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, even me, so I hope by the time you get to the end of this article, you’ll be able to nod with confidence!
So, what is exactly is a ‘share’?
A share is essentially a percentage of ownership in a business. Congratulations, that’s it… well there’s a bit more to it, but that’s the first step of the puzzle! Are you still tilting your head a bit in confusion? You just need to remember the basics and later on things will make more sense, so just think…. A share is a part of the company.
So.. a shareholder…is….
Well you might have guessed it already, if you are a shareholder, then you are someone who owns a share (owns a slice of the
pie… company yay!) A share IS a piece of company, but as I mentioned before, it’s not just a slice of the pie, it also represents part ownership of the company as well, which means when you buy a share, you own a part of the company…(even if it’s a teeny tiny bit microscopic bit, doesn’t matter, still counts!)
What’s the point of owning a share?
The whole point of owning a share is to invest in the company, become a part owner, and benefit from (hopefully) the success of the business. People invest to make money, which usually comes in two ways.
- If the company makes money and grows, your ‘share’ of the company grows as well. If you buy one share, you own a percentage of the company. If the company doubles in size, and doubles its profit, well that means you slice of the pie is worth more. This is called Capital Growth
- The company may decide to reward all the shareholders, and give a small portion of their earnings back to the shareholders. This is called a dividend (we’ll get to what a dividend is soon)
Ok, so a share is a piece of the company, and a shareholder is the one who owns the shares, and if you are a shareholder, you own a percentage of the company… and you become a shareholder to invest into company, with the goal of making profit?
Exactly! Owning a part of the company has to have some perks right? Well.. as a beginner shareholder you might not get a company car, but you could potentially have a claim to the profits the company makes in a financial year.
These are called Dividends.
That’s it for this lesson, lets move onto the next section.. What is a Dividend??
Hmm.. before we move on… can I get an example?
Absolutely! Let’s take all this talk and put it into an example.
Ok, so let’s pretend that at the end of your street, there is an amazing furniture store owned by Mr Wood.
The furniture store is a company, and has been running for the last 20 years, and sells beautiful hand crafted goods to ALL the residents in town.
Turns out, you LOVE woodworking, and you want to buy the furniture store so that everyone buys from you instead.
How much do you think you could buy it for? $100? $1000? (Tell him he’s dreaming!)
The evaluation of the furniture store can get complicated, so let’s pretend that a professional company specialising in that type of thing has done all the hard work, and they have told us it’s worth $500,000!
If we want to buy it (and Mr Wood wants to sell it) then you can pay Mr Wood $500,000 in cold hard cash, and then the furniture store is yours! Woohoo!
Okay so turns out you don’t have $500,000 in cold hand cash, damn, but what if you had half?
Well if you had $250,000 then you could buy half of the company instead of the whole thing, right?
This would mean that you would own 50% of the furniture company (half), and Mr Wood will own the other half.
If this were to happen, then that means that instead of all the money from selling furniture going to Mr Wood, he gets half, and you get half (makes sense right?)
Now another way of saying that you own 50% of the furniture company, is to say you own 50% of the stock of the company, which is effectively saying you own 50% of the shares.
Let’s get back to the furniture shop..
We can buy 50% of the shares in the company for $250,000. If we didn’t have that much, we could potentially buy 25% of the shares for $175,000 or 5% of the shares for $25,000…
All this talk of selling the furniture company really has Mr Wood thinking about retirement, and so he actually wants to sell it all!…but….
turns out you can only only afford 1% ($5,000) of the Furniture store (Oh how your dreams have been crushed!)
Mr Wood isn’t going to sell the business to us for only 1% of what it’s worth, so what does he do?… Well turns out you aren’t the only person that is interested in buying the company.. everyone in the town wants some!
He puts an ad in the paper (for those new to the world, that’s when things were printed on this material called paper) and says “Hey Everyone, I have 100 pieces of my company for sale”
1 share = 1% of the company. Each share is worth $5,000. 100 shares = $500,000 (Make sense?)
To buy all 100 shares you would need $500,000, but since you only have $5,000, you can buy one share.
So you buy one share in the company… You own 1%, and Mr Wood owns 99%.
For every $100 that the company makes, you get $1, and Mr Wood gets $99.
Hmm Mr Wood is confused.. “Everyone wanted to buy into my company, so why are you the only person to have brought a share?”
After having a chat around town you realise that not everyone can afford to buy a share for $5,000.. so you tell Mr Wood and he decides to ‘slice’ up the company into more, smaller pieces! He goes from having 100 shares, to having 1000 shares!
Now a single share is worth $500.
“Hang on” you say… I paid $5000 for a share for 1% of the company, does that mean it’s now worth $500? What gives?!
You own 1% of the company remember?.. Your one share was sliced up too.. so now you have 10 shares (worth $500 each), for a total of $5000.
Because the stock of the company was sliced up into smaller shares.. you need more shares to own the same percentage as before.
So this is the basic concept.
Companies cut their stock into pieces, or shares, and then sell the shares to people who will buy them.
The people who buy shares are called “shareholders”.
Shareholders hope to make money through the company growing and making profit.
If a company decides to give some of the profit back to the shareholders, it’s called a Dividend
Phew.. great job, what a read!