A proportion of net profits is always going to be retained by the board of directors to reinvest in the business. Smaller, growing companies usually need to reinvest all of any net profit. Nowadays, many large companies don’t pay dividends either – particularly those which have become dominant in the newer industry sectors.

So where is the benefit to a shareholder if profits are reinvested rather than distributed? Answer – by using profits to grow the company, this should increase the value of the company’s shares. Here is the plan.

In this scenario the shareholder sees increasing investment returns through an increase in share price. What is a share price?

Shares, like other securities, are issued in a primary market and traded in a secondary market. Three types of price are involved in this process:

1. nominal price - all shares have what is called a nominal price, or face value. As the name suggests, this is usually represented by a small nominal amount such as 10p or 10 cents.
2. issue price - this is the price a share is first sold at; the price it is issued at.
3. market price - this is the price a share trades at in the marketplace after it is issued. In other words, the price another investor will pay to buy your share.

Nominal price and issue price are determined by the issuer - the company whose shares are being issued. Market price is determined by the market; and a rising share price - capital appreciation - has, in recent years, become the main ingredient of shareholder returns.

But this can be a pretty elusive type of return.

Investment return as capital appreciation is uncertain because it relies on the market to start valuing your investment more highly than it did when you bought it. And it must keep on valuing it more highly, because, crucially, capital appreciation only turns into a capital gain (an investment return) when you realise it - when you sell the shares.

So the market is pretty important. But what is a stockmarket?