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date

11 august 2021

A security that gives us ownership of a particular company. Generally speaking, owning shares in a company makes us co-owners. Owning a part of the company entitles us to a part of the profit every year. Part of this profit we receive most often as a sum of money (bank transfer), which is called dividend.

But not all profits are distributed as dividends - companies usually start new projects or invest part of that profit to improve their operations and become more profitable. If these new ventures are successful, they lead to a rise in the company's share price. When shares rise in price, we benefit from the difference between the price at which we buy the shares and the price at which we sell them, receiving a capital gain.

If the company's endeavours fail, its share price may fall, leading to a capital loss for us.

Shares can be issued by large companies (called in slang blue chips), which shares are considered as lower risk and often pay stable dividends, but can also be, for example, small companies (called in slang small cap), which are more risky, but can grow at a faster rate and most often do not pay dividends as they reinvest all their profits in their activities and expansion of their business.

Shares can also be defined as:

  • defensive - goods and services that we consume whether we are in a crisis or recovery, such as the food industry, electricity distribution companies, pharmacy, etc.
  • cyclical - goods and services, the consumption of which we shrink in times of crisis, but increase sharply with the rise - for example, the automotive sector, electronics, tourism.
  • luxury - goods and services that we consume mostly at the peak of economic growth

Example:

Owning shares in Shell (full name Royal Dutch Shell plc) - the company known in Bulgaria mostly for its gas stations, we own part of Shell as a company. Its activity is managed by a Board of Directors, which is elected by a general meeting of shareholders. This means that we, as shareholders, can vote and directly influence this choice, resp. of company management.

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