Owning shares means owning part of a business.
Many people think of the share market as a type of gambling and they are put off by how much share prices fluctuate. Over short periods of time, these share price swings can be quite large and are completely random.
But underneath every stock code there is a real company, and the share price will eventually come to reflect the company’s financial performance. If the company continues can grow its profits by selling more of its product or service or raising its prices, the share price will inevitably follow.
Benjamin Graham, the so-called “father of value investing” and author of both Security Analysis and The Intelligent Investor, put it best:
“A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”
Reasons to Own Shares
People own shares for many different reasons, but the main one would be to protect their savings against inflation—that is, goods and services usually cost more each year, which means that the value of a person’s savings will be worth less over time (because the savings can purchase less stuff). Investing in businesses that are able to increase the price of their goods or services in line with the rate of inflation (or better) can protect the value of their savings.
Another common reason is to grow your wealth, either for retirement or to spend on something (house, car, holiday, child’s education) at a later date. Investing in companies that can grow their profits is a time-tested way of growing your wealth as shares have generally performed better than other types of investments (bonds, term deposits and property) over long periods of time.
There are also many other benefits to investing in shares, including how easy it is to get started and the ability to invest small amounts of money with low fees. These low fees also make it easy to diversify your investments (which makes it less risky) and withdraw part or all of the money at short notice.
What’s more, the businesses are managed by professionals so it doesn’t take up much time, and investment profits (known as capital gains) can receive a tax discount of 50% if the shares are held for longer than a year.
