Shares

Buying shares (or stocks) is a way to invest your savings. Typically, shares are a relatively riskier form of investment and therefore come with higher expected returns compared to, for example, government bonds or corporate bonds issued by companies. Before considering buying shares, let's understand what a share is, what types exist, and which risks to watch out for.

What is a share?

A share is a financial instrument issued by a joint-stock company (S.p.A. in Italy) to raise financial resources. The funds collected this way make up the company's share capital. Each share represents a fraction, a portion, of the company's capital. By purchasing one or more shares, you become a shareholder – that is, a co-owner of the company.

As a shareholder, you have the right to receive dividends – the portion of the company's profits it decides to distribute to shareholders – and to take part in major decisions by voting in the shareholders' meeting.

When you buy a share, on the other hand, the company is not required to return the equivalent share of its capital to you, except in the event of liquidation. Usually, you're also not entitled to regular predetermined payments – only to the portion of profit the company decides to distribute as dividends.

Types of shares

Not all shares are the same. In addition to ordinary shares, which are the most widespread, there are also shares with different rights than ordinary ones, such as:

• dividend rights (e.g., priority in distribution, higher amounts, or both);
• capital repayment rights in case the company is dissolved (liquidation);
• voting rights (e.g., more votes per share).

Shares other than common ones may also carry restrictions, such as limited or no voting rights. In Italy, an example is savings shares: if you own them, you get preferential rights in profit distribution and repayment in case of liquidation, but you do not have voting rights. By law, these are the only shares that can be bearer shares, meaning they don't need to include the owner's name.

Listed and unlisted shares

Shares are listed if they are registered and admitted to trading on a regulated market, such as the Electronic Stock Market (MTA) operated by Borsa Italiana.

Listed shares have two main advantages:

• they can be bought and sold very easily;
• their price is public and transparent, reflecting at all times the market's expectations about the performance of the issuing company.

By contrast, unlisted shares can only be bought or sold through private agreements, and the purchase or sale price may differ significantly from their actual value.

Risks to watch out for

Like any investment, buying shares exposes you to the risk of loss. A share's price can fall below the price you paid for it due to many factors – some affecting all shares, like an economic crisis, and some specific to the company, such as failed product launches, bad investments, scandals, etc.

The risk arising from company-specific factors is called idiosyncratic risk, but it can be reduced through diversification - that is, by buying shares of several companies across different sectors and countries. A simple way to do this is by investing in mutual funds or Exchange Traded Funds (ETFs).

In general, investing in shares is riskier than investing in government securities or other bonds. However, higher risk is typically associated with higher expected returns.