Shares: Meaning, Types, how it works and more

Shares are a type of financial instrument that represents ownership in a company. They offer a way for individuals to invest in businesses, and a means for companies to raise capital. 

In this article, we will explore the meaning of shares, how they work, and various other important aspects of investing in shares.

Meaning of shares

Shares are units of ownership in a company. When an individual buys shares of a company, they become a shareholder and have a proportional ownership stake in the company. The value of a share depends on the financial performance of the company and can rise or fall based on various factors such as market trends, changes in management, or economic conditions. 

A company may issue shares to raise capital, which can be used to fund growth or pay dividends to shareholders. Shares can be bought and sold on stock exchanges, and the price of shares is determined by supply and demand. The total number of shares a company has is referred to as its “outstanding shares”. The number of outstanding shares can change over time as a company issues or buys back shares. When a company’s financial performance is strong, the value of its shares usually rises, making it an attractive investment option for many individuals.

How shares work

Shares represent ownership in a company and are a form of investment. When an individual buys shares in a company, they become a shareholder and have a proportional ownership stake in the business. The value of a share is dependent on the financial performance of the company and can rise or fall based on various factors such as market trends, changes in management, or economic conditions. Shares can be bought and sold on stock exchanges, such as the Nigerian Stock Exchange, and the price of shares is determined by supply and demand.

A company can issue new shares to raise capital, which can be used to fund growth or pay dividends to shareholders. When a company is profitable, its share price usually rises, making it an attractive investment option. When a company is not performing well, its share price may fall, causing a loss for the shareholders. This is why investing in shares can be considered a higher-risk investment compared to more conservative options such as bonds or savings accounts.

Shares also give shareholders a voice in the company’s decision-making process. Shareholders have the right to vote on important issues such as board elections, mergers and acquisitions, and changes to the company’s articles of incorporation. They also have the right to receive dividends when the company declares them, which are usually paid out in proportion to the number of shares held. Overall, investing in shares offers the potential for higher returns, but also comes with a higher level of risk. It’s important to thoroughly research the company and understand the risks involved before investing in shares.

Types of shares 

There are several different types of shares that investors can choose from, each with its own unique set of characteristics. Some of the most common types of shares include:

1. Equity shares

Equity shares are the most basic type of share, representing a proportional ownership stake in a company. Equity shareholders are entitled to a share of the company’s profits in the form of dividends and have voting rights in important company decisions.

2. Preferred shares

Preferred shares are a type of share that offers a fixed dividend and priority over common shareholders in the payment of dividends. However, preferred shareholders typically do not have voting rights.

3. Class shares

Some companies may have multiple classes of shares, each with different voting rights, dividend preferences, and other privileges. For example, a company may have Class A shares with more voting rights and Class B shares with fewer voting rights.

4. Restricted shares

Restricted shares are a type of share that may be granted to employees or executives as part of a compensation package. These shares may come with restrictions on when they can be sold or transferred.

5. Index funds

An index fund is a type of investment vehicle that invests in a basket of shares, representing a particular index, such as the S&P 500. Index funds offer a convenient and low-cost way for investors to gain exposure to a broad range of shares.

Each type of share has its unique advantages and disadvantages, and the right type of share will depend on an individual’s investment goals and risk tolerance. It’s important to carefully consider the different types of shares and understand their specific characteristics before investing.

Investing in shares can offer several advantages and disadvantages, and it’s important for investors to carefully consider both before making a decision. 

Advantages of investing in shares

1. Potential for high returns: Investing in shares can offer the potential for high returns, especially over the long term. Historically, shares have outperformed other investment options such as bonds or savings accounts.
2. Diversification: Investing in a basket of shares can provide diversification and reduce the risk associated with investing in a single company.
3. Liquidity: Shares are traded on stock exchanges, making them easy to buy and sell. This provides investors with greater flexibility and the ability to quickly respond to market changes.
4. Company participation: Investing in shares gives investors a voice in the company’s decision-making process, as well as the opportunity to receive dividends when the company declares them.

Disadvantages of investing in shares

1. Volatility: The value of shares can fluctuate rapidly and unpredictably, making investing in shares a higher-risk option compared to more conservative investment options such as bonds or savings accounts.
2. Company dependency: The value of a shareholder’s investment is dependent on the financial performance of the company, and can decline if the company is not performing well.
3. Lack of guaranteed returns: Unlike bonds, shares do not offer a guaranteed rate of return. The value of a share can decline, and there is no guarantee that the company will pay dividends to shareholders.
4. Market risk: The value of shares can be influenced by macroeconomic factors such as interest rates, inflation, and changes in government policies.

Investing in shares can offer the potential for high returns, but it’s important to carefully consider both the advantages and disadvantages before making a decision. It’s also important to understand the risks involved and thoroughly research the company before investing.

Key considerations for investing in shares

Investing in shares can be a complex and challenging process, and it’s important for investors to carefully consider several key factors before making a decision. Some of the key considerations for investing in shares include:

1. Investment goals: It’s important to understand your investment goals and determine the type of investment that will best meet those goals. For example, if you are looking for a low-risk investment, shares may not be the best option.
2. Risk tolerance: Investing in shares is a higher-risk option compared to more conservative investment options such as bonds or savings accounts. It’s important to understand your risk tolerance and determine if shares are the right investment option for you.
3. Company research: Before investing in shares, it’s important to thoroughly research the company, including its financial performance, management team, and growth prospects. This will help you make an informed decision about the potential of the investment.
4. Diversification: Investing in a basket of shares can help reduce risk, so it’s important to consider diversifying your portfolio with a range of shares from different industries and regions.
5. Long-Term View: Investing in shares is a long-term investment, and it’s important to have a long-term view when making a decision. The value of shares can fluctuate over the short term, but historically, shares have provided strong returns over the long term.
6. Professional advice: Consider seeking the advice of a financial professional, who can help you make an informed decision about investing in shares and develop a personalized investment strategy.

Investing in shares can offer the potential for high returns, but it’s important to carefully consider several key factors before making a decision. By thoroughly researching the company, diversifying your portfolio, and taking a long-term view, you can make a smart investment decision that aligns with your investment goals and risk tolerance.

Conclusion 

Shares play a crucial role in the world of finance as they represent a portion of ownership in a company. Understanding their meaning and others such as common shares, preferred shares, and rights shares is crucial for investors to make informed investment decisions. By having a clear understanding of shares, one can potentially maximize their investments and secure their financial future.

Frequently Asked Questions (FAQs)