What are shares and how do they work?

The rundown

Buying shares makes you a shareholder, which means you purchase a part of a certain company when you buy a share.
Investing can help you grow your wealth as shares may increase in value over time.
As a shareholder, you may receive dividends (regular payments) from the company’s shares you own, providing an additional income stream.
Investing comes with risks that are sometimes beyond an investor’s control, such as current affairs or conflicts.

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What is a share?

Shares are a way for companies to raise money for the operation of their business. When you buy shares, you're purchasing a part of that business. Shares are also known as equities, securities, or stocks, are bought and sold through exchanges, such as the Australian Securities Exchange (ASX), Nasdaq or the New York Stock Exchange (NYSE).

Why invest in shares?

Buying and selling shares could help you grow your wealth through:

Increasing in value: Shares can increase in value over time (capital growth), allowing you to sell them for more than you paid.
Additional income stream: Dividends are payments made to shareholders from a company's profits.

Investing vs. trading

Investing and trading are different. Investing is the act of buying shares (or other investment types) to grow your investment portfolio over time (this could be over weeks, months or years). Trading is the buying and selling of shares on a regular basis (often daily) to profit from small price changes.

What are the risks in buying shares?

Like anything, buying shares comes with risks. It's important to understand and be comfortable with these risks before investing.

Capital loss risk: Selling shares for less than you paid results in a capital loss.
Liquidity risk: It can be hard to buy or sell shares when you need to, as you may not always find a buyer or seller at your desired price and time.
Market and economic risk: External factors can affect companies and the share market, causing volatility.

Learn more about the risks of investing in shares >

Before investing, consider:

How much can you afford to lose? Think about how much money you can tolerate losing without impacting your lifestyle.
Will investing keep you up at night? Imagine if your portfolio dropped by 10%, 30%, or even 50%. Consider these potential losses to find the right balance of investments for your risk tolerance.
How long do you have to invest? The longer you have to invest, the more you can withstand market ups and downs.

Remember, all investments carry risks. Shares are high-risk because prices fluctuate daily. Keep these points in mind:

Higher returns come with higher risks.

If you have more time to invest, it increases your portfolio’s risk tolerance.

Consider how much risk your entire portfolio is exposed to.

Don’t invest more than you can afford to lose.

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CommSec Learn is intended to provide general information of an educational nature only. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Investing carries risk.

Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Investing carries risk.