Investment: Definition of business investment

If you want to use shares as an investment, you should understand how share trading on the stock exchange works. We will explain what a share is and how it is traded at banks and on the stock exchange.

Share trading: What exactly are shares?

If you own shares in a company, you are a co-owner to a certain extent.

• Shares are traded on the stock exchange. A company may decide to go public in order to raise new money. In doing so, it sells shares.
• When a company takes this step, its share capital is divided. A single fraction of this capital stock is then called a share.

This is how trading shares on the stock exchange works

Share trading can be compared to a credit transaction.

• In this comparison, the company is the borrower: it needs money. It receives this from the shareholder, who buys a share in its company. The share, i.e. the share in the company, serves as security, so to speak.
• With his share - his share in the company - the shareholder receives certain rights. For example, they are entitled to attend the annual shareholders' meeting. At these meetings, the company's Board of Management reports on profits and losses.
• The annual dividend for the share is also determined at these meetings. This is the amount by which the shareholder participates in the company's profits. The dividend is effectively compensated for the money borrowed and is distributed to the shareholders.

The stock exchange as a trading place for shares

Shares are traded on the stock exchange. This means that anyone with an interest in a company can buy shares in the company. Supply and demand on the stock exchange determine the price of individual shares:

• Each company has only a certain number of shares issued. If, for example, many shareholders would like to acquire shares in the company, the price consequently rises.
• If a shareholder sells his share at that moment, he can make a profit if he had bought it earlier at a cheaper price. On the other hand, a share can also fall in value, of course, if no one wants to invest in a particular company and buy shares anymore. In this case, a shareholder can lose a lot of money - the share is then worth significantly less than when it was purchased.
• The price of a share is influenced by several factors that cause demand to rise or fall. For example, a company's published quarterly figures play a role here, as does the order situation. If a company can report the receipt of a large order, the price of a share often rises.
• Politics also has an influence on the development of shares on the stock exchange. For example, wars will often cause the shares of defense companies to rise - because of the resulting order situation. On the other hand, prices will generally fall when political instability and uncertainty spread. Investors will then invest less in stocks for fear of losses - so demand will fall.
• By the way, you can read in detail how the stock market works in another article.
• Do you want to start trading on the stock exchange? To do so, you first need securities account at a bank or a low-cost online broker. There your shares are deposited and you can make purchases and sales. You can find suitable securities account in the online broker comparison.

Trading with shares and the risks

To be able to trade with shares as a private person, you always need a bank.

• As a private person, you cannot directly buy or sell shares on the stock exchange. An intermediary is always a bank or a broker. So you need a corresponding trader account. However, you can then also trade shares online via the bank. What you should pay attention to as a beginner when you open a trader account, you will learn in another article.
• In the past, stocks were considered a popular investment, just as they are today. However, the stock market is no longer as stable as it was in the last century. You can get a good return with stocks, but you can also lose a lot or all of your money. Stock trading is always associated with risks.
• A stock market crash can lead to large losses, and they are not that rare. The last big crash of the stock prices took place in 2008 in the course of the banking crisis.
• Also well known is the worldwide "dot-com bubble", which burst in 2000 and in which many investors lost their entire deposits. In Germany, a separate segment called "Neuer Markt" had even been established beforehand, on which shares of promising technology companies were traded. Demand was huge, and prices rose accordingly. Many of these companies subsequently went bankrupt, and investors lost everything.