What is a Share or Stock?
When you hear the terms “stock”, “share”, or “equity”, it is the same thing, which is part-ownership of a company entitling you to a share of its assets and profits.
In the US people commonly use the term “stocks,” while in the UK we say “shares.”
Understanding Shares / Stocks in Business
In business, shares play a crucial role in raising funds for companies.
Buying or holding shares in a company makes you a shareholder, with a claim to a portion of the company’s assets and earnings. These shares can be traded on exchanges like the London Stock Exchange (LSE) or the American, technology focused NASDAQ, or in some cases, sold privately. These exchanges are highly regulated, and companies must adhere to these strict regulations to list their shares on them.
The percentage stake of a shareholder is determined by the number of shares they own relative to the total number of outstanding shares in issue. For example, if a company has 100 shares and an individual owns 1 share, they will have a 1% ownership stake in the company’s assets and earnings.
What are “Ordinary” and “Preferred” Shares
There are 2 types of shares that you may come across, “ordinary” (also referred to as “common”) and “preferred”.
Ordinary shares typically grant shareholders voting rights in proportion to their holdings, and the ability to receive dividends from the company.
Preferred shareholders usually do not have voting rights but have a higher claim on assets and earnings in case the company is liquidated. They may also receive higher dividends.
How to make money from owning Shares?
Shares go up and down in value due to variations in demand and supply. If you buy a share at a certain price, and its price goes up, you can sell it and make a profit.
A share can also pay a ‘dividend’, which is a share of the company’s profits given to shareholders. The frequency of this payout is up to the company, but quarterly or annually is normal.
Typically, investors can only buy, or sell the shares they own. However, some advanced investors can also make money when a share falls in value by “shorting” it. Ie. selling shares, they do not own, which puts downward pressure on the share price. To do this an investor is lent shares by other shareholders, or a broker, for a fee, which are then sold by that investor who keeps the money. They then wait for the share to fall in value, and buy it back at a lower price, so they can return these borrowed shares back to the lending party and keep any profits. However, if the share rises in value, they will have to pay more than they received, meaning they make a loss.