Buying a share of stock comes with greater risks than leaving your money in a bank account or investing in bonds (see our later chapter for an in-depth explanation on bonds). The main risk is losing money as the share price goes down from where you bought it. This can be a horrible feeling, as you sit and watch the value of your own hard-earned money disappear before your eyes! This is what we call destruction of your capital, and that is exactly what this course is designed to help you avoid.

Capital is the term for the original money you invest. Lets say you invest $5,000 into 50 shares of Louis Vuitton at $100 per share, your "capital" invested is $5,000. The money you make as share prices go up are called your profits. If LV share price rose from $100 a share to $110 a share, your Stock Broker Account would show a profit of $500. You still own 50 shares in the company, however "the market' is now valuing these shares as higher than when you bought them. This simply means that someone is now willing to pay $110 for each share you own. You have not crystalised your profit until you sell your shares to them. However in theory if you sold them today, you would receive $5,500 (less costs, but dont worry about that for now!).

If you decide not to sell the shares, then at some point during the year Louis Vuitton may pay out a dividend, which is a share of the profits they have made from selling their expensive bags. If they returned $10 per share to you, then you can work out what percentage this is in comparison to the original capital you invested. So ($10 / $500 per share = 0.02 or 2%). Think of this like you would think about an interest rate on savings account. Your annual return from owning a share in Louis Vuitton was 2%. This can also be known as a "yield". Because owning this asset has yielded you a return on your capital of 2%.

Now, here lays the major difference between putting your money in a savings account or buying shares. Both can earn you a "return" or "yield" as a savings account pays you interest, and a stock can pay you a dividend. (Remember a dividend is a share of the profits that the company makes, and returns to shareholders every 3, 6 or 12 months).

However the money or capital you put in your bank savings account does not change as the profits of the bank go higher or lower.

• A bank savings account only pays you interest on your capital. Usually an agreed percentage (%) of your capital before you put your money in the account, or a % that moves in relation to the interest rate of a Central Bank (Bank Of England, Federal Reserve, ECB etc). However, the bank promises to return all the money you gave them to look after for you. No more, or no less than the amount you deposited.
• A company you invest in by purchasing shares in it, does not promise to return all your capital to you. However as the expectations of future profits of the company increase, then so might the value of your shares.

As an example if you buy shares in a big bank like Barclays or JP Morgan, then the value of the shares can appreciate in value as well as them paying you the dividend!

In summary, when you invest your capital into buying a share of the company, it can go up or down in value. Thats why its so important to choose the right company to invest in. The theoretical profit on your investment comes when the share price rises, because someone else is willing to pay more to buy the shares from you. Their expectations of the future profits of the company may be higher than previously.

The actual profit comes from when you sell the shares to lock in the gains! However when you sell the shares, then the new owner now has the right to all the future dividends the company will pay out. So you can see the dilemma shareholders have! Should I keep my shares and enjoy the annual returns from the dividends, or should I sell the shares and lock in my profits?

This leads us neatly onto our next topic. In the next chapter, we are going to look at what causes share prices to go up and down.