What is a share?
It may seem like a simple question, but the answer may change the way beginner investors approach investing, for the better.
A share should not be thought of as a 3-letter code (E.g. ASX:XYZ) that simply changes price every time the market opens. A share represents part ownership in a business.
That is, the owner of the share has a right to receive an equal portion of the company's profits, if declared, in the form of dividends.
That's why it is important to think of your shares in this way. Indeed, there is more to owning a business (for example, assessing the competency of management and watching to ensure it grows, responsibly) than owning a piece of paper.
Profits can be made from owning shares in two different ways: dividends and capital gains.
For instance, let's say you own shares of Commonwealth Bank of Australia (ASX: CBA). One Commonwealth Bank share is currently trading for around $80 on the Australian Securities Exchange (ASX), up from $79 12 months ago. That represents a gain of around 1.3%.
During that time, Commonwealth Bank has also distributed $4.21 per share to investors in the form of dividends (notably, there are tax benefits attached to those dividends as well).
