Why do some people own shares on the stockmarket?
Maybe you are exploring investing for the first time and want to understand a
little more about it. Many people are fed up with the low returns on cash
savings and are looking at options for a better return with stocks &
Whether we agree with the system or not, the fact
remains that here in the UK we live in a developed capitalist economic system.
It is predominantly a self regulated system with minimal intervention from the
state. This is the opposite of a communist system which operates in the likes
of Cuba and North Korea where the economy is largely run by the state which
controls the means of production.
Under our system therefore, capital is valued more
than labour and those who set up and own a business usually make much more
money than the employees of that business. Capitalism has provided us with our
smart phone from the likes of Apple or Samsung for example, Google which we all
use to search the web (and more), advances in drugs and medicine which is
helping us all to live longer, from Amazon we have the Kindle e-reader and more
recently the voice-activated Echo speaker with Alexa, we now have the electric
car and just around the corner is the driverless car and the promise of our
online shop delivered by drones! A lot of people criticise the system but
continue to buy into many of the latest must-have technology.
The stockmarket is basically a product of a capitalist system. It is a place where a business can be
listed and basically enables the business owner to raise capital in return for
a share of the future profits in the business. Therefore the owner does not need
to risk his/her own savings or borrow money secured on his own house for
Many will be familiar with the popular TV programme
'Dragon's Den' where someone with a new business idea will 'pitch' this to the
Dragons who hold all the cash and who may, if they like the business and see
potential to make money, agree to invest their own money in return for quite a
substantial share of the business.
Anyone with some capital, therefore, can become a
'dragon'. They may not wish to take a punt on a new start up but can buy shares
in the many hundreds of established companies listed on the London Stock
Exchange known as the FTSE. They then become a part owner of that company and
they will share in the future success of the business as the share price rises
and may also receive regular dividend payments.
I guess many new investors who 'dabble' with stocks
& shares do not think of themselves as part owners of a company but more
likely they are taking a punt on the share price rising and making a profit at
some point when the shares are sold. They probably regard it as an online
transaction carried out via their online broker and possibly not much different
to an online purchase from their favourite retailer.
Here's a short extract from
an interview with Warren Buffett, possibly the most successful investor of the past 60 years:
"Imagine you’re buying an ownership stake in the convenience store
around the corner from your house. Automatically you’ll think about the
competition, suppliers, prices, etc. You’ll have to think both about the
specific location as well as its competitive position in the market.
Similarly, while buying stocks, you need to think about
all these things – just as the people running the business do.
When you buy a stock, you’re not just buying a piece of
paper or a ticker symbol. Buying the stock of a company is buying an ownership
stake in a BUSINESS".
It is therefore possible for anyone to become a part
owner in some of the largest companies in the world such as Facebook ($550bn),
Apple ($950bn) and Amazon ($800bn) which are listed on the US stockmarket
With the introduction of the low-cost online brokers
and access to the internet, it is fairly simple to open an account and buy into
any of the large, well-established global businesses. Certainly it is far
easier than starting your own company from scratch.
Buffett's again..." Owning a profitable, growing business
is one of the few paths to wealth. It’s something anyone can do today with
a meager amount of savings. You can start a business or buy one
(Buffett often refers to farms or apartment buildings). Or you can take a
simpler approach by buying a portion of a business through the stock market".
"Owning a decently profitable
business over a long period of time will compound your net worth. And you
can diversify into multiple businesses (via an index fund) to increase your
chance of success. A savvy investor might try to buy shares of businesses for
less than they’re worth".
The returns from owning a
small share in a company or more commonly many companies held via collective
investments will far exceed the return from holding cash in a deposit account.
Over the past 50 years the average annual return from equities after inflation has
been 5% each year compared to just 1.2% from cash (according to Barcap Equity
Gilt study). That means a sum of £10,000 invested in 1968 would now be worth
£90,000 whereas the same amount in a savings account now worth only £18,000.
Invest or save...you would
think this would be a no-brainer yet only a small percentage of the population
actively choose to invest on the markets. Many think it's far too risky...like
gambling at the casino or say they just do not understand finance. They would
probably go to great lengths to research their next phone deal, holiday or car
purchase but will not think to put the same time and effort into understanding
something which could enhance their wealth and lifestyle in a fundamental way.
One of the reasons for running this personal finance blog
is to help those who want to understand this important subject get an understanding
of the basics. Of course some people will sadly never grasp finance and I
am not naive to believe investing is for everyone, many just do not have any spare cash to invest, for others to some extent it will depend on temperament and the ability to remain patient but I am sure there are many people
who could do a decent job of it if they put in a little time and effort.
subscribe to the philosophy of legendary investor Ben Graham who said “To achieve satisfactory investment results is easier
than most people realize; to achieve superior results is harder than it looks.”
I was completely unaware of
the stockmarket until I was in my 30s. It was never talked about in my
immediate or extended family and was not covered at school. Most of what I now
know has been acquired through a process of experimentation combined with an
ongoing interest in learning from others with more experience. Some of the
blogs I follow (see right) hold a great wealth of investing knowledge which I
I believe in keeping things
fairly simple..have a basic strategy, hold low cost global index funds to
capture the whole market, match your allocation mix to your timeframe and
temperament, maintain a realistic expectation of future returns, hold through
thick and thin and don't second-guess the market (as I often do!), automate as
much as possible and make use of tax breaks and free money from
employers/pensions...it's not really rocket science.
Over to you...why do you
invest? Is it rewarding? Was it difficult to settle on a strategy? Leave a
comment below and share your experience with others.