3.1.7 Shares – volatile but good long-term performers
Shares are sometimes called ‘equities’. They entitle the holder to a share or part ownership in a company. Depending on the type of share, this may entitle the shareholder to vote on how the company is run. Shares also usually entitle their owners to receive dividends, paid by the company out of the profit it makes. The receipt of these dividends is, for the shareholder, the income element of the return from their investment in the shares.
The price at which a particular share can be bought or sold will vary from minute to minute, depending on the balance of investors who want to buy them and existing holders who want to sell. If investors are able to sell shares at a higher price than they originally paid, they make a capital gain. If they sell for less, they make a capital loss.
Shares are bought through a broker. A broker can be found in high-street banks, on the internet or in a stockbroking firm. For online broking, there is typically a flat-rate charge for any transaction, say £12 for one-off trades, or £10 per trade for frequent traders, so it is not usually worth buying or selling shares in very small amounts. Conventional stockbrokers may also charge a percentage commission on the value of the transaction as well as a minimum commission.
Stamp Duty Reserve Tax (SDRT) of 0.5 per cent is paid when shares are bought electronically (which the vast majority are these days). SDRT is not paid when shares are sold. Share prices can be seen in most newspapers that report daily on share prices as well as on other information.
You have seen earlier the factors that can dictate the prevailing level of interest rates in the economy and, by inference, the returns on interest-bearing investments.
So what drives the levels of share prices?
The first important point is to distinguish between the factors that will generally affect the levels of share prices – typically measured by referring to stock market indices like the FTSE-100 – and those factors that specifically affect a particular, individual, share price.