Introduction to Financial markets
What are shares?
Shares are the best-known financial market in the world, and one of the most popular among individual investors.
What are shares?
Shares are literally just that – a share in the ownership of a company. Owning shares mean that you own part of a business. If its value increases, so does the value of your shares. You may also be entitled to some of the organisation’s profits via dividends or to vote on company matters.
Say, for example, that Apple’s ownership is broken down into one billion different shares. If you own 100 Apple shares, then you have a 0.00001% stake in the ownership of the company. As Apple’s value goes up and down, so does the value of your shares.
Because shares provide their owners with a stake in a company, they are also referred to as equities, or the equity market. This is to differentiate them from bonds, which are also issued by companies, but do not provide equity. You may also hear shares referred to as stocks.
Companies sell shares because they want to raise capital. Often, this is to fund further expansion – but sometimes it’s so the founders can cash in on their company’s success. Instead of borrowing money in the form of a loan or a bond, they can choose to sell a stake in their company, diluting their ownership in return for a profit. This process is known as listing.
Did you know? Not all big companies are tradable as shares. There are some very large ones – including famous household brands – that are still privately owned. When a business has shares available for trading, it is known as a public company.
In addition, some bigger companies only list a portion of their shares, while the rest is kept in private hands or owned by governments. The listed portion is called the free float.
Who trades shares?
Lots of different people, companies and institutions will hold shares. Banks, pension funds and professional investors will buy and sell stocks as a means of generating profits. Equities are also popular among individual investors and traders, who use a broker or a leveraged trading provider to take long or short-term positions on stocks.
Different companies will perform very differently on the stock market. Established businesses, for example, may not see much volatility in their share prices. But smaller, lesser-known stocks can see massive growth – or disappear without a trace.
This means that equity markets have something to offer almost any type of trader. Pension funds with low risk profiles can stick to ‘blue-chip’ companies, while risk-hungry treasure hunters can search for gold among ‘penny’ stocks.
Why trade shares?
Just like other financial markets, the vast majority of share trading is undertaken with the aim of earning a profit. There are two main ways to make money from stocks: selling your shares and dividends.
Sell them for a profitA company’s share price is a reflection of its perceived value on the markets. Many investors will try to find companies that they think will grow in the coming months and years and buy shares in them. Then, they can sell those shares for a profit when the company has achieved success. Of course, if the company never grows, then your shares will never make a profit – and you may have to sell them for a loss. |
DividendsMany companies will also pay out dividends to their shareholders. A dividend is a share of the organisation's profits that is paid back to its owners. Companies are not obliged to pay dividends, but many do so. These stocks are prized because they offer income as well as returns. Dividends are usually paid out on a regular basis. |
