Investing explained: the share

The investment world has many familiar and less familiar terms. For example, there are shares, bonds and futures. But what exactly are they? In a new series, we explain the characteristics and genesis of the various asset classes. In this first episode, Ton van Ooijen (responsible within APG for investments in consumer goods in developed markets) discusses the best-known form of investment: the share. 

What is it?
Simply put, a share is a negotiable certificate of ownership of a company. In the case of a publicly traded company - which most large corporations are - trading in these ownership certificates takes place through the share exchange. In principle, anyone can buy such a share, thus becoming a co-owner of a company.

A share has several advantages for both the shareholder and the company issuing the shares, Van Ooijen explains. “For example, as an investor you can spread your wealth - and thus the risk - by investing in several companies. Another advantage is that equity investments often lead to higher returns than the interest on a savings account. As a shareholder, you also have a say in the company’s policy. A well-known example of this is the shareholder meeting, where shareholders are allowed to vote on, among other things, the remuneration policy for directors. Also, many listed companies pay dividends (part of the profits, ed.) to their shareholders. This does depend on the company’s performance. Is a company doing well? Then shareholders can count on (an increased) dividend. Is the company going through a down period? Then it will pay less or no dividends.”

That is an immediate advantage for companies. If they borrow money from, say, a bank, they always have to pay interest on that loan. They are obligated to do so, whereas paying dividends is a choice. “That makes it more attractive for a company to raise money by issuing shares rather than by borrowing. If things go wrong financially, they don’t owe the original value of the shares to their shareholders.”

When did it come into being?
For this, we have to go back to the founding of the United East India Company (VOC) in 1602. “Before that time, start-up capital for enterprises was provided by wealthy individuals or families,” Van Ooijen explains. “The purpose for which the VOC was founded, trading in spices from ‘The East’, required an investment that could not be raised by one wealthy family or even the state. That is why the VOC recruited investments among a large group of private individuals.” What was special was that the 1143 investors included not only wealthy patricians, but also, for example, grocers and housekeepers. They received a receipt, a so-called recipisse. This could be transferred or resold from person to person, which is why it is now considered the earliest form of a share.

What else is involved?
It is important for the investor to know the company he or she is investing in, Van Ooijen asserts. “And that means not only keeping an eye on the share price, but also looking at what the specific drivers of the company are. What factors make the company valuable? Why are its profits growing? What industries does it operate in and what is the competition?” This also includes an understanding of risk. “If a share investment is too good to be true, it probably is. And everything has a price. Cheap shares are cheap for a reason. That’s why it is always good to look at the risks that apply to the company you are investing in.” Van Ooijen approvingly quotes Warren Buffet. This super investor once said that you should only invest in shares of companies that you think will still be around in five years, and if all goes well will have become worth more by then. “You should also not buy shares if you need your invested money again in the short term. That is speculating, rather than investing,” Van Ooijen concludes.