Investing in shares

When you hold a share in a company, you effectively own part of that company’s capital. This means that you may be entitled to a share in the company’s profits, which is called ‘dividend’. If the company performs well, the value of your share may go up. If it does less well, the value of the share generally goes down. The price of a share is determined by many factors. The main ones are:

• the company’s performance;
• economic developments and developments in the financial markets; and
• investors’ expectations as to the company’s future profitability.

Companies issue shares, which are also called ‘stocks’, to raise funds. By issuing shares, a company increases its ability to scale up or invest.

Shares can be listed on a stock market, but this is not necessarily the case. When you invest through ABN AMRO, you invest in shares listed and traded on stock markets such as Euronext Amsterdam in the Netherlands and the New York Stock Exchange and NASDAQ in the US. In order to give investors a clear view of how shares or groups of shares on a stock market are performing, stock markets have developed indices. AEX is one such index, containing 25 companies with the highest market capitalisation (the number of freely tradable shares multiplied by the share price on the Amsterdam stock exchange). Other Dutch indices are AMX and the AScX. Internationally, well-known indices include the Dow Jones Industrial Average, S&P500 and NASDAQ.

At ABN AMRO, you can buy shares traded on stock markets around the world, including the New York Stock Exchange and Euronext Amsterdam. But how exactly does that work? Find out all about the possibilities with our extensive tips and information.

Buying shares? Here’s how it works.

The quote of a share is the price at which it changes owners. The price is formed when there is demand for the share and also supply. When demand is high, the price goes up. When supply is high, i.e. there are lots of people selling the share, the price goes down. The current price is not the exact price you will pay or receive for the share. For that, you have to look at the bid price and the offer price. These two figures tell you at what price you can sell or buy a share:

• Bid price: this is the highest price that someone is willing to pay for a share at a specific point in time and at which you can sell the share. Given that there are often large numbers of sellers and buyers operating on the market at the same time, the bid price is subject to constant change.
• Offer price: this is the lowest price at which someone is willing to sell a share. It is the price at which you will then be able to buy the share. Again, given that there are often large numbers of sellers and buyers operating on the market at the same time, the offer price is also subject to constant change.
• Spread: the difference between the bid price and the offer price is referred to as the ‘spread’. Shares that are traded on numerous occasions on a trading day tend to have a tight spread, while shares that change owners less frequently are likely to have a wider spread.

On the share price page (Dutch), you can track the prices of shares traded on European and US stock markets. The prices of shares you are interested in are shown on Internet Banking, in the ABN AMRO app, or on the My Dealing Room platform.

You can then proceed to buy or sell shares on Internet Banking or in the ABN AMRO app.

A return on a share can be made up solely of the increase or decrease in the value of the share or also include a dividend. A value increase means that the price of the share has gone up relative to the price you paid for the share. It is entirely up to you to decide when you are happy with the possible value increase and want to sell the share. Needless to say, the price can also drop. When the price drops to below the price you paid, you have made a loss on your investment. Share prices tend to move up and down in waves, which we refer to as ‘stock market fluctuations’. This can be rather unnerving for a beginning investor. Investors who are trying to anticipate and take advantage of price fluctuations are speculating rather than investing.

Since prices are volatile, it is better to look at how prices develop over a longer period of time. When measured over a longer time span, price peaks and troughs will level out and only the general movement, i.e. the trend, will be important for the end result. Investing in shares for a longer period will increase your chances of generating returns. It is one way to spread the investment risk.

If you hold shares for longer, you will also receive more in dividends. A dividend is a portion of a company’s profit that is paid out to shareholders. When a company pays a dividend, they can do so in cash or by awarding additional shares, which is known as a ‘stock dividend’. How much you are paid in dividend on a share depends on how much profit the company made and what the company wants to do with that profit, i.e. distribute it to shareholders or reinvest it. Companies are not under an obligation to pay a dividend.

Read more about dividend

Start-ups that still have considerable growing to do often don’t make a profit yet. And when they do start making a profit, they often decide to reinvest it for even more growth. The idea is for this growth to push up the share price to benefit shareholders. This kind of share is what we call a ‘growth share’. Companies that have been around for some time generally grow at a slower rate and tend to have a more stable revenue stream. It allows these companies to pursue a policy where they pay more of their profits out to shareholders in the form of a dividend. Shares in these kinds of companies are called ‘dividend shares’. Put simply, returns on dividend shares come mainly from the dividend paid on these shares. Growth shares, on the other hand, generate returns mainly when their price goes up. Needless to say, returns are not guaranteed in either case. Growth share prices tend to be more volatile, meaning that there is a greater chance of them going down.

This explanation does not always apply. Results depend on specific situations and shares.

As a general rule, we can say that shares, as an investment asset, offer higher expected returns in the long term than other investment assets, such as bonds. Investing in shares you picked yourself (direct shares) may be an interesting option if you expect to be able to achieve higher returns than if you were to invest in equity investment funds or equity ETFs, or than if you were to hold shares for their dividend income potential only.

However, investing your money in direct shares also comes with more risk if you fail to adequately diversify your share portfolio. If the company in which you hold shares has hit a rough patch, the value of your shares will go down. If the company goes bankrupt, your shares may even be worthless. So if you invest too much in one or a few shares, you have no way to offset losses through other shares that are performing well. With an equity investment fund, you reduce the risk, as the fund manager will spread the risk over many different shares.