What are shares?

What you'll learn in this step: Obtain definitions of the many types of shares around and learn how to read newspaper tables. Find out more in this step.

Investing in shares has many benefits including a high level of liquidity which unlike property, gives you ready access to your money. There are more than 1200 companies on the stockmarket in which you can buy shares so there are plenty to choose from to match your investment needs.

Buying shares in a company provide you with a “share” of it, making you a partial owner along with the other shareholders. Companies issue shares to the public for a number of reasons such as to raise money to fund growth or a takeover. Around 40 per cent of Australians are now shareholders, largely through the listings of companies such as the Commonwealth Bank and Telstra. By becoming a shareholder, you have the right to a say in how the company is being run by asking questions at annual meetings, and a share in its profits.

Companies in which you can buy and sell shares are called listed companies and they can be found on the Australian Stock Exchange. You trade in shares on the stock exchange via a stockbroker. You can either call your stockbroker with an order or trade through them over the Internet.

If a company is listing for the first time – known as floating - you can apply to buy shares by completing the application form in the company’s prospectus. (see What is an IPO?). These new shares are offered to the public at a set price. After the company lists, you can only trade the shares through a broker.

Learn more: Making sense of the jargon, Ron Marney, The Age, 24 April 2003
If the jargon is a barrier to investing, maybe it is time to clear a few things up, writes Gabrielle Costa.

Making money from shares

The most common form of shares is ordinary shares. You can also buy preference shares, options and partly paid shares.

There are a number of different types of shares such as ordinary or preference shares which have different properties. For more experienced investors, derivatives such as options and warrants provide further diversification. However, when the majority of investors invest in shares, they buy ordinary shares.

We invest in shares to make money – either through a share’s capital growth, i.e. the amount by which the share price increases in value over time, or through the dividends it pays to its shareholders. Dividends are payments made by companies to shareholders from their profits. Not all companies pay dividends. Dividends are usually paid twice a year and are in effect the yield from your investment. Some growth companies plough most of their profits back into generating more business rather than paying out dividends to investors.

calculated and what does it say about the company? Ron Marney explains.