What is a share?
A share (stock) is a share of ownership in a limited liability company that gives you the right to attend and vote at the annual general meeting and the opportunity to share in any profits the company makes through dividends – the payments distributed to shareholders. As a shareholder, you are a part owner of the company and thus also contribute to the company’s capacity to grow.
What kinds of shares are available?
There are about 750 listed companies on the NASDAQ OMX Stockholm (Stockholm Stock Exchange). You can find out which shares are available through your bank or online broker, from us at www.nasdaqomxnordic.com, or by consulting a major daily paper. There are different lists depending upon the company’s size and turnover. Novice investors in the stock market typically select among the 30 largest companies in Sweden – the companies on the OMXS30 Index. As you pick your stocks, it is a good idea to select companies or sectors that you are personally interested in – simply because that makes it more fun to track their performance. Perhaps you shop a lot at ICA or are keenly interested in IT? Most business sectors are represented on the stock exchange.
What is a share portfolio?
The set of different companies that you choose to invest in is your share portfolio. It is wise to spread your risk by diversifying – buying shares in a variety of companies and sectors. This mix then makes up the share portfolio. The advantage to diversification is that it reduces your risk of loss because you are not dependent upon only one or very few companies.
How does trading in shares work in practise?
As a private person, you cannot trade directly on the Stock Exchange. You must have a custody account with a bank or an online broker. It is easy to open a custody account via the internet or through your bank. You should compare custody account fees and management charges, since they will vary from one provider to the next. One viable alternative may be to open an ISA – Investment Savings Account – which allows you to trade in securities without having to declare every transaction when you sell. These accounts can only be held by individuals – that is, not jointly with another person or a company. You are however allowed to have as many ISAs as you like. You may also have an ordinary custody account and an ISA at the same time. ISAs may also be held by minors, which makes it possible for children to save. Once your account is set up, all you have to do is select the shares you want to invest in.
How do I buy shares?
Once you have opened your custody account, transferred funds to it and decided what shares you want to buy, what do you do next?
Shares are traded in “lots” and the price is per lot. So, you need to decide how many shares you want to buy and at what price – or limit, as it is usually called. The limit is the highest price at which you are willing to buy or the lowest price at which you are willing to sell.
“Order depth” (or “order book”) is an expression used in share trading. Trading on a stock exchange is organised as an auction at which buyers and sellers come together. After each market closing, there are three prices: the last closing price (e.g. SEK 115.00 per share); the lowest offer price, which is the lowest price asked by any seller (e.g. SEK 115.25); and the highest bid price, which is the highest price any buyer is willing to pay (e.g. SEK 114.75).
In practise, there are sellers who want a higher price and buyers who are willing to pay less. The order depth shows how the number of shares available relative to the price levels and what the levels are. You can regard the order depth, or order book, as a list of the buy/sell orders that are waiting for a matching order.
How do I make money on shares?
There are two ways to get a return on your investment. First, the company in which you own shares may grow and perform well enough that the share price rises. Secondly, through dividends, which is how the company distributes part of its profits to shareholders. Reinvesting your dividends can be a smart way to grow your share portfolio.
What should I consider as a novice investment saver?
Investment savers always take a risk – it is the price you have to pay for the chance to achieve high returns over the long term. You can lower this risk by following certain rules. Investors usually refer to the seven golden rules: follow them and your chances of achieving good returns on your shares will improve considerably.
1. Set targets for your savings in shares and mutual funds and take a long-term approach
You are the one who sets the targets for your investment savings. Have realistic expectations. Historically, shares have generated average total returns of about 10 percent per year. Short term, the value of shares can fluctuate wildly. For this reason, shares and mutual funds must be regarded as a long-term form of savings.
2. Invest regularly
Do not invest your entire savings capital in shares and mutual funds at the same time – you risk “buying high.” Reinvest your dividends and refrain from jumping in and out of the market – that can entail substantial costs.
3. Control the risks
Do not invest everything in one or only a few stocks. Buy shares in 10-15 companies in 5 or 6 different sectors. This will reduce your exposure to volatility in both individual companies and sectors. A healthy risk spread provides some protection when individual shares in your portfolio decline in value.
4. Beware of margin trading
Buying on margin – buying shares with borrowed money – can lead to high profits very quickly, but can also cause personal financial disaster. Successful margin trading requires expertise and extensive experience with the stock market.
5. Keep well informed and do not blindly follow advice
Knowledge is critical to successful investment in shares. Accordingly, you should make every effort to keep informed about the companies in which you own shares. Monitor news reports about the company. Read annual reports and interim reports. By all means, listen to the advice of others, but do not blindly follow that advice. Always form your own opinion. The only one who will suffer the consequences of following bad advice is you.
6. Do your own research
Do not buy shares in companies that you have not researched and do not thoroughly understand. Do your own research and analysis of the company and the mutual fund you are considering buying shares in.
7. Set rules for when you should reallocate
Reallocate when one of your shares has become too large a percentage of your portfolio or when the company no longer meets the conditions that applied when you purchased the share. Re-examining your investments too often can generate unnecessary stress and lead to wrong decisions. When you reallocate, you should plan ahead carefully to avoid paying tax unnecessarily.
How active do I have to be?
There is no rule here. Your level of activity depends entirely on how interested you are and how much time you have. Investors do often become more active as their interest grows. Making deals is fun and since you can easily follow your holdings online, being an active shareholder is not as complex as you might think.