DIY financial investing: The s


DIY financial investing: The stock market

The idea of pooling resources together and of forming partnerships is as old as man.

DIY financial investing: The s


Imagine a prehistoric hunt with various participants. It would have been a brutal affair, to be sure, but the basics are there: various individuals contribute and in the end, the profits are shared.

A more modern example (although no less brutal) can be of three friends who together own a butchery. The interesting difference between an ongoing business and a once-off hunt,  however, is that an individual can sell her part of the business. So if one of the friends become vegetarian and wants to quit, then she can get someone to buy her share of the business at an agreed price. This new person will now own a third of the butchery and receive a third of the profits.

Public or listed companies are generally enormous with thousands of shares. But the basics are essentially the same. Each share is a small part of the business. The owner of that share owns a small part of the business, and gets a part of the profits once or twice a year.

This part of the profits, which is paid out to shareholders, is known as a dividend. All the profits are not usually paid out as dividends, some of it remains in the company and is used to expand the company. If the company becomes bigger, then the price of each share will go up.

The difference between a small partnership and a listed company?

If your butchery gets into financial trouble, then you as an owner of the business might be held accountable. This is not the case for a listed company. The company itself is a legal entity and can get sued, but you as a shareowner will not be held responsible. In this regard, your loss is limited to what you paid for your share, because if the company goes bankrupt, then your share of the business will obviously be worthless.

Also read: DIY financial investing: Save to invest

Another advantage to owning shares, also known as stocks, in listed companies is that it is very liquid. You do not have to find someone who will buy your shares when you want to sell them, and you do not have to ask the other owners of the company whether they mind. All buying and selling are done through a stock exchange and with a modern stock exchange, you simply have to let them know electronically that you want to buy or sell a certain amount of shares at a certain price.

If there is someone else on their system with whom a deal is possible, then your request will be executed. The stock exchange does, of course, take a commission, but this is generally not high.

But why would you want to buy shares in listed companies? And what should be your strategy? We look at these questions next week.