WHAT ARE STOCKS AND SHARES?
Essential information for beginners

What are stocks and shares?

Quite simply, a stock, share or equity is a share in the ownership of a company. Owning a stock means that the owner can have a claim on the assets and earnings of a company.
Stock, share, equity, assets, earnings, bond, debt, shareholder, votes, certificate,

What is a stock? What is a share? What is equity?

The terms stock, share and equity mean the same thing. Quite simply, a stock, share or equity is a share in the ownership of a company. Owning a stock means that the owner can have a claim on the assets and earnings of a company. The greater the number of stocks you own, the larger your stake in the company and the bigger your claim on the assets and earnings.
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What is a shareholder?

If you own stock in a company, you are known as a ‘shareholder’. Being a shareholder means that you have a claim on the assets and earnings of a company. The greater the number of shares you own, the larger your stake in the company and the bigger your claim on the assets and earnings. Usually, companies have very many shareholders which means a shareholder’s claim on a companies assets is usually very small in comparison to the overall value of a company. Shareholders may also have voting rights. For example, each share owned by a shareholder will give that shareholder a single vote to elect a board of directors. So one hundred shares will entitle the owner to one hundred votes.

What is a share certificate?

If you own a share in a company, this is represented by a certificate to prove ownership. Share certificate used to be actual documents, but these days they are more likely to be electronic documents. This means that they are easy to trade. Historically, when a person wanted to sell his or her shares, the certificate would needed to be presented physically. These days, a click of a mouse or a phone call will suffice.

Aims and objectives of company management

The aim of the management of a company should be to increase the value of the business so that the shareholders shares in the company increase in value. In theory, if the management does not perform well, and the company does not increase in value, the shareholders can vote to have the management removed. In reality, most armchair investors do not own enough shares to have a significant influence on the direction of the company. However, instructional investors, such as pension or unit trust funds, and billionaire investors have a better change in influencing the way company is managed. See Why do companies issue stocks and shares.

What is a dividend?

Shareholders are entitled to a share in the profits of a company and in a company’s assets. The share in profits is sometimes paid out in the form of a ‘dividend’. The greater number of shares you own, the larger your dividend.

A shareholder’s claim on the assets of a company is only relevant in the company collapses and declares itself bankrupt. Unfortunately, shareholders are only entitled to a share in the assets if there’s anything left after all the other creditors have been paid.

The concept of shareholder limited liability

Another feature of being a shareholder is ‘limited liability’. This means that the shareholder is not personally liable if the company collapses because it is unable to pay its debts. The limit of the shareholder’s liability is the value of their investment. If you are a shareholder, you can never lose your house or other assets.

WHAT ARE STOCKS AND SHARES? Essential information for beginners

WHAT ARE STOCKS AND SHARES?
Essential information for beginners