Fundamentals of Business

Why do people buy shares

Why do people buy shares the obvious answer is, they want to make money preferably more than they can get from a bank through interest.

Investors perspective
Investors are interested in:
. Return on their investments
Expressed in two different ways:
The overall return, the return on equity Profit attributable to ordinary shareholders/Capital and reserves the annual return, dividends
. The stock market's view of the future returns on investment the price earnings ratio.

Earnings per share/Today's share price
There are two ways to make money from shares:
The price rises and you have a capital gain on your investment that can only be realised when you sell the shares or receive dividends.
Some shares attract investors looking for growth (capital gain)
Example
Extract from LONDON (AFP)

Dein sells Arsenal shares to Russian for 75 million pounds Former Arsenal vice chairman David Dein sold his 14.58 percent stake in the Premier League club to Russian billionaire Alisher Usmanov for 75 million pounds on Thursday. Dein bought his initial 16 per cent stake for just 300,000 pounds.

Others attract those looking for income (dividends)
Example
Extract from The Guardian

HSBC announces record profit for UK bank
Mark Tran, Monday March 6 2006 HSBC today reported record earnings for a British bank, announcing pre-tax profits of $20.9bn (£11.9bn) for 2005. HSBC has more than 110 million customers in 79 different countries, and makes 80% of its profits overseas. The bank's record earnings followed bumper profits elsewhere in UK banking. HSBC announced total dividends for 2005 of 73 cents a share, an increase of 11% over 2004. It described the near term outlook as encouraging, with the world economy continuing to grow steadily.

What does it mean? If you have 10 shares your dividend will be (73 x 10) = 730 cents, assuming this is in terms of US$, the amount will be $7.30 If you have 100 shares your dividend will be (73 x 100) = 7300 cents or $73 and so forth.

Advantages of being the main shareholder you have the control as a majority shareholder and more influence of the enterprise. The more shares you give the less you own. It is important if you want to have the control of your enterprise not to give too much else you may force to sell all of it as example of the majority of Manchester United fans who were minority shareholders.
Example
Extract from bbc·co·uk

Green to pocket bumper dividend Clothing entrepreneur Philip Green is to pocket £460m ($841m) in share dividends from Arcadia Group. He and his family are to receive the pay out after the Top Shop group unveiled annual pre-tax profits of £246m, up from £160m on the year before. Total sales for the firm, which also includes Burtons and Dorothy Perkins, remained flat, up just 0.8% at £1.66bn. Earlier this month, Mr Green also collected £40m in dividends from his other business - department store Bhs. Mr Green and his family get £460m of the Arcadia's total £500m of share dividends because they own 92% of the retailer. The balance is going to banking group HBOS, which owns the remaining 8% stake after it backed Mr Green's £850m purchase of the business in 2002.