Shares Explained for Beginners

Shares are the best-known financial market in the world, and one of the most popular among individual investors.

What are shares?

Shares are literally just that – a share in the ownership of a company. Owning shares mean that you own part of a business. If its value increases, so does the value of your shares. You may also be entitled to some of the organisation’s profits via dividends or to vote on company matters.

Say, for example, that Apple’s ownership is broken down into one billion different shares. If you own 100 Apple shares, then you have a 0.00001% stake in the ownership of the company. As Apple’s value goes up and down, so does the value of your shares.

Because shares provide their owners with a stake in a company, they are also referred to as equities, or the equity market. This is to differentiate them from bonds, which are also issued by companies, but do not provide equity. You may also hear shares referred to as stocks.

Companies sell shares because they want to raise capital. Often, this is to fund further expansion – but sometimes it’s so the founders can cash in on their company’s success. Instead of borrowing money in the form of a loan or a bond, they can choose to sell a stake in their company, diluting their ownership in return for a profit. This process is known as listing.

Who trades shares?

Lots of different people, companies and institutions will hold shares. Banks, pension funds and professional investors will buy and sell stocks as a means of generating profits. Equities are also popular among individual investors and traders, who use a broker or a leveraged trading provider to take long or short-term positions on stocks.

Different companies will perform very differently on the stock market. Established businesses, for example, may not see much volatility in their share prices. But smaller, lesser-known stocks can see massive growth – or disappear without a trace.

This means that equity markets have something to offer almost any type of trader. Pension funds with low risk profiles can stick to ‘blue-chip’ companies, while risk-hungry treasure hunters can search for gold among ‘penny’ stocks.

Why trade shares?

Just like other financial markets, the vast majority of share trading is undertaken with the aim of earning a profit. There are two main ways to make money from stocks: selling your shares and dividends.