What a share is
A share is part of the ownership of a company. As simple as that.
When a company lists on the stock exchange it divides its ownership into millions of equal parts anyone can buy. If a company has 100 million shares and you buy 1,000, you own 0.001%. It is not much, but it is real ownership, and it gives you a right to your part of the dividends, the profits the company decides to pay out, and to vote at the shareholders’ meeting.
And then there is appreciation: if you buy at 10 euros and the market ends up valuing the share at 20, you have doubled your investment.
Why the price moves
A share’s price reflects what the market expects the company to earn in the future, not what it has today. That is why a company with no profits can be worth a lot if it is expected to have them, and a profitable one can fall if it announces it will earn less than expected. The question is always the same: will this company create more value than its price reflects?
Ways to pick shares
There are several styles. Growth looks for fast-growing companies even if they do not make money yet. Momentum follows the price trend more than the business. Dividend investing looks for mature companies that pay out profits every year.
The approach I focus on is value investing: the price of a share and the value of the company are different things, and the opportunity lies in that gap. Benjamin Graham and his student Warren Buffett developed it in the twentieth century: analyse a company’s profits, debt, competitive advantage and management, estimate what it is worth, and buy it when the market sells it for less. The market gets carried away by fear and euphoria: in a panic it sells solid companies at bargain prices and in euphoria it pays anything for mediocre ones.
Invest in what you know
Peter Lynch, one of the best fund managers in history, argued that the individual investor has an advantage over the analysts: what he sees in his work and daily life. If you know a product is better than the competition because you use it, you know something an analyst looking only at numbers on a screen does not see as clearly.
That advantage is twofold. It helps you judge whether the company has a real and lasting edge. And it helps you hold on: when the share falls 30% and everyone sells, the only thing that keeps you steady is knowing why you bought it. If you know the product, a fall in price does not change your thesis; in fact, the company is now cheaper. If you bought because of a fashion, when it falls you have nothing to hold on to, and panic wins.
I learnt it with AMD, the processor maker. I had spent years building computers and comparing its products with Intel’s, and I could see AMD improving generation after generation while Intel stalled. I did not need a complex analysis to see who was gaining market share. That conviction let me hold on through the falls.
It does not mean you can only invest in what you already know. It means that before buying any share you need to understand what the company does, why it is better than its competitors and what would have to happen for it to stop being so.
Next: Module 6. Bonds. Course contents.