Why invest in shares
Studies have proved, time and again, that shares (or equities) are one of the best long-term investments in the financial market place. They tend to outperform government bonds, corporate bonds, property and many other types of asset.
Share prices can go down as well as up so buying shares is not without risk, but over the long term, they can generate good returns. If you want to double your money in a year, for example, buying shares is not the best way to do it. But if you want to invest for ten or 20 years, shares may be a rewarding investment.
Shares are designed to provide investors with two types of return, annual income and long-term capital growth.
Most shares offer income in the form of dividends, which are typically paid twice a year. Dividends can be seen as a reward for shareholders. They are paid when a company is profitable and has cash in the bank after it has satisfied all its obligations.
In most cases, the more profitable a company is, the higher the dividend payments. If a company is making substantial amounts of money and making significant dividend payments, it is usually considered a good investment so the share price rises.
Investors may buy shares specifically for income. Many companies generate substantial amounts of cash every year. They may use some of that money for general corporate purposes, such as paying rent and wage bills, and they may use some of the money to invest in equipment, research and development. But a proportion of that money may be paid to investors as a dividend. As dividends are usually paid out twice a year, they can provide investors with a regular income.
Companies that pay generous dividends are known as income stocks.
Some companies have heavy investment programmes so they plough their profits back into the business. These companies are often at an early stage of their development and they are keen to expand and grow. They are known as growth businesses and, if their plans succeed, their share price will increase substantially.
Long-term capital growth comes about when a share price increases over a period of time.