few quick wins. In the short term, shares are bad investments.
The key indicator of a company's share price, is its earnings. Prices may fluctuate because of economic conditions, interest rates and investor sentiment but the overriding factor is earnings.
Inflation is the biggest threat to long-term investments. A stock market crash can lead to falling stock prices, but if recent history is anything to go by then the prices tend to bounce back stronger than ever. Inflation can strip 3.2% off the value of your investment, and will rarely bounce back.
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