What are shares and how do they work?

Are you intrigued by the world of investing but unsure where to begin?

Shares, also known as stocks, offer an entry point into the world of financial markets. Whether you're aiming to grow your wealth or simply curious about how the stock market operates, learning about shares will undoubtedly prove useful.

In this guide, we'll explore what shares are, how they work and how to start investing in them through Superhero.

What are shares?

Shares represent ownership in a company. When you buy shares of a company, you become a shareholder. This means you now own a portion of that company.

Becoming a shareholder typically means getting the right to vote on certain company decisions and receive dividends – which are distributions of the company's profits. 

How do shares work?

Shares are bought and sold on stock exchanges. These are platforms where investors can trade shares of publicly listed companies. Some of the largest exchanges in the world are the New York Stock Exchange (NYSE), NASDAQ and London Stock Exchange (LSE).

Prices of shares fluctuate based on supply and demand. Some factors that influence this are the company's performance, economic conditions and market sentiment. Using an investment platform like Superhero offers access to the Australian Securities Exchange (ASX) and U.S. Markets and allows you to track performance of the shares listed on those markets.

What is the ASX?

In Australia, the primary stock exchange is the Australian Securities Exchange (ASX). The ASX is one of the world's leading financial market exchanges, where investors can buy and sell shares of Australian and international companies.

Most popular stocks on the ASX

Some of the most popular shares on the ASX include Commonwealth Bank of Australia, Qantas, BHP and Rio Tinto. These companies are some of the largest ones listed on the ASX, which is unsurprising given that they are home-grown names.

But with how active the stock market is, Superhero's most traded shares change almost everyday. If you're curious, we actually curated a list of Superhero's most traded shares last year. Perhaps that list can help jump-start your research into ASX-listed companies.

Can I make much money from shares?

Investing in shares can offer opportunities for generating wealth. Some of the wealthiest individuals in the world, such as Warren Buffett, made their names by successfully growing their wealth through shares. There are also others who generate wealth by buying and selling shares regularly, taking profits along the line.

Some ways that shares can help grow your wealth is by earning you dividends and giving you the potential for capital growth. But do remember that investments also carry risks that have the potential to lead to financial losses. We will be going through a few examples of risks in the next section.

Earning from dividends

Dividends are distributions of a company's profits to its shareholders. As a shareholder, you become a part-owner of a company, which means that you're entitled to receive a portion of these profits. Dividends can provide a steady stream of income, enhancing the overall returns on your investment portfolio. 

The dividend amount you receive depends on a few factors, such as the number of shares you own and the amount of cash dividend the company decides to pay out per share. Companies generally share this information alongside any announcements they make about a dividend payout.

Do note that not all companies pay out dividends. Some may not do so due to reinvesting earnings back into the business. 

Earning from the capital growth of shares

Another way to make money from buying shares is through capital growth. As the value of the company increases over time, so does the value of your shares. When you sell your shares at a higher price than what you paid for them, you realise a profit. This capital appreciation is generally one of the key drivers of wealth accumulation in the stock market. 

Is it risky to invest in shares?

While investing in shares offers the potential for significant returns, it also carries risks that investors should be aware of. These risks can lead to potential capital loss, which is why some investors choose to get professional advice before starting their investment journey. 

Two of the most cited risk factors are market volatility and company specific risks. 

Market volatility

Share prices can be highly volatile, fluctuating in response to various factors such as economic conditions, company performance and geopolitical events. Market volatility can lead to fluctuations in the value of your investment portfolio and potentially result in losses if you sell your shares during a downturn.

Company specific risks 

Investing in individual companies exposes investors to company-specific risks. Some examples are poor management decisions, competitive pressures, regulatory changes and financial instability. If a company experiences financial difficulties or goes bankrupt, shareholders may suffer losses.

How much do I need to buy shares?

The amount of money you need to buy shares depends on the price of the shares you're interested in and the minimum investment requirements set by your brokerage account. Some platforms allow you to start investing with as little as a few hundred dollars, while others may require higher minimum investments.

Superhero allows you to buy shares with a minimum trade amount of just $10. Similarly, our brokerage fee is highly competitive at just $2 brokerage (for trades up to $20k in the relevant currency). T&Cs apply. Brokerage rates differ for Superhero Super. See how Superhero's fees compare to competitors.

What shares should I buy?

Choosing which shares to buy can be daunting. Unfortunately, there is no quick or generic answer to which shares you should buy. It's essential to conduct thorough research and consider factors such as your investment goals, risk tolerance and time horizon. Some shares can gain or lose 20% in a day while some only exhibit very little movement.

Many investors choose to diversify their portfolios by investing in a mix of different companies across various industries. If that's what you believe suits you best, looking into the exchange-traded funds can expand your options.

When should I buy shares?

One line that many investors live by "time in the market beats timing the market". What that means is that the length of time you're invested in the stock market is likely to yield better results than trying to predict the perfect moment to buy or sell investments.

This adage comes from the fact that historically, the broader U.S. stock markets have increased over long periods of time – think decades. While past performance doesn't guarantee the same in the future, this long-term trend has inspired the confidence that investors have on long-term investing.

Either way, trying to time the market perfectly can be challenging, if not impossible, even for seasoned investors. Instead of obsessing over finding the absolute best moment to buy shares, an investor can focus on their personal investment goals, financial needs and investing time horizon. They can then build an investment strategy tailored to their individual situation.

How do I buy shares in Australia?

To buy shares in Australia, you'll need to open a brokerage account with a licensed stockbroker or share trading platform.

Superhero is an online trading and investing app that allows you free access to both the Australian and U.S. stock markets. These include the ASX, NYSE, NASDAQ and several others. After creating your account, you can browse through different stocks, see how they've performed historically and see a brief overview of what the company does.

With Superhero, you can begin your investing journey with a minimum trade size of just $10 and brokerage starting from just $2 in the relevant currency.

Do note that brokerage and other fees may apply when you decide to start investing.