What are Shares/Stocks?

by | Jun 10, 2020

Shares or stocks represent a piece of ownership in a company. If you buy shares in Apple you will become an owner of Apple. As an owner, you get a chance to vote on decisions the company makes if you choose to. You are also entitled to a portion of the companies profits. 

Why do companies sell their shares?

Companies will sell their shares to raise money. The company will use this money for many different things such as developing new products, opening new stores, buying new machinery, etc. Let’s say I own a company that sells ice cream. I may sell shares in my company in order to buy new freezers or ice cream machines. When a company first sells its shares to the public it is known as an Initial Public Offering or IPO. 

Usually, when you buy shares you won’t be buying them from the company. Instead, you will buy them from another investor who owns shares and wishes to sell them. This is the same when you sell shares. Normally you won’t sell your shares back to the company instead you will sell your shares to another investor who wishes to buy them. 

Why do investors buy shares?

Investors buy shares because they hope to earn a return on their investment. They can earn a return in two ways. 

  1. The stock can go up in price. The investor can then sell their shares for a profit. For example, an investor buys 10 shares in a company for $100 per share. Their investment is $1,000. The share price then increases to $150 per share. The investor can sell their 10 shares for $1,500 making a $500 or 50% profit. 
  2. The stock can pay a dividend. Dividends are payments to the shareholders which come out of the companies profits. Companies will usually pay a dividend every 3 or 6 months. Not all companies pay dividends but many do. 

Over the past 100 years or so stocks have returned on average around 10% per year. With a return of 10% per year, your money will double in just over 7 years. While the stock market goes up on average it does not go up every year. The biggest one-year loss for the S&P 500 was -47.07% in 1931 and the biggest gain was 46.59% in 1933. Because the stock market can be volatile it is usually recommended that you invest for the long term (5 years or more). 

How do you buy shares?

In order to buy shares, you will need a stockbroker. Long gone are the days that you need a human stockbroker like Bud Fox. Instead, you can open an account with one of the many online stockbrokers such as Commsec in Australia and Charles Schwab in the US.

To buy shares you will place an order through your broker. Your broker will then relay that order to the stock exchange. If your buy order is met by a sell order then the trade will take place.

Summary 

  • Owning shares or stock of a company means you are an owner of that company.
  • As an owner, you can vote on company decisions.
  • Owners are entitled to a share of the company profits.
  • Companies will sell shares to raise money.
  • When a company first sells its shares to the public is known as an IPO.
  • Investors will buy shares in hopes to get a return on their investment.
  • Investors can earn a return either from the price going up or through dividends.
  • The average return for the stock market has been around 10% per year. 
  • To buy shares you will need a stockbroker.

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