Investing in shares

The share price is the price at which the share changes owners. A price is established when there is demand for a share, and also supply. When demand is high, the price goes up. When supply is high, i.e. lots of people want to sell the share, the price drops.

The current price is not the exact price you will pay or receive for the share. For that, you have to look at the bid price and the offer price. These two figures tell you the price at which you can sell or buy a share: 

• Bid price
  This is the highest price that someone is willing to pay for a share at a specific point in time, and at which you will be able to sell the share. Given that there are often large numbers of sellers and buyers operating on the market at the same time, the bid price fluctuates constantly.
• Offer price
  This is the lowest price at which someone is willing to sell a share. It is the price at which you will then be able to buy the share. Again, given that there are often large numbers of sellers and buyers operating on the market at the same time, the offer price is also subject to constant change.
• Spread
  The difference between the bid price and the offer price is referred to as the ‘spread’. Shares that are traded on numerous occasions on a trading day tend to have a tight spread, while shares that change owners less frequently are likely to have a wider spread.

Alongside the price that you pay for a share, you must also take various costs into account. Read more about the costs involved in investing.

As a general rule, we can say that shares offer higher expected returns in the long term than other investment assets, such as bonds. Investing in shares you picked yourself (direct shares) may be an interesting option if you expect to be able to achieve higher returns than if you were to invest in investment funds or ETFs, or than if you were to hold shares purely for their dividend income potential. And it allows you to invest in your favourite companies or a sector that you follow.

However, if you fail to adequately diversify your share portfolio, investing your money in direct shares also comes with more risk. If the company in which you hold shares hits a rough patch, the value of your shares will go down. If the company goes bankrupt, your shares may even be worthless. So if you invest too much in one or a few shares, you have no way to offset losses through other shares that are performing well. With an equity fund (which is what we call a fund that invests in shares), you reduce the risk, as the fund manager will spread the risk over many different shares.

A return on a share can be made up solely of the increase or decrease in the value of the share, or may also include dividends. A value increase means that the price of the share has gone up in relation to the price you paid for it. It is entirely up to you to decide when you are happy with the possible value increase and want to sell the share. Needless to say, the price can also drop. When the price drops to below the price you paid, you have made a loss on your investment. Share prices tend to move up and down in waves. These ‘stock market fluctuations’, as we call them, can be rather unnerving for novice investors.

This is why it is better to invest for the long term. When measured over a longer time span, price peaks and troughs will level out and only the general movement, i.e. the trend, will be important for the end result. Investing in shares for a longer period will increase your chances of generating returns. It is one of the ways of spreading the investment risk.

If you hold shares for longer, you may also receive more dividend payments. If a company makes a profit, it can pay a dividend in cash or in extra shares, which is known as a stock dividend. The dividend you receive on a share depends on the size of the profit the company made and what the company intends to do with that profit, i.e. distribute it to shareholders or reinvest it. Companies are under no obligation to pay a dividend.