Share Prices Explained
Wednesday April 22, 2009
Share Prices Explained
What Are Shares?
A share is part ownership in a company that you purchase on a stock exchange. Shares are sold in bundles of $500 or more on the ASX, and when you buy shares, you become a shareholder with a vested stake in the performance of your chosen company.
Companies sell shares to raise capital that can be used for expansion, new projects and a variety of other purposes, and shares are often referred to as stocks, securities and equities. Also, the word share market is often used interchangeably with stock market and stock exchange, but you will find more than just shares are traded on the Australian stock exchange.
Understanding Share Prices
Understanding share prices is the key to making money on the share market, and if you haven't figured this out already, it can be a speculative process. Even the top investors in the world can make mistakes, and there are many factors to consider when assessing share prices.
It all sounds very scary, but in truth, the situation is very simple and you should have total control over your investment at all times. Of course, the catch here is that you must be informed and employ an investment strategy that suits your financial goals, and you must also understand the variable risks involved with each investment strategy.
However, before going into those preliminary steps to investing, there are a few general rules you can apply that will greatly help your understanding of share prices.
- Company Performance
At its most basic level, share prices are determined on company performance. Supply and demand, market conditions and a range of factors specific to each business will drive company performance, and choosing the best shares will mean picking the company that is going to perform well over the long term.
A good start is to look at companies with solid, transparent balance sheets with good business models that are moving with the current economic climate. These will often include Australia's biggest companies, and these shares are often called blue chip shares, which are known for their long-term stability and performance.
- Global Markets
Like it or not, global economies depend on each other, and what affects one major world economy is likely to have an impact at the ASX. This is especially true when it comes to Wall St and the US stock markets. What happens on Wall St is often shadowed on the ASX.
- National Economy And Short Term Factors
If the share markets were predictable, we would never see crashes. Unfortunately, sometimes factors escape economist's predictions and share prices can rise or fall accordingly. For the long-term investor, this situation is not so much of a concern.
However, for those looking to buy shares or liquidate shares they have held for a long time, it becomes essential. The current share prices can be affected by the state of the national economy, business reports and even large amounts of shares being traded on the stock exchange itself.
Many people actually make money on this short-term volatility, and these people are known as day traders, or active traders.
Make Money Using Share Prices
Understanding share prices should give you some ideas of how to make money on shares. However, so it is crystal clear, we'll have a look at some of the common strategies people employ with different degrees of risk and success.
- Buy Low, Sell High
It sounds simple, but no matter which way you look at it, when trading shares, you must buy them at a lower price than you sell them. In a long-term trading strategy, with the right shares and advice, this is not a difficult prospect. A 10-year investment plan should see you sitting on some impressive investment returns assuming with the right shares.
However, in the short term, the risk increases exponentially, and this can include when you are simply thinking about liquidating your assets after a long holding period. Using tools such as margin lending and other stock market tools aside from shares (such as derivatives) also increases the potential for risk.
- Know Your Limits
While the minimum parcel of shares you can purchase is $500, most financial advisors recommend starting with $4000 or more. We would encourage new investors to perform a large amount of research and speak to a financial advisor if they are not certain about an investment.
There is no reason you can't see decent returns even with a small amount of money, but you won't become a millionaire overnight without taking on a ridiculous amount of risk. In most cases, a sensible investment will produce returns in line with the initial investment amount, i.e. a bigger initial investment will produce bigger returns.
Having said this, many people are now trading online with discount brokers and trying their hand at short to mid-term trading. The internet is a powerful tool on the share market, and it provides previously unknown advantages. Know your risks, know your limits and invest wisely.
- Diversify
A diversified investment portfolio is one of the best forms of protection against share market risks. You may even want to consider commodities or a managed funds in your overall portfolio, and at least you should consider shares from different sectors. If share prices in one sector or company crash, your diversity will minimise the chance for loss.
There was a time when it took a substantial amount of money to truly diversify a portfolio, but nowadays, online stock brokers are providing smaller retail investors the opportunity to diversify with share packs.
A share pack is a pre-packaged solution constructed by financial professionals designed to allow smaller investors to invest in numerous top companies with minimal outlay. Of course, more information on individual share packs can be found through the providers, and you must always do thorough research on any investment.
Live Share Prices
The ASX provides close to live share prices for free (20 mins delay), and you can look up information for specific companies too. Of course, many of our sponsors also provide live share prices through online trading platforms and other modern methods.
For the latest share price news, you can check out our articles that contain stock market reports and other useful information. Australia's top media outlets report on the Australian share market throughout each day, and it is good share trading advice to watch current share news from a variety of sources.
For more information on stock brokers, Australian shares and the process of buying shares, make sure you take the time to explore the rest of shareprices.com.au.
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