Understanding Share Trading
Shares, the Backbone of Trading: When people discuss trading or investing, they often refer to share trading—a popular and traditional method, especially among individual investors. If you have a pension plan, chances are you’re already involved in shares to some extent. But what exactly are shares, and how do they function?
Share Value Calculation: A share is a unit of ownership in a company. To determine the value of one share, you divide the total company value by the number of shares issued. For example, if a company is worth £10,000 and has 2,000 shares, each share would be worth £5 (£10,000 ÷ 2,000). As share prices fluctuate, so does the overall value of the company.
Why Do Companies Offer Shares? Companies offer shares primarily to raise capital. By allowing investors to buy a stake in the company, management can generate funds for various purposes such as expansion into new territories or launching new product lines. The success of the business and the value of the share price are interlinked companies need shareholders for funding, and shareholders expect the company to use their investment to fuel growth and profitability.
Factors Influencing Share Prices: Share prices are dynamic, influenced by the principles of supply and demand. The level of a share’s fluctuation is termed its volatility. If more people want to buy a share than sell it, the price rises due to high demand; conversely, if supply exceeds demand, the price falls.
1. Earnings:
- Profits a business makes significantly impact share prices. Better-than-expected earnings generally lead to a rise, while disappointing earnings result in a potential fall. Earnings announcements, usually on a quarterly, half-yearly, or annual basis, can cause volatility in share prices.
2. Sentiment:
- Share prices are heavily influenced by expectations regarding a company’s future performance. This sentiment is shaped by factors like upcoming industry legislation, public trust in the management team, or the overall economic health.
Lesson Summary: Understanding Shares and Share Prices
- Share Basics:
- A share is a unit of ownership in a company, representing a stake in its assets and earnings.
- Company Financing:
- Companies offer shares as a means to raise capital. By allowing investors to buy part of the company, management can generate funds for various purposes like expansion or new product launches.
- Share Prices and Influencing Factors:
- Share prices are dynamic and influenced by several factors:
- Supply and Demand: Prices fluctuate based on the principles of supply and demand. If more people want to buy a share than sell it, the price rises; if supply exceeds demand, the price falls.
- Earnings Figures: The profits a business makes significantly impact share prices. Better-than-expected earnings usually lead to a rise, while disappointing earnings can result in a fall.
- Market Sentiment: Share prices react strongly to expectations of a company’s future performance. This sentiment is shaped by various factors, including industry changes, public trust in management, and overall economic health.
- Share prices are dynamic and influenced by several factors:
Understanding these dynamics is crucial for anyone venturing into share trading. In the next lessons, we’ll delve deeper into trading strategies, risk management, and explore other financial instruments. Stay tuned for an enriching journey through the world of financial markets!
