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Why Do People Buy Shares?

19 Jan 2016 | 15:00PM

 

What is a share?

The capital of a company is divided into shares. Each share stands for a unit of ownership. These shares are offered for sale when an organization needs to raise funds. An Initial Public Offering means that a company is making a portion available for traders or investors to buy. Companies benefit from this exercise as they receive the required funds for different purposes.

Wealth creation

In its very essence, investing in shares is about accumulating and multiplying wealth. The most basic tip about how to invest money in the share market that traders follow is 'buy low, sell high'.

Another share market basic for wealth creation is investing for the long term. This is because businesses go through a lifecycle, and investors need to give their shares enough time for value creation. This is possible only if they stay invested in a particular stock over a period of time.

Opportunities to own

Buying shares of companies implies that the investor owns a part of that company, thereby allowing him to enjoy the profit that the company makes. The part of the company owned is equivalent to the percentage of shares that he has purchased. As a partial owner of the company, he will be kept informed about company news and updates.

Portfolio diversity

Investing in shares adds diversity to the investment portfolio. The portfolio could now give investors several sources of income – from real estate, stocks, interest earned from bank accounts apart from his chief source of income.

Minimizing loss

The Indian share market comprises a number of companies, enabling investors to distribute their investments rather than committing all their resources into one. If the losses of one company lead to the depreciation of some of their shares, the successes of the other would help balance out their losses.

Easily accessible money

The money put into some types of investments, such as fixed deposits, cannot be accessed until the investment has matured.

In contrast, buying shares allows investors to sell them at any time, without a limit. The amount resulting from this transaction may be easily transferred to their bank accounts.

Combating risks

The primary fear when it comes to trading in the share market is unexpected losses. This may be overcome through stop loss, a feature that enables investors to give a mandate to their brokers about a specified price limit. If the value of their shares falls below this limit, they will be automatically sold, thereby saving them from incurring great losses.

Added benefit of dividends

A dividend is the payment that investors receive from the overall profit that a company makes. This amount may be paid in the form of money or more shares. It is important to invest wisely and choose a company that is trustworthy, because paying dividends to investors is not compulsory. However, most multinational corporations and established businesses do offer dividends, as this widens their shareholder base.