Jargon Buster: What Are Shares?
With investing, whether it be in a Stocks & Shares ISA or Personal Pension, you may find a number of terms that you don’t understand. In our Jargon Buster series, we’re explaining how many of the seemingly difficult concepts can be quite simple.
Today, we’re looking at a fundamental building block of investing: shares.
What is a Share?
Equities, stocks and shares are different words to describe the same thing.
With investing, you can buy shares. When you buy a share, you buy ownership of part of a company in which you become a shareholder in. The more shares you have, the higher your level of ownership.
By investing your money in that company, you’re buying an equity stake. As an investor, your objective is to sell your share for a higher price than you paid for it, but it is important to remember that the value of your share can fall as well as rise.
A Shares’ Value
The value of your shares will depend on the actions of the company of whose shares you own as well as the general market sentiment. For example, if the firm you own shares in is performing poorly, then the value of your shares may go down. However, if it is performing well, the shares’ value may rise. A number of people choose to invest in a managed portfolio which uses multiple assets and diversification in order to reduce this level of uncertainty.
Diversification is simply not putting all of your eggs into one basket.
For example, if you’re solely invested in shares in one company, let’s call it True Burgers, and their profits rise, the share price is likely to rise too. This means that your investment would profit.
However, if there is suddenly a fad for healthy eating and True Burgers struggle to compete, then their profits will fall, meaning your investment will decline. In this case, you may want to hold shares outside of this sector to gain more diversification.
But what if you were also invested in a company, let’s call them True Organic, who sell a variety of healthy products? With such products being popular, their profits would rise, and with this the share prices in the company, resulting in a positive outcome for your investment.
Think of a set of scales with True Burgers on one end and True Organic on the other. True Burgers weigh the scale down into negative territory with their low profits, but by placing True Organic on the other, with their high profits, you manage to level the scales out resulting in a better outcome for your portfolio.
This is how a diversified portfolio works. Your investment is spread across multiple assets with the aim of mitigating risk and maximising returns. Our True Potential Portfolios use this technique, but take it one step further by using advanced diversification. This means that we spread your investment across more assets and geographic regions than in a simple or multi-asset portfolio.
When investing in one individual asset type, such as shares, you rely on that one form of investment to perform well. However, if you choose to invest in a portfolio that uses advanced diversification, such as our True Potential Portfolios, then you open your investment up to more opportunity.
Shares, stocks, equities are simply one way in which you can invest. They can be a standalone investment or within a portfolio. Whichever you choose, make sure that you feel comfortable with your investment strategy.