What are shares?
Many people wonder what shares are. When you buy a share, you immediately become a co-owner of the company. You can then trade your share on the stock exchange. But how does the price of a stock change? How can you trade in price developments on shares yourself? And what is the origin of the share? On this page you will find everything you need to know about stocks!
A share is a proof of ownership in another company. When you buy a share, you become co-owner of the company. A company often issues shares to raise more capital. When a company issues shares, it is also called an equity offering.
The simple answer is that it can generate a lot of money. Shares on average yield about 7 to 8 percent yearly. This means that after inflation the yield has been around 5% since 1900.
When you leave the money in your savings account, the real return you receive on it will be negative. This is the case because inflation is higher than the interest you receive on your savings account.
5 percent may not seem extremely exciting, but the strength of the compounding effect allows your shares to increase in value quickly. When you repeatedly invest your returns, you will also receive returns on your returns. If you invest $1,000 annually for 30 years at 7%, at the end you will own $101,073. Even with small amounts, it certainly pays to invest.
It is now clear what share are, but how can you make a profit with shares? There are two methods you use make a profit with shares: with price gains and dividends.
Method 1: price gains
Shares are tradable on the stock exchange and that is where a price is created by the interaction of supply and demand. The price of the stock indicates for how much you can buy or sell it. When you hold a share for a while and the price rises, you obtain a positive return.
Method 2: dividend
However, this is not the only way you can make money from shares. Many companies also pay dividends on a regular basis. Dividend is a profit distribution. The company can determine the percentage of profit to be paid as a dividend. Some companies never pay dividends, while there are also companies that pay out multiple percent of dividends on an annual basis.
Do you want to know more about dividends? In our special on the subject you can read everything you need to know:
Now that you know what stocks are, you can actively trade in stocks. There are two ways you can trade in stocks.
Buying stocks for the long term
The first option is trading shares in the long term. This is when you buy up shares because you believe they will be worth more money in the future. When people buy shares, they often do so with an eye on the future.
Do you want to know how and where to buy shares? In our article on buying shares, you can read everything you need to know:
Other investors choose to speculate actively on the share prices. The share prices may rise or fall by several percent in one day. By responding wisely to this, you can achieve a good return.
The basic strategy for trading shares is clear: when you expect the shares to go up you buy the stock and when you expect a fall you sell the stock. You can take advantage of falling prices by taking a short position. With a short position, you benefit from a falling price.
Do you want to try speculating in shares risk-free with a free demo? Use the button below to open a free demo for stock trading:
How to invest in stocks?
Now that you understand the meaning of stocks, you want to know how to invest in stocks yourself. You can invest in shares with an online broker. A broker is a party that allows you to trade in various investment products.
Nowadays, anyone can open an account with a broker. Do you want to know which broker you can invest with? Use the button below to open an account directly with a broker:
What influences the price of a stock?
The price of a share is entirely determined by the number of buyers and sellers. When more people want to buy a share, the price goes up. When people dump the stock, the price drops. Expectations about a share’s prospects can have a strong impact on a share price. Let us explain this with two examples.
In the first example, you want to invest in a biomedical company. When a news report comes out that this company has discovered a special drug, it is wise to buy the stock. The likelihood of an increase in demand is surely high.
However, the opposite is also possible. Suppose you are considering investing in retail chains. When a news report comes out saying that the retail market is collapsing due to the rise of online shopping, then it is wise to sell.
Do you want to learn how to better invest in stocks? Then it is important to learn how to analyse the stock markets. In our articles on fundamental and technical analysis, you will learn how to do this:
- Fundamental analysis: using financial figures to make predictions
- Technical analysis: make predictions with patterns
What are the risks of stock trading?
Of course, trading shares involves the necessary risks. However, now that you know what stocks are, you are already one step ahead and the chances that you will eventually be successful are a lot higher.
Risk of a lower exchange rate
One risk of equities is the so-called price risk: there is a chance that the share you buy today will be worth less tomorrow. In that case, you will achieve a loss when you sell the stock again.
In some cases, the entire market may perform poorly. This is also called the market risk.
Risk of bankruptcy
In addition to this risk, there is a chance that the company will go bankrupt; when a company goes bankrupt you often only receive a fraction of the value of the share back.
Lack of liquidity
When you buy a stock with a low trading volume, there is a chance that nobody wants to buy your shares. It can then be difficult to sell your shares because there is no market. With the large shares listed on the Dow Jones or S&P 500, this is very unlikely to happen.
Issuing shares can be an attractive way for companies to raise more money. The money obtained by issuing shares is permanent capital and therefore the company does not have to pay interest on this.
The money raised with a share issue is often used to grow further. Without the capital raised from the issue, the company would be less able to expand.
On paper, you are then co-owner of the company. Unfortunately, this does not mean that you get a parking space on the property and that you can walk in and out of the director’s room. Nevertheless, as a shareholder, you do get quite a few extra rights.
As a shareholder, you may attend the shareholders’ meeting. At this meeting, all shareholders can vote on the company’s policy. As a shareholder, you are also entitled to a share of the profit distribution. Not all companies distribute their profits to the shareholders.
There are also special shares. For example, preferred stock give the owner special privileges and founder shares are non-voting shares.
The definition of what shares are is 100% clear. However, this definition covers many types of shares. For example, you can invest in bank shares as well as in tourism shares.
It is advisable to spread your investments across different sectors as much as possible. There is always a risk that one sector will not do well. You can then absorb the negative returns in that sector with the positive return from another sector.
Are stocks for you?
After this explanation you understand the meaning of shares. However, before you invest, you must decide whether investing in stocks is really for you. Trading shares is attractive if you want to benefit from the positive results of companies. At the same time, you must realize that you can lose part or even all of your investments.
If you want to invest in shares, you can do this with as little as $100. If you want to build a serious portfolio, it is advisable to do so with a minimum of $5,000. When you invest with smaller amounts, spreading your risks is difficult. In addition, you will have to deal with relatively high transaction fees.
What is the difference between stocks and mutual funds?
You can buy both shares and units in investment funds from a broker. It is important that you understand the differences between these two investment products. When you buy a share, you do it of your accord. Therefore, you choose which company you want to invest in. When you buy a unit in a fund, it is different.
A fund determines for you in which shares you invest. You deposit a certain amount of money and with that, you automatically invest in a bundle of shares. Consequently, you have less influence on the composition of your investments. However, you can choose from funds with different styles. An Asia fund will not invest your money in Europe.
What is the difference between bonds and stocks?
Not everyone understands the difference between bonds and stocks. Let us explain this briefly. With a share, you become co-owner of the company and indirectly share in the results. When you buy a bond, you do not become the owner of the company.
A bond is a debt. With a bond, you have the right to monthly interest payments. When the company unexpectedly goes bankrupt, you have priority over the shareholders. However, you are never entitled to more than the interest payments. Do you want to know more about bonds? Click the button below:
Investing in shares brings advantages and disadvantages. A big advantage of stocks is the higher expected return. Over the past 100 years, shares have performed a lot better than other investment products. There is currently no reason to expect that this will be different for the next 100 years.
However, there are also disadvantages associated with shares. For example, investing in shares is risky: you never know if you will achieve a positive result in the short term. You will also need to spend a significant amount of time to decide in which shares you want to invest.
Finally, investing in shares can be expensive for investors with a small amount to invest. The costs are then relatively high. If you want to trade in shares with small amounts, you can consider an investment fund.
Where do stocks come from?
Stocks originate from the Netherlands. The VOC, which was founded in 1602, was quickly looking for new funds that allowed them to carry out numerous long journeys. They needed a lot of capital for this, and to obtain it they decided to issue shares. Additionally, these shares did not entitle the holder to a dividend, but to goods acquired during the trip.
Would you like to know more about the history of stocks? In our article on the history of investing, you will learn more about this:
- Shares are deeds on a company
- You can actively invest in shares by buying & selling them.
- You can make a profit with shares through price increases & dividends.
- The price of shares is created by demand and supply.
- As an investor, you run a price risk & the risk of bankruptcy.
In the last part of the article we deal with frequently asked questions about shares. This can help you to understand the meaning of shares better.
Shares have no fixed maturity. Your shares will not simply expire, and they are in theory permanently valid. Only when the company goes bankrupt can you lose your shares.
Who are stocks suitable for?
Stocks are suitable for people who are willing to take risks. It is advisable to invest only in shares with money that you can miss for the foreseeable future. In the long run you can achieve good results with shares, but in the short term this is not certain.
Are stocks always in name?
Not all shares are in name. The big companies that are traded on the stock exchange are not registered. You can trade the shares freely with a broker and there is usually no clear register where you can see who owns which shares.
When you open a private company with some family members, the shares are often registered. You will know exactly who the shareholders are.
A company can decide for itself how many shares they issue and at what price. It is wise to compare companies based on market capitalization. The market capitalization indicates the total value of all outstanding shares.
Preferred shares give shareholders some preferential rights. For example, they receive a fixed dividend for the other shareholders. Do you want to know more about preferred shares? Read this article.
Value shares are shares of companies that have often been in existence for a long time. The shares habitually pay a stable dividend and have a low price-to-earnings ratio. Examples of these types of shares are Shell and Heineken.
What are ETF stocks?
ETF stocks are shares that are acquired within a fund. With an ETF, you can directly monitor a bundle of funds. ETF stands for exchange-traded fund.
What are CFD stocks?
When you trade in CFDs, you do not directly invest in the stock itself. CFDs do follow the price of the stock. Do you want to know more about CFDs? Read this article.
What are cyclical stocks?
Cyclical stocks are shares that move along with the economy. When the economy is doing well, prices rise and when things go bad, prices fall. Do you want to know more about cyclical stocks? Read this article.
You can also invest indirectly in the value of a share through a share certificate. A certificate is a security that follows the exact value and returns of a share. The product is similar to an investment fund, but specifically focused on one share.
Bearer shares are shares that do not name the owner. Most of the shares that are traded are bearer shares. After all, you trade on the stock exchange in shares that are not in the name of an owner.
You normally pay a so-called spread when buying and selling shares. This is the difference between the purchase and the sale price. In addition, you also pay a fixed commission at many brokers. In our article about the costs of investing you can see exactly how much investing in the shares costs.
Registered shares are the counterpart of bearer shares. Registered shares cannot simply be sold to someone else. They are specifically given to you, and therefore you own a part of the company. For example, you see a lot of this type of share within family businesses.
What are treasury stocks?
Companies may decide to buy back some shares. A company can do this when, for example, its share price has fallen sharply. Buying your own shares can stimulate the price. The shares that are repurchased are also called treasury shares and can be sold on the stock exchange at any time.
What are gold stocks?
A gold stock is a share with a special right of veto. For example, a government may command a golden share from some essential companies. This can prevent a takeover or the reduction of services.
What are large cap stocks?
A large cap stock is a stock with a high market capitalization. Large cap therefore stands for large market capitalization. Companies worth more than 10 billion dollars or pounds are often referred to as large cap stocks.
What are the best stocks?
The simple answer to this question is: the best stocks are the ones that perform best. This is, of course, a simplified vision. Today’s best-performing stock may no longer exist tomorrow due to bankruptcy. Moreover, not all shares fit within everyone’s investment strategy. It is therefore important to do your research.
What are blue-chip stocks?
A blue-chip stock is a high-rated stock. Blue-chip stocks have a reputation for high quality and reliability. People have a lot of faith in the future of this company.
Class A shares have more votes per share. This allows management to remain in control of the company. If all shares had equal voting rights, an external party would be able to take control more easily. The Class B shares have fewer voting rights.
FTSE shares are shares listed on the London stock exchange. The FTSE is an index containing the 100 largest UK companies. Companies can regularly join and disappear from the FTSE, as stock prices are constantly changing.
What is short selling stocks?
When you take a short position, you bet on a price drop. When we talk about a short selling stock, we often mean a short position on the share.
The nominal value of the stock is the price at which it was originally launched at the stock exchange. Face value is not relevant when you invest in a stock. After all, the price of a share changes constantly. A share will therefore not be traded at face value for a long time.
What is the intrinsic value of an asset?
You can calculate the intrinsic value of a share by deducting the company’s debts from the assets. Then you divide the amount that remains by the number of shares. On its own this figure gives little information. It is also important to investigate the company’s future expectations.
Defensive shares are less sensitive to the development of the economy. When you include defensive shares in the portfolio, your returns will fall less quickly when the overall economy falters. An example of a defensive share is a supermarket share.
Try trading risk free?
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.