What Are Shares?
When a company wants to raise money, one of the most common methods is to divide its ownership into small, equal units and sell them to the public. These units are called shares — and when you buy one, you become a part-owner, or shareholder, of that company.
Shares are also commonly referred to as stocks or equity. While these terms are often used interchangeably in everyday conversation, there are subtle differences worth knowing as you develop your investing knowledge.
Types of Shares
Not all shares are created equal. The two main types you'll encounter are:
- Common Shares (Ordinary Shares): The most widely held type. Common shareholders typically get voting rights at company meetings and may receive dividends, but they are last in line to be paid if the company goes bankrupt.
- Preferred Shares: These usually don't come with voting rights, but preferred shareholders receive dividends before common shareholders and have a higher claim on assets in the event of liquidation.
How Do Companies Issue Shares?
A company first issues shares to the public through a process called an Initial Public Offering (IPO). This is when the company "goes public" — listing itself on a stock exchange like the NYSE, NASDAQ, or London Stock Exchange.
After the IPO, those shares trade freely on the open market between investors. The company itself generally doesn't receive money from these secondary market transactions — that money flows between buyers and sellers.
What Does Owning a Share Actually Mean?
Owning shares in a company gives you several rights and potential benefits:
- Ownership stake: You own a proportional slice of the company's assets and earnings.
- Voting rights: Common shareholders can typically vote on major corporate decisions, such as electing the board of directors.
- Dividends: If the company distributes a portion of its profits, you receive a payment proportional to your holdings.
- Capital gains: If the share price rises and you sell, you pocket the difference as a profit.
How Share Prices Are Determined
Share prices fluctuate constantly during market hours based on supply and demand. If more investors want to buy a stock than sell it, the price rises. If more want to sell, the price falls.
Factors that influence share prices include:
- Company earnings reports and revenue growth
- Broader economic conditions (interest rates, inflation)
- Industry trends and competitive landscape
- Investor sentiment and market speculation
- News events and geopolitical developments
How to Buy Shares
To buy shares, you need a brokerage account. This can be a traditional full-service broker or, more commonly today, an online discount broker or investing app. Once your account is funded, you can search for a company by its ticker symbol (e.g., AAPL for Apple) and place an order.
Types of Orders
- Market Order: Buy immediately at the current market price.
- Limit Order: Buy only if the price reaches a specific level you set.
- Stop Order: Trigger a buy or sell when the price hits a certain threshold.
Key Takeaways
Understanding shares is the foundation of all investing. Before diving into complex strategies, make sure you're comfortable with these basics:
- Shares represent fractional ownership of a company.
- Common and preferred shares have different rights and risks.
- Share prices are driven by supply, demand, and fundamentals.
- You need a brokerage account to buy and sell shares.
Once you've grasped these fundamentals, you'll be well-positioned to explore more advanced topics like portfolio construction, valuation analysis, and dividend investing.