For the most fundamental understanding of what stocks and shares are, where they came from and there purpose in the financial world.

What are stocks and shares? How do they differ from each other?

For this blog post I decided I would write about the most fundamental piece of knowledge of the stock market. For me, I thought that would be a raw understanding of what stocks and shares are as well as why they exist and who invented them. Although some information may not be required for you to have a successful investing career, I think there are some fundamental and interesting topics I will cover in this post.

So What are Stocks and Shares

Stocks and shares are financial instruments that represent ownership interests in companies. They are also known as equities or equity securities. Stocks and shares are similar to bonds, except that they offer investors exposure to the profits generated by businesses. The value of a stock fluctuates depending on the performance of the company however can be influenced by other factors.

The idea behind stocks and shares is that an investor has a share of ownership over the business. In return for their investment, the investor receives dividends which are paid out periodically based on the profitability of the company. These dividends are usually calculated using the earnings per share (EPS) metric.

Not all companies pay dividends along with there stock however. Some companies who are in a smaller position or are not yet profitable will likely not be paying dividends. Companies of these nature may typically be higher risk but could also reap higher rewards if the company is successful. 

The Difference Between Stocks and Shares

A share is an individual unit of ownership in a corporation. A shareholder owns a proportionate part of the assets and liabilities of the business. The number of shares a company can be split into is often different company to company.

For example, company A may have 1 million shares valued at £1 each; Company A is therefore worth £1 million. Or you could have company B with 10 million shares valued at £0.50 each. Although, just by looking at share price you may assume that company A is a higher value company but in fact it is not. Company B is higher valued as they have many more shares available meaning the company valuation (market capitalisation) is £5 million due to the number of shares multiplied by the share price.

In contrast, stock typically is used to represent a whole or more than 1 share. This means that if you are invested in a company then you would likely own many shares of a companies stock. You may often hear the term stock and shares used interchangeably in the community however there is a difference which is important to keep in mind.

How Share Prices Are Set

Share prices are set by the market. Companies decide how much they want to sell their shares for. If they choose to sell all their shares then the market sets a price. If they only want to sell half their shares then the market will determine the price. When a company decides to issue new shares, the market determines the price at which these shares should be sold.

This process continues until the company has no more shares left to sell. At this point the company will have reached its maximum market cap. However, if the company wants to increase the market cap further they can issue additional shares. This can happen through issuing new shares or buying back existing shares.

When a company buys back shares it reduces the supply of shares in the market. This increases the demand for those shares leading to a rise in the price. Conversely when a company issues new shares, the supply of shares in circulation rises and drives down the price.

Why Do People Invest in Stocks and Shares

Someone who purchases stocks and shares are referred to as investors. Investors typically buy assets and in this case equities such as stock are considered to be assets.

As stocks and shares represent partial ownership of a business, a typical investor will be hoping that the company they have bought shares in will perform well in the future. This in turn means that it is possible for the price of their shares to increase over time and therefore the investor would gain a profit on there purchase. If the company performs poorly then the price of its shares could fall.

At any point the investor can choose to sell their shares at market price. The main difference between a share and a stock is that a share represents an undivided interest whereas a stock represents a whole or multiple shares.

Why Do Companies Issue Stocks and Shares

Companies issue stocks and shares to raise money from investors. Companies need funds to invest in new projects, expand existing operations and pay off debts. In order to do so, they must attract investors willing to put up cash.

When raising money through issuing stocks and shares, a company needs to ensure that all shareholders are happy with how much they are being paid. Shareholders usually agree to take less money than they might otherwise receive because they believe that they will benefit from the growth of the company.

A company is that is available on the stock market is called a public company. These companies must make their financial information publicly available. They also need to publish annual accounts showing their profits and losses.

Companies who are public can become under a lot more scrutiny and difficulties as they have to ensure there share holders are happy and there companies are performing well as this will determine the price of the stock and therefore their valuation.

What Is a Stock Exchange

The stock exchange is where people trade stocks and shares. It is a place where buyers and sellers meet to negotiate prices and terms. There are two types of exchanges: primary and secondary. Primary exchanges are where most trading takes place. Secondary exchanges are places where traders can find other people to trade with.

Some of the most well known stock exchanges are NASDAQ, NYSE Euronext and LSE. All three of these exchanges are regulated by the Financial Conduct Authority (FCA).

Stock Exchanges are not only places where people buy and sell stocks and shares but are also places where companies list their shares for sale. A listing is when a company decides to go public and makes their shares available to the general public. Once listed, the company must follow strict rules set out by the FCA. For example, a company cannot pay dividends until after five years unless it has been granted special permission.

If a company does not comply with these rules then it risks having its shares delisted. Delisting is when a company’s shares stop appearing on a stock exchange.

The First Stock Exchange and Public Company

In 1602, the first stock exchange was established in Amsterdam. At this time, it was illegal for Dutch citizens to own shares or hold them as investments. However, the law did allow foreigners to own shares.

This meant that foreign investors were able to enter the country and buy shares in Dutch companies. By 1753, the Dutch government had passed laws allowing Dutch citizens to own shares.

By 1801, the Dutch Stock Exchange was one of the largest in Europe. Over the next 100 years, many countries copied the model developed by the Dutch. Today, the world's leading stock markets include London, New York, Tokyo, Hong Kong, Frankfurt, Paris, Moscow, Shanghai, Singapore and Toronto.

According to research carried out by investopedia.com they have seen that Belgium may have had a stock exchange all the way back in 1531 Antwerp. Stocks as we know it now didn't exist back then so instead the primary trades were other financial assets such as promissory notes and bonds.

https://www.investopedia.com/articles/07/stock-exchange-history.asp

Summary

Stocks and shares are important parts of any business. In order to raise capital, a company needs to issue shares. This means that the company will be required to give some of its ownership away to others. The owners of the company will want to know what they are getting for their investment. If the company is successful, they may see an increase in value.

When a company issues shares, they are said to be going public. Going public means that the company wants to show off its success to potential investors. This helps to attract new investors and encourage existing investors to buy more shares.

I hope you have found this blog useful. If you did then please consider sharing it on social media. I post new blogs every Wednesday, Friday and Sunday so subscribe if you are interested in more personal finance posts.

Thanks for Reading

FAQ

What investments are held in stocks and shares ISAs?

A stocks and shares ISA is effectively a 'tax wrapper' that can be put around a wide range of different investment products. Any investment growth or interest earned within a Stocks and shares ISA is tax-free.

Source: (moneyhelper.org.uk)

How Do People Lose Money in the Stock Market?

Most people who lose money in the stock market do so through reckless investments in high-risk securities. Although these can score high returns if they are successful, they are just as likely to lose money. There is also an element of psychology: an investor who sells during a crash will lock in their losses, while those who hold their stock have a chance of seeing their patience rewarded. Finally, margin trading can make the stock market even riskier, by magnifying one's potential gains or losses.

Source: (investopedia.com)

What are the different ways to invest in shares?

Invest directly in individual shares:buying shares in individual companies may be a good option if you can do your own research and keep abreast of market developments. However, it’s a relatively risky option due to the risk of an individual company underperforming.

Source: (forbes.com)

Why buy or trade shares?

People buy and trade shares as a way to gain exposure to global economic health and growth, as well as an individual company. Your decision about whether to invest in shares or trade on their price will depend on whether you want long-term or short-term exposure.

Source: (ig.com)