The vault is the one stop shop for learning about all things ‘money’.
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What is ‘a share’?
Have you heard about people investing on the stock market, buying ‘shares’, and you’ve just nodded along like you know what they’re on about? Yeah? Well the good news is that it’s happened to us all at one point, so hopefully after this post you’ll be able to nod with confidence!
So, what is exactly is a ‘share’?
A share is essentially a piece of a company.
Congratulations, that’s it… well there’s a bit more to it…
Take the image below. If you own 30% of shares, it’s not just a magical number, you own part of the entire company as well!
A share IS a piece of company, but it also represents part ownership of the company as well, which means when you buy a share, you own a part of the company, and a claim to the assets (and profits!) of the company as well.
What’s the point of owning a share?
The whole point of owning a share is to invest in the company. People invest to make money, which comes in two ways.
- Your ‘share’ of the company grows. 30% of a huge pie makes you more money than 30% of a mini pie.
- The company pays you dividends, which over time can be extremely profitable.
When a company makes a profit, it can choose to give some of the profit it made back to its shareholders, and that’s called a dividend. The more profit a company makes (and the larger your ownership) the larger the dividend.
For example, say the Company makes $100. It costs $40 to run the company, so it leaves them with $60 profit.
They decide to give ALL profits back to shareholders. Since you own 30% of the shares, your entitled to 30$ of the $60 profit, which is… 1/3 of $60 = $18. Not bad!
The stock market is simply the marketplace where people can buy and sell their shares with others, it’s kind of like an action house. When you buy shares, you’re usually buying those from someone else who wants to sell them!
There are quite a few stock markets around the world, Australia’s is called the ASX (Australia Stock Exchange). These exchanges track the supply and demand of each stock, such as who is selling, who is buying, and what the price is!
Why do share prices go up and down?
Simply put, supply and demand. Buyers offer to buy shares at $X price, and the seller wants to sell their share for $X price.
A ‘trade’ will only occur when a buyer and a seller have the same price. Computers are constantly trying to match up buyers with sellers to execute trades on behalf of the buyers/sellers.
In this example, no-one wanted to buy their share for $10, so they compromised and sold it for $8. In reality, the trading doesn’t happen with in person, but rather through an online broker, and the auctioneer is a computer system.
When there are more buyers than sellers, the price goes up to reflect the demand, and when there are more sellers than buyers, the price can fall.
Note: The price of a share is not to be confused with the value of a share. The price is what people are willing to buy/sell it for, it could be $5, but the value could be $2, $4, $6 or even $10. Accurately valuing a company can be extremely complicated.
Giving or receiving money isn’t ‘free’.
If you burrow money, you have to pay interest on the debt, it’s the price you pay for someone giving you money.
When you put money into the bank, the bank pays you for that service, in the form of interest.
Interest is usually paid as a percentage (%) of the amount giving/received.
Interest rates are usually calculated on a per year basis
If you burrowed $100 at a 5% interest rate, then the total interest will be $5 for the year (or if you divide by 12 Months, then 5/12 = $0.40 cents per month.
Calculating the actual interest is a lot more complicated than that (That example uses ‘simple interest’). Compounding interest is when interest is calculated at the end of every day, which would take up way too much blogging space to write up, but you can play around with compound interest hereat the moneysmart gov website. Try playing around with:
- Initial Deposit
- Regular deposit amount and frequency
- Number of years
- Interest rate
What happens when you increase the interest rate?
What happens when you deposit $1 with no contributions over 100 years?
If you want to read about my first interest payment, check out myzero to 100 post (Tip, it wasn’t a lot)
Interest can be scary. When it’s working against you (Debt) it can be really hard to get ahead of it and pay down the Principal off completed, however, when its’ working FOR you, well then it’s your best friend. I like to imagine every $1 is a little worker, working 24/7 to make a tiny bit of extra money. The more workers (money) the more they produce.