When you buy shares in a company, you actually own a small piece of that company and the value of your investment will fluctuate in line with the share price. The company may pay dividends – which are made to shareholders out of the company’s profits.
It is reckoned shares are fully priced within four seconds of any news relating to the market in general, or the individual equity. Equity exposure is dangerous as the market is closed for two thirds of the day, meaning proper risk management needs to be applied. Predicting the future movement in equity prices is a “crystal ball exercise” since nobody can predict the future.
Risk and rewards
The gift of the market to investors and traders is risk reward. Shares are considered riskier than cash and bonds, but the potential returns can be higher. Bear in mind that the value of shares can fall as well as rise and you could lose your original investment.
Spreading your investment across different companies, industries and even countries can also help to offset some of the risks associated with only holding shares in one company. Spreading the risk like this is known as diversification.