What is a share?
A share is, quite literally, a share in a business. Think about that for a moment because it’s where a lot people go wrong. You are, in effect, a business owner. Now consider, for the sake of argument, that you want to buy 100% of a business. What would you look for?
Well, you’d probably want a company that was profitable, and that produced enough cash flow to pay you some income. You’d also want a business that had sound prospects for the future and employed people that you felt you could trust. And you would certainly want to buy in at the cheapest possible price.
So why should it be any different when you buy 0.001% of a business, as you do on the Australian Stock Exchange? In reality, it isn’t, it’s just that most people don’t make the connection. Too many investors concentrate on a share price rather than the products and services the company delivers. But when you buy a share, you are not just buying a piece of paper. You’re acquiring a stake in a business that employs people, a company that makes and sells things that someone wants.
You’re an owner and, as a result, you’re entitled to a proportion of the profits, albeit a small proportion. And you are entitled to a say in how the company is run. You get to appoint the directors, who in turn appoint management. Management runs the company on your behalf, although the way some managers carry on they have clearly forgotten this.
By purchasing a share, you own part of a company and if it’s a great business, why not participate in its future? But what of the risks? All too often, even if they think like owners, many shareholders feel powerless in the face of egotistic and greedy management. Which brings us to the risks and rewards of investing in shares.
