How do shares actually work?

Ben Nash

Have you thought about buying shares to get ahead, but realised you have no idea how this actually works or what the process is? Find the whole process confusing and not sure where to start. Confused by all the jargon and wish someone would just lay it out in English? You’re not alone…

I met someone a few weeks back at a workshop, and as tends to happen, we got to chatting about investing. This person had heard about shares, and thought they might be a good way to get ahead with their money. But when we got down do it, they had no real idea how shares worked, how to set up their strategy, or how the whole process worked.

I wanted to put this post together to help others understand how shares work and the things you need to know to get started investing in shares.

But what actually are shares?

Shares are, as the name sort of suggests, a ‘share’ in the ownership of a company. Every share represents a tiny fraction of the ownership of the company.

Example, the Commonwealth Bank (CBA) is worth approx. $126,269,000,000, and at the current price ($73.81 as of the day of writing) this means that each share in CBA represents an ownership interest of 0.000000058% of the overall company.

Because each share represents a partial ownership of the company, each share is then ‘entitled’ to a share of the profits of the company. Payment of these profits to the owner of shares is called a dividend, and companies normally pay these on a quarterly or six-monthly basis.

Where do I buy shares?

Public companies are those that have chosen to list their shares for sale on the Australian Stock Exchange (ASX, also, the sharemarket, or market). These are the companies that you can choose to invest in.

Shares are traded on the stock exchange through stock brokers. This gets a little complex, but the simple version is that only certain people can access the stock exchange directly. Gone are the days when you can walk down to the Stock Exchange building on Sydney’s Bridge St and buy shared directly on the trading floor. Today we use electronic exchanges to communicate and transfer shares between companies, the stock exchange, and investors.

For investors, and in particular young professionals and those just getting started with investing in shares, the most common place for them to buy and sell shares is something like Commsec, Etrade, or other online brokerage platforms.

These online ‘brokers’ allow you to create an account, and once you know what shares you want to buy you can use this online broker or platform to purchase the shares.

How does the share trading work?

Every time a share is purchased in Australia (with a couple of limited exceptions such as new companies listing or new shares being created), there is someone on the other side of the transaction selling the same share. This means that you can only ever buy a share at a price someone else is willing to sell the share for, and conversely you can only ever sell a share at a price someone else is willing to pay.

What’s the next step?

Now you understand the process of buying shares, the next big decision you need to make is around your investment strategy. This step is critical to the success (or failure) of your investment, and involves choosing the companies you’ll invest your money in.

Get this right, and you’ll be well on your way to success in your investment and using share investing to grow your income and assets. There are loads of different options here, more than we can cover in this post. But stay tuned for the next blog in our shares series where we’ll cover the most important things you should think about when setting up your investment strategy.

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