What is a share?

A share is a unit of ownership of a company. In order for a public company to raise money, it can sell shares to investors, who then become equity shareholders in the business. 

Shareholders then have the opportunity to earn dividends, with profit distributions depending on the company’s share price and overall performance of the share, meaning their value can vary.

Key takeaways

Shares are often issued as an alternative to taking on debt. Most companies, whether large or small, issue shares of one kind or another to a certain extent. 

In the case of private companies, the shares are usually held by the business’ owners. If more money is required, for instance if the company expands, then it might make an initial public offering (IPO), where others can pick up shares. At that point, the business is publicly traded, with shares usually traded on stock exchanges. 

Public companies’ shares are held by a wide range of people and institutions. At first, shares will be sold to investors in a primary market. People who have the chance to buy shares then often include members of staff and friends and family, along with venture capital investors.

Shares can go up in value as well as down in value, meaning that investing in shares can carry risk. Therefore, you should do your own research, remember that prices can go down as well as up, and never invest more money than you can afford to lose. 

Types of shares

There are two kinds of shares, common stock and preferred stock.

Common stock is, as its name suggests, the most common type of share. It carries the right to receive dividends, or regular payments, if the company is doing well. 

Common stockholders also have voting rights on decisions affecting the company’s future. However, should the business go bankrupt, they are usually at the back of the queue when it comes to getting their money back. 

Preferred stock, also known as preference shares or hybrid securities, is a cross between a bond and a regular share, it offers more benefits and stability to investors. It often does not give its holders voting rights but does potentially provide higher dividends. There are a range of preferred stocks, including:

• Cumulative. The company must collect all dividends and pay them to the preferred shareholder, usually at the end of that year, as long as the company is in profit.

• Participating. As well as receiving fixed dividends, holders of this type of preferred stock can potentially earn money above the dividend based on a company’s profits.

• Non-participating. This type of preference share pays a fixed dividend only. 

• Convertible. These can be converted to common shares.

• Callable. Gives the issuer the right to redeem the stock at a fixed date for a fixed price.

The types of shares can also be divided into another three different subdivisions, authorised shares, issued shares and outstanding shares. 

Authorised shares represent the maximum amount of shares that a company’s board of directors is legally allowed to issue. 

Issued shares represent the stock that has been issued, either to the company, employees, or members of the public. Generally, a company will not issue all of its shares, meaning that the number of authorised shares is larger than the number of issued shares. 

Outstanding shares are shares that have been sold to the general public. Therefore, all outstanding shares are both issued and authorised but not all authorised shares are issued, outstanding or both. Meanwhile, all issued shares are authorised, but not all of them will be outstanding. 

Incidentally, a company may not issue all its shares because it allows it to maintain a level of control which it might lose if another interest were to take hold of a majority of shares. 

Why invest in shares? 

There are a number of reasons an investor or trader might want to invest in shares. These could include:

• Higher returns. Shares could potentially deliver higher returns than other types of asset, such as bonds, precious metals or property.

• Building for the future. Shares can potentially help someone build their savings and diversify their portfolio.

• Sense of ownership. Owning shares in a company could help someone feel like they are part of something. Common stock allows people to vote on decisions affecting the company’s future.

• Dividends. If a company is doing well, shareholders can be paid dividends, meaning they can get a return on their investment without having to sell their stock. 

• Tax breaks. In some jurisdictions, people who own stocks and shares can save on their overall tax bills. 

Risks associated with investing in shares

It is, of course, worth noting that investing in shares does carry its risks, these can include:

• Losing money. Prices can and do go down as well as up, so investors should make sure they always do thorough research and never invest more money than they can afford to lose. 

• Volatility. The stock market is inherently volatile.

• Credit risk. Holders of common stock are usually the last to get reimbursed if a company collapses. 

• Timing risk. It is possible to buy or sell a share at the wrong time. Every market is different so the patterns they follow will be different, too. 

• Liquidity risks. Although shares are comparatively liquid, there will be times when a seller will be unable to find a buyer for their shares, meaning that they could be left with an asset that they don’t want.  

Conclusion

In conclusion, shares are a unit of ownership of a company. They are traded on stock exchanges and can, in some cases, grant shareholder privileges such as voting rights and the issuing of dividends. However, shares can be volatile and investors can stand to lose their money. This is why they need to do their own research, remember that prices can go down as well as up and never invest more money than they can afford to lose. 

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