First of all, shares and stock are different words but in the stock market world, they often mean the same thing. For example you could say "I have shares in Microsoft " or "I have stock in Microsoft ". Therefore if you see stock and share used it is important not to get confused as they both often mean the same thing.
However if you were to clearly define the two;
Why do shares exist?
Shares are issued by a company to raise money (capital) to help plan for future projects or because the owner/s of the company want a big lump sum of money for themselves as a reward for the hard work they have put into building up the company!
Example
- Joe Bloggs owns 100% of Company A (for arguments sake we'll say he owns all 100/100 shares of company A. By owning over half the company (51% or more) he gets to make all the company's strategic decisions.
- He then issues shares for his company and decides to sell 40% of the company (40 shares)
- As you can see by the pie chart below he now owns only 60% of the company but that means he still owns the company outright (over 50%) and still gets to make all the company's strategic decisions. However he will now only receive 60% of the future profits when the company's dividends are paid.
- So you ask "why has Mr Bloggs done this?" The reason is that when he put 40% of the company up for sale he would have received a major lump sum of money when everyone bought the remaining shares of his company. This money could allow him to grow the business or he could even keep the money for himself to buy a mansion in southern France!
So why should the public buy the shares offered by company A?
The public would buy the shares in order to reap some of the future profits made by the company. They would receive these profits in the form of dividends.
but that's not the only reason!
The public could also make money by a rise in the price of each share. This is called a capital gain on their stock.
Example (we'll use the £ for now!)
- Jane Doe buys 20 shares of company A at £10 each, that's a total of £200 spent.
- Company A keeps expanding and so do its profits. Therefore the demand for shares in Company A has risen. This means people are now willing to pay £18 per share in Company A.
- Jane Doe sells her 20 shares for £18 each. That's means she collects £360. As a result earning herself a tidy profit of £160 or 80%!
Types of shares
There are two types of shares, ordinary shares and preference shares.
It is important to note that when dealing with shares in the stock market as we know it, you will nearly always be dealing with ordinary shares and its not an issue you should worry about!
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