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Wonder what stocks and shares are? If you want stocks and shares explained simply in plain English then read on!
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;
- stock is the capital raised by a company through the issue of shares
- a share is a single unit of stock
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!
- Joe Bloggs owns 100% of Company A (for arguments sake we’ll say he owns all 100/100 shares of company A).
- 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 Mr Bloggs now owns only 60% of the company meaning he still owns the company (over 50%) and therefore still gets to make the company’s strategic decisions. Note: Mr Bloggs 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 by putting a portion of the company up for sale he would have received a major lump sum of money when people bought the remaining 40% of shares in 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!
Why should the public buy 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.
- 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 (also known as “common stock”) and preferred shares.
- Ordinary shares are the most common type of shares and carry flexible dividends (dividends that are adjusted in accordance to a company’s profit), these shares also carry full voting rights.
- Preferred shares have fixed dividends, which must be paid before any dividends are paid to ordinary shareholders. However preferred shares carry no voting rights.
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 (common stock) and its not an issue you should worry about!
Learn more about the stock market by taking an online class at Udemy.
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Why not check out some more reasons to buy shares.
Play a fun game to help you get to grips with the stock market – stock market 60
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Stock market basics
Stock charts explained
Stock dividends explained
Stock Split Explained
Why do shares move up and down?
How do I read a stock quote?
Understanding company financial statements
Rights issue of shares
The process of buying shares
Why buy shares
Age limit for trading shares
Tax rules on shares
Styles of trading
Buying (going long)
Shorting stock (going short)
Stop losses explained
Stock market trading guide
Stock market games
Advanced stock market trading