Shares

How do I know what shares I should buy?

There is no easy answer to this question. What share you should buy depends on who you are, the status of your finances and what risk you are willing to take.

One thing you need to be absolutely certain of, is that your choice should not be random. Get to know the different companies you are interested in, familiarise yourself with what they do and what their future prospects are.

Read our research reports!

If you are not entirely comfortable with reading financial figures and annual reports, use the research reports created by our experienced analysts. You can read our research reports and recommendations here.

Research is better than pure intuition.

Why do companies issue shares?

Selling shares is one way a company can raise money – selling shares is a source of funding.

A company needs money in order to operate

An idea alone is rarely enough. Companies are in need of capital to start out and to operate. If owners don’t have enough money on their own, they can raise capital by selling shares in their company. If they need further funds at a later stage they can market a subsequent share issue.

Multiple ownership is an alternative to borrowing money

Issuing shares and obtaining additional owners is therefore an alternative to borrowing money. Those who buy shares become co-owners, or ‘shareholders’, in the company. Obtaining multiple owners has its advantages and disadvantages. Owners have one voting right per share and in the General Meeting everyone has a chance to express their opinion on company operations.

The advantage of borrowing is that company founders retain control. The disadvantage of borrowing, if it is at all possible to get a loan, is the need to pay interest. Perhaps for years to come. Companies usually try to avoid such expenses.

What does high risk mean in relation to shares?

Many people associate the word risk with something dangerous, but the word ‘risk’ in the share market is just a way of saying that the values can fluctuate.

• High risk is a way of saying that the value of a share, or a market, can fluctuate a lot.
• Low risk is a way of saying that the value is more stable in normal circumstances.

High risk leads to a possibility of both higher returns and greater losses.

Knowledge gives you better predictability

If you understand why the value of a share, or why the overall market is fluctuating, you then have options to reduce the risk of losses.

One piece of advice is to research the shares you are considering buying. This way you understand what the company does and what it takes for it to earn money.

Another good piece of advice is to allocate your investments between different companies in various industries. This way you are not dependent on a singular company in a specific industry performing well.

Do you find it difficult to understand what a company does, and which companies are expected to perform or not? If so, you might prefer to hand over the investment job to a professional portfolio manager and start saving in an equity fund.

What are dividends and buy-backs of shares?

Dividends, or dividend yield:

When you own shares in a company, you have the right to receive your portion of the company profits. If the company makes strong profits one year, a decision to pay out dividends will be made during the General Meeting. A dividend is a cash payment per share. Some may call this the dividend yield.

The number of shares you own determines the size of the potential dividend payment, and the number of votes you have at the General Meeting.

Share buy-backs

A company can also pay out parts of the profit by buying back shares. When the company buys back shares, the price will rise, and individually this will create a value increase per share equal to the share of the amount used for the buy-back.

In a neutral tax system, like Norway’s, in principle it makes no difference whether the profit is paid out as a dividend or with a buy-back. The value increases for the shareholders either way.