Buying a share means buying a small part of a company. As a shareholder, you share in the company's fortunes — through changes in its share price and any dividends it pays. Shares have long been a core part of many investment portfolios, but they come with meaningful short-term volatility.

What is a share?

A share represents part-ownership of a company. Companies issue shares to raise capital, and those shares can then be bought and sold between investors on a securities exchange. In Australia, the main exchange is the ASX, although other exchanges also operate.

Shareholders may have the right to vote on certain company matters and to receive dividends if the company declares them. They are also exposed to the risk that the company performs poorly and the value of their shares falls.

How the share market works

Share prices are set by supply and demand. When more investors want to buy a share than sell it, the price tends to rise, and vice versa. Prices respond to company results, announcements, economic news, interest rates and changes in investor sentiment.

Investors typically buy and sell shares through a broker or trading platform. Trades on the ASX generally settle two business days after the trade date.

Two sources of return

Capital growth occurs when the share price rises above the price you paid. It is only realised when shares are sold, and it is never assured — prices can also fall below the purchase price.

Dividends are distributions of company profits to shareholders. Not every company pays dividends, and dividends can be reduced or cancelled. In Australia, many dividends carry franking credits, which reflect tax already paid by the company and may be relevant to an investor's tax position.

Researching a company

When researching a listed company, investors commonly consider:

  • Revenue — how the company earns money and whether sales are growing.
  • Earnings — whether the business is profitable and how consistent its profits are.
  • Debt — how much the company owes and its capacity to service that debt.
  • Cash flow — whether reported profits are converting into cash.
  • Competitive position — what protects the business from competitors.
  • Industry — the structure, growth and risks of the sector.
  • Valuation — how the share price compares with earnings, assets and peers.
  • Management — the experience, track record and alignment of the leadership team.
  • Growth prospects — realistic opportunities for future growth.

Individual shares or diversified investments?

Holding a small number of individual shares concentrates risk in those companies. Diversified options such as managed funds and exchange-traded funds (ETFs) spread exposure across many companies in a single investment. Many investors use a combination of the two, depending on their interest, time and objectives.

Volatility and time

Share prices can move significantly in the short term. Over longer periods, shares have historically delivered higher returns than cash and fixed income, but past performance is not a reliable indicator of future performance. Because of this volatility, shares are generally considered more appropriate for money that will not be needed for several years.

This article is general information only and does not recommend any particular security. Consider seeking independent professional advice before investing.