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Investing FundamentalsChapter 2 — Understand Equities

2-1 What Is a Share?

A page sorting out what kind of product a share is, and what return and risk come with it

Chapter 2 looks at equities themselves. The first thing to settle is that a share is not something you watch only for price movement — it is part-ownership of a company.

What you'll learn
  • A share is a product that gives you part of a company.
  • Return comes from both price appreciation and what the company returns to shareholders.
  • Risk is larger than a deposit, but shares make it easier to capture a company's growth.
  • When you hold a share, separating what you own from what you are expecting keeps things clear.

1. A share is part-ownership of a company

Buying a share means owning part of that company. You do not run it directly, but if the company grows its profits and its future value rises, that result flows through to shareholders too. Holding a share also means investing in that company while asking yourself can this company keep creating value?

Owning shares = owning part of a company
Shares are easier to think about as a stake in how the company does, not as a number on a screen
CompanyYour stake100 sharesVoting rightsA say in how the company is runRight to dividendsA share of the profitsRight to residual assetsA share of assets if it winds upYou hold a slice carved out of the whole

When looking at a share, it helps to work through three things in order: how does this company make money, where does the return come from, and what would have to break for me to revisit my assumptions.

2. Return comes from price appreciation and dividends

A share's return comes mainly from two sources: price appreciation and what the company returns to shareholders. Price appreciation arrives when expectations for the company's future improve and the share price rises. Shareholder return is the company handing part of its profit back through dividends or share buybacks.

Capital gain
The gap between your buy price and a higher sell price is the return
BuySellGain
Income
Dividends and interest received while you hold
Dividends & interest

Even among shares, companies with high growth expectations tend to lean on price appreciation, while companies with mature businesses and steady profit and cash flow tend to emphasise shareholder return. That is exactly why, before you hold a share, it is worth putting into words what it is about this company that you are counting on.

Next, 2-2 Why do share prices move? sorts out how expectations for a company show up in its share price.

1-3 Risk and Return of the Main Products

A page comparing deposits, bonds, equities, and REITs on the same axes, and sorting out the role each plays in your finances

2-2 Why Do Share Prices Move?

A page sorting out why share prices move on future expectations and outside conditions, not only on current earnings

On this page

1. A share is part-ownership of a company2. Return comes from price appreciation and dividends