If you’ve ever thought about the idea of investing in shares, you may have been put off by all the jargon that seems to go with it. You don’t have to sound like a stockbroker to successfully buy or sell shares but it’s useful to know what some of the terms means. And, rather like learning a foreign language, it’s not so difficult once you’ve mastered a few words.
What is a share?
A share is simply a stake in a company. If you own a share, you’re a part owner of that company and that means that if the value of the company rises, so does your investment and vice versa if its value falls.
SAVVY TIP: You often hear people talking about ‘stocks and shares’ and you may have wondered what the difference is between them. The answer is, very little and the two words are often used interchangeably. The only difference being that stocks are often used to refer to shares in general, whereas shares normally refer to shares in a particular company. In the UK, investment specialists often talk about to ‘equities’ rather than shares. The London Stock Exchange website has a guide to investing in shares.
- Understanding dividends. When a company produces a profit it distributes some of these profits to its shareholders. This is called the ‘dividend’. Some companies (such as energy suppliers) traditionally have a better track record of paying dividends than others. Companies may choose not to pay a dividend but to channel the money into research or future plans instead.
How companies may be categorised
There are lots of different ways that companies are categorised and many of these overlap. Here is some of the jargon you’re likely to come across.
Cyclical/non cyclical stocks:
- Cyclical companies are those that are affected by how well or how badly the economy is doing. Examples of cyclical sectors include car manufacturers, house building companies and tour operators.
- Non cyclical or defensive stocks include energy suppliers, tobacco companies, household goods manufacturers and food retailers.
Another way of categorising a company is by its size in the market. The ‘market capitalisation’ or ‘market cap’ measures the total value of all the shares of a company in the market. A company with ten million shares priced at £5 each has a market capitalisation of £50 million.
SAVVY TIP: The market capitalisation can give an indication of the strength of the company, but it’s not the case that bigger is always better. Even the biggest companies can fail.
- Micro cap: This includes shares in the smallest companies that are traded on the stock market. These companies will tend to be younger and riskier than the other categories. Don’t assume that cheap shares are necessarily good value.
- Small cap: This commonly refers to companies with a market capitalisation of below £100 million.
- Mid cap: Companies that fall within the FTSE 250 index, which is made up of the next largest 250 companies after those that qualify for the FTSE 100 index) are often referred to as mid cap.
- Large cap: This commonly refers to companies that fall within the FTSE 100 index or those with a market capitalisation of £3 billion or more.
SAVVY TIP: If you’re interested in investing in shares and want to make the decisions yourself, or if you want to take an active interest in your investment portfolio, it’s worth familiarising yourself with the language around investment.
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