Many people are aware that building a financial portfolio is important, but why invest in shares? To answer that question, it is important to first understand what shares are.
What is a share?
Shares is obviously a noun taken from the verb “to share”. To share something is to divide it among multiple people. So a share is a part of something that is owned by one person, while other parts of the same thing are owned by others. Specifically, the shares we are talking about are pieces of the financial interest in a company. When a person owns a share, they own part of the company.
What is a shareholder?
A shareholder is a person who owns one or more shares in a company. Shareholders receive a variety of benefits, depending on what type of company they own shares in, and what type of shares, or stock, they own.
The most basic type of share provides income when a company does well and improves its standing in the market. If a company’s stock price increases, a shareholder may sell that stock for a profit.
Other types of shares may allow the shareholder a right to receive dividend payments. Dividends are payments made out of a company’s profits, and may be paid monthly, quarterly, or annually. An investor with dividend rights in a highly profitable company can make a great deal of money without putting any effort into the profits. Many times, shareholders of this type also have voting rights, and can help drive company decisions in major financial decisions.
Why invest in shares over other opportunities?
There are many investment opportunities available for those with extra cash flow. Investors might choose to back a small business by supplying start-up capital for an agreed upon percent of profits. The small business may also set up a payment plan to return the borrowed funds with interest. In effect, this puts the investor in the role of a bank, loaning money at a certain rate of return. The drawback with this investment type is there is no guarantee the borrower will pay back all of the funds.
Another popular investment area is real estate. Individuals purchase houses, have them fixed up or remodeled, and sell them for a profit. Similarly, individuals might purchase rental properties and rent them out for monthly payments that eventually become profit. While real estate can be a lucrative investment, it takes a lot of upfront work and money to be successful.
Many people choose to invest in fixed annuities, which are offered by insurance companies. Fixed annuities offer investors a monthly or quarterly payment over the course of several years after an initial investment. When all payments have been received, the investor has gained more than the original payment. However, annuities do not generally yield returns as high as those available when purchasing shares or investing in the stock market.
Benefits of investing in shares
Historically, investing in shares has been one of the proven ways to make large gains in a long-term investment strategy. In fact, most of the richest people on the Forbes lists made their fortune by owning significant portions of shares in companies that experienced extreme success. That is not to say all people who invest in shares will become insanely rich. But with proper research and investment strategy, anyone can generate extra income or long-term financial gain by investing in the stock market.
When contemplating the question, “Why invest in shares”, it is best to seek the guidance of an experienced stock broker. Such an individual can assist beginners in choosing the right investment opportunities for their financial needs and cash flow situation.