What are Shares?

When you buy stocks, you are buying shares of a company. But there’s more to it than meets the eye.

The Merriam-Webster Dictionary defines the noun ‘share’ as, “any equal portion into which property or invested capital is divided.” With that definition in mind, when you buy shares of a publicly-traded company, you are buying a small portion of that business. In other words, when you invest in a stock, you own a share (or shares) of that company.

Shares can come in a range of prices, and some shares come with benefits such as dividends, which are distributions of earnings given out to reward investors. Some dividend stocks have an additional benefit that can substantially increase your results over time are dividend reinvestment plans, or DRIPs.

When you choose to reinvest your dividends, each stock’s dividend payment is used to buy new shares of that same stock, at the market rate. You then start earning dividends on those new shares, and those dividends get turned into more shares, and so on and so forth. Over time, the number of shares you own and the size of the dividend checks you receive every quarter will both gradually increase, without you doing a thing.

Of course, not all stocks offer dividends, but no matter what kind of stocks you buy, you want the price of your shares to increase. While there’s never a guarantee in the stock market, there are some companies that exhibit qualities that make them desirable to investors. If you’re looking to buy shares in businesses that are generally safe, and will increase in value over time, look for these five key attributes:

1. A product or service or business model that is revolutionary
2. A mass market
3. A company that’s still small enough to grow rapidly
4. A company that is not respected—perhaps not even known—by the majority
5. And last but not least, a stock that’s trending up, indicating that investors’ perceptions of the company are improving. This is important because perceptions are always at least as important as reality, at least on Wall Street.

One thing to watch out for, however, are dual-class shares. Dual-class (or even triple-class) structures issue shares that don’t have voting power. The idea is that investors can buy these dual-class shares, receive dividends and benefit from stock splits and other moves, but can’t vote on company decisions like appointments to the board of directors or other corporate decisions.

The usual reason for the creation of non-voting shares is that this allows company founders and leaders to maintain control of the company even if they don’t own a majority of the stock.

Stock exchanges are always eager to gain new listings and may be willing to grant permission for dual-class shares as a way to attract them. But apparently the companies that calculate major stock indexes—the FTSE Russell and S&P Dow Jones—have banned them from inclusion.

To find out more about stock investing, download your copy of our FREE report, How to Invest in Stocks: How Stocks Work, How to Calculate Return on Investment and Other Investing Basics.