Why invest in shares?
We know now that investing in shares is akin to owning part of a business. A profitable business keeps ploughing back profits to earn more profits or should we say “compounding profits”. Hence unlike investing in assets like gold and real estate. Of course investing is risky. Higher returns always come with higher risks. However the risks of investing need not deter one. After all, the rewards outweigh the risks.
There are a number of different shares you can buy, including preference shares, bonds, and gilts but the most popular type is the ordinary share. Ordinary shares simply represent ownership of a company. So, when you buy shares, also known as equities or stocks, you literally become a part-owner of that business. If, for example, a ABC Plc has 100,000 shares worth £1 each and you buy £1,000 of shares, you own 1% of the company. Companies do not have to list on the stock market to issue shares. Many businesses start life with friends and family as shareholders. These businesses are called unlisted firms and their shares are often referred to as ‘unquoted’. There are more than 2300 shares listed on the main UK market and 700 on AIM, from big household names such as Marks & Spencer and Tesco to smaller businesses such as Eidos, the technology company. As a shareholder you have a say in the company’s affairs by voting at company meetings and, of course, the ability to share in its fortunes
Once debt levels have been reduced and a regular savings pattern has been established, it may be time to start looking at how those savings can be best put to work to grow even faster. Often over a long period of time, funds left in bank accounts, even high yielding accounts and term deposits, can lose their purchasing power. Purchasing power refers to how much a certain sum of money can buy now. Due to the effects of inflation, the same sum of money is likely to be able to buy less in the future – particularly 10 or 15 years in the future. So by leaving funds in a bank account, an income return is received but no capital growth is achieved. Shares and property are two asset classes that offer capital growth. Property has been a long-time favourite but is also highly illiquid, difficult to pick and requires a significant capital outlay. Shares are liquid assets so if funds are needed in a hurry for any reason, they are easily sold on the stock exchange. The price volatility of both pro
——————————————————————————– Answer We know now that investing in shares is akin to owning part of a business. A profitable business keeps ploughing back profits to earn more profits or should we say “compounding profits”. Hence unlike investing in assets like gold and real estate, which are not productive, or in bonds or debentures, which have fixed returns, investing in shares, which represent ownership in productive assets (business), hold very high upside potential. Thepower of compounding is what makes investing in stocks very attractive. In very simple terms it means that the returns on the principal earn returns too. In other words, Rs100 that earns mere returns of 15% per annum becomes Rs250 in ten years whereas Rs100 compounding at 15% per annum turns out to be Rs405 in ten years! As you stretch the time horizon, your money appreciates further. Compounding at 15% per annum Rs100 becomes Rs405 in ten years, Rs810 in 15 years a
