How to buy & sell shares for profit

How to buy & sell shares for profit

What is a share?

Well, as the name suggests, if you hold shares you own a share of a company. In practice, this means three things for you as a shareholder:

  • You can sell your shares to other people interested in buying them - hopefully for a nice profit!

  • You may also be entitled to a share of the company's profits. This is paid out to you by the company every six months as the 'dividend'.

  • You can vote at shareholder meetings. (Though if you hold your shares in a nominee account, you can't.)

So there are two two ways of making money from shares:

Firstly, if you buy a share, and then sell it later at a higher price, you make money from the price difference. This is called the 'capital gain'. This is what most people think of when they think of making money from shares - 'buy low and sell high!'

But there's another important way of making money from shares:

It's not as glamorous as the capital gain, and the potential returns aren't nearly as big, but it can be a nice, steady source of income. In other words, as long as you're the owner of shares in a company you can also receive a 'dividend'. 

This is your personal share of the company's profits, in proportion to the number of shares you own.

It's like receiving interest on money from a savings account - though it's important to know that owning a share is not nearly as secure as having your money in the bank, because there's no guarantee that you'll be paid a dividend at all. (Plus the price of your shares could fall.)

Obviously, whether you receive a dividend or not depends on whether the company's making a profit. If the company isn't making a profit, then of course, there's nothing to give out to shareholders as a dividend.

New companies often take a few years to become profitable.

And even successful, established companies can have bad years, when they actually lose money.

Also, some companies - Microsoft being a well-known example - decide not to pay out dividends to shareholders even when they're making profits. Instead of distributing the profits to shareholders, they reinvest all the money in the business to try and make it more competitive and more successful.

However, most companies that make profits do pay dividends. And the dividend is generally paid to you by cheque, every six months.

If you'd like to know a bit more about why companies issue shares, how to buy and sell shares and how to choose a broker, just start your Red Hot Penny Shares 1-month, risk-free subscription now!

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The past is not a guide to future performance. Trades in stocks recommended by Red Hot Penny Shares are small company shares. By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances.