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Three things you need to know about share prices

Thinking of dabbling in stocks and shares? Investing is a risky business, so it always helps to be prepared! Here are three vital pieces of information to help you get started.

What are shares and shareholders? Shares are simply stakes, or segments of a company, so when you become a shareholder you have a stake in the business. Shareholders receive the accounts and other related documents, as they must be kept informed of how the company is faring – not only because they are interested, but because the information will let them know how big their share of the profits is likely to be.

Why – and how – do companies sell shares? Shares are issued to raise money for further investment, research and development. You may have heard the term ‘initial public offering’, or IPO. That signifies that a company is selling shares for the first time. The shares are normally listed on a stock exchange, where members of the public can freely buy and sell them. If a business wants to sell more shares later, that is known as a ‘rights issue’ and usually means the shares will be offered to existing shareholders as opposed to the public.

What causes share prices to go up and down all the time? It’s all down to confidence. Imagine a playground see-saw, with investors on one side and a company on the other. If the company is doing well and investors feel confident about its outlook, more people will want to jump on board, so as the investor’s side expands, the company will ‘rise’. The growing demand will drive up share prices.

But if the business has not fared as well as had been anticipated, shareholders may want to opt out, so the investors’ side of the see-saw will get lighter and the company will ‘drop’. In other words, when demand goes down, share prices go down, too.

This see-saw effect can go on all day as investors, consulting financial newspapers and websites for updates, decide whether the shares are worth buying or selling. In some cases, when a share price is very low, investors will take a risk in the hope that the price will rise again.

Always remember, investing does involve risk-taking and results can vary.

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