As with all other investments, prices of shares can go up as well as down. Sometimes, share prices can change substantially as a result of reaction to some news which may affect the listed company. Whenever there is news about a listed company which shows, for example, improvement in its profits, investors tend to react positively by purchasing more shares into the company. As the demand for the shares increase, so too will the price because people would be less willing to sell their holdings in the shares. This is referred to as the law of supply and demand – when demand increases, prices increases. On the other hand, price will start to fall sharply when investors, reacting to negative news about the company, dispose of their holdings as quickly as possible to minimise any dramatic downfall in value of their shares.
There are instances where share prices can fall dramatically. Don’t get into a panic – think carefully before selling your shares quickly at a loss. In fact, do not buy or sell on the basis of a change in price only. Your decision to buy or sell should also be based on your analysis of the annual report, changes in management, news about the company etc.
A company is not obliged to pay periodic dividends, even if it has made profits. Hence, you may find that although in one year a company has paid out dividends to its shareholders, the following year that same company may choose, for a number of reasons, not to share part of its profits with its shareholders. Therefore, shares are not suitable if you want a periodic (such as annual) payment of interest. Shares are perhaps more suitable for those seeking capital growth and are prepared to take some risk.
Are all your eggs in one basket? Ask yourself: is this your only investment or your biggest investment (except for your home)? If all your money is going into purchasing shares only or in units of collective investment schemes which invest in shares, you will be taking a really big risk compared with someone who has a variety of other safer products.