How should you react when markets are volatile?
By buying a share in a company you are, for better or worse, tying the fate of the investment to the performance of that particular organisation. In effect, you are buying part of that company and its future profits, or if the company doesn’t perform well, a share of its losses. Investors receive a share of the company’s profit in the form of a dividendDividendThe amount of a company’s after-tax earnings which it pays to shareholders. payment and can also benefit from a future rise in the company’s share price. It’s important to keep in mind that investments in shares (also referred to as ‘equities’EquitiesAnother name for shares held in a company. or ‘stocks’StockA generic term for equities (shares) and, less frequently, bonds. See also Security.) can go down as well as up in value.
The stock marketStock marketA place where shares or other securities are bought and sold e.g. the London Stock Exchange. can be divided into two separate categories – primary and secondary. Both are equally important to companies wishing to raise end capital.
This consists of shares in two types of companies:
Existing company shares are traded here on a daily basis. Movement in these prices indicates the relative performance of the company over time. Most investment in shares is in the secondary market Secondary marketAny market in which existing securities are traded (as distinct from the primary market, in which securities are first issued). The Stock Exchange is the secondary market for share trading. and it must work efficiently for the primary market Primary marketThe market in which securities are sold at the time they are first issued. (As opposed to secondary market). to function.
Share prices in the secondary market reflect the supply and demand for the individual share:
Many factors can affect the price of a share. Events in the short term can affect the psychology of investors – creating a ‘herd mentality’, which can invariably affect the share price.
There are many factors that can affect the demand for shares, some caused by the wider geopolitical and economic (macro) factors and other (micro) factors associated with the company itself.