how do shares work exactly?

[farmer95]

Hi guys, very new to the investing scene and just trying to wrap my head around something.

I'm looking at a investment opportunity one of my workmates has put me on too. But im just trying to understand how much i can potentially make.

What im trying to figure out -

If i buy a 1 share for say $40 then it goes up to $60 and i sell it, does that mean iv'e made $20 profit? The reason im asking is because my workfriend said this isn't how stocks work but my brain couldn't understand how he was explaining it and i didn't want to re ask and look stupid lol.

sorry if this is a very dumb question, just looking for some clarification.

Thanks guys.

 

[tomorton]

Basically you're right - buy at 40, sell at 60, make a profit of 20 per share. But from that you have to deduct the broker's fees for carrying out the transaction for you (you can only access the shares market using a broker): should not be too much these days. Also you might have to pay tax on the 20 profit, depends on the tax laws in the jurisdiction where you live.

But also you have to allow for the spread - you might be able to buy a $40 share at $40.50, and maybe you can sell it at $39.50, so the spread is $1 per share. $40 is the mid-price, just short-hand for the share's price, its not a true quotation for buyers and sellers.

So now you see your share has to rise by more than $20 to make $20 per profit.

Some companies (NOT all) pay you a dividend for owning their shares. So maybe you'll automatically $2 per year per share dividend.

But the most important question is what do you do if the share you bought at 40 goes down to 36? Or 35? Or 20? Or 4?

 

[timsk]

. . . I'm looking at a investment opportunity one of my workmates has put me on too. But im just trying to understand how much i can potentially make. . .

Hi farmer95,
Welcome to T2W.

As Tom rightly implies, don't worry about how much you could make, instead, put 99% of your time, energy and focus into much you could lose. That this 'opportunity' comes via a workmate usually means a start up company or a penny stock that is set to move dramatically in a very short space of time. It almost always doesn't happen and the people who jump on them usually lose most or all of their money. So, only 'invest' with money you can afford to lose and under no circumstances use money that you need for mortgage payments, rent, food or other day-to-day living expenses. Make sure you're not being lured into either a boiler room scam or a Ponzi scheme - as both pray on people who have little or no understanding of the stock market. Caveat emptor. In the meantime, this will explain the basics: Essentials of Stocks.
Tim.

 

[farmer95]

Thanks for the replies, will definitely have read of the Essentials of Stocks

 

[counter_violent]

Hi guys, very new to the investing scene and just trying to wrap my head around something.

I'm looking at a investment opportunity one of my workmates has put me on too. But im just trying to understand how much i can potentially make.

What im trying to figure out -

If i buy a 1 share for say $40 then it goes up to $60 and i sell it, does that mean iv'e made $20 profit? The reason im asking is because my workfriend said this isn't how stocks work but my brain couldn't understand how he was explaining it and i didn't want to re ask and look stupid lol.

sorry if this is a very dumb question, just looking for some clarification.

Thanks guys.

As Timsk has pointed out. Do not get involved in penny shares as a way of investing.
If you are serious about investing, then proven dividend payout year on year is the way to go. Share price increase is less important and secondary to dividend payout, which basically means that your money is working for you.

 

[farmer95]

how exactly do dividend payments work? For instance this is how I think it works. Say a share price is $2.50 and the dividend payout is 0.10c. If i invest $500 = 200 shares 200shares x 0.10c dividend payout = $20? That's how i understand it, but i could be completely wrong. I mean i understand it would be more in depth then my example but would this just be the basic jist of things?

 

[tomorton]

how exactly do dividend payments work? For instance this is how I think it works. Say a share price is $2.50 and the dividend payout is 0.10c. If i invest $500 = 200 shares 200shares x 0.10c dividend payout = $20? That's how i understand it, but i could be completely wrong. I mean i understand it would be more in depth then my example but would this just be the basic jist of things?

Yes that's about it. Sometimes you will be encouraged to re-invest the dividend into moire shares of the same company and I suspect you might get a discount on their price at that point, rather than buying them on the open market: this can be a good value way to increase your holding though it leads towards a less diverse portfolio of shares.

 

[farmer95]

Yes that's about it. Sometimes you will be encouraged to re-invest the dividend into moire shares of the same company and I suspect you might get a discount on their price at that point, rather than buying them on the open market: this can be a good value way to increase your holding though it leads towards a less diverse portfolio of shares.

So if a company pays a dividend say 4 times in a year, is the "0.10c" dividend divided by 4? So 4 dividend payments of 0.025c totaling 0.10c for the year? Or is it 0.10c dividend payment 4 times a year?

 

[tomorton]

So if a company pays a dividend say 4 times in a year, is the "0.10c" dividend divided by 4? So 4 dividend payments of 0.025c totaling 0.10c for the year? Or is it 0.10c dividend payment 4 times a year?

The dividend and the number of payments per year are set by the company, its their decision how much they pay from zero upwards and whether they want to change it up or down next time round. No doubt many other companies will follow different policies.

Be aware of the date on which you must be a shareholder in order to qualify for the divided. Notice too what happens to the share price when the dividend is paid out.