A share is a unit of ownership in a company. Corporations often offer shares to investors as a way of raising capital without increasing debt. By purchasing shares, investors buy into the company, gaining the status of equity shareholders.
Shares are generally traded on stock exchanges. As a shareholder, you can benefit financially through dividends – payments made to you from the company's profits. The catch, however, is that a share’s value isn't set in stone. It fluctuates depending on how well the company performs and its current stock price, so how much your investment is worth can go up or down.
There are two types of shares: common stock, and preferred stock.
Think about what the term ‘share’ means to you (in a financial context, of course). Chances are, you’re thinking of common stock – the most widely known type of share.
If the company you’ve invested in is performing well, owning common stock gives you the opportunity to receive dividends. You’ll also have voting rights as a common stockholder, giving you the chance to have a say in decisions that affect the direction of the business.
That said, should the business fail, you’ll usually be last in line when it comes to being reimbursed.
Preferred stock has a few names. It’s sometimes referred to as preference shares, or hybrid securities. While preferred stock still represents unit of ownership in a company, it functions more like a cross between a stock and a bond than common stock.
There are a few different types of preferred stock – ‘cumulative’, ‘participating’ and ‘convertible’ among them. But generally, they involve greater potential dividend payouts than common stock, and don’t often offer their holders voting rights.
Share prices are influenced by a wide array of factors ranging from company-specific events to broader economic conditions.
A company’s profitability and revenue growth directly impact how investors value a company. Likewise, quarterly and annual earnings reports can lead to significant price movements based on whether or not a company meets expectations.
How investors feel about a company's future prospects can influence its share price, sometimes regardless of its real financial metrics. To that end, positive news like successful product launches or favourable legal decisions can boost prices, while negative news can lead to falling share prices.
Wider economic indicators also play a part. Higher interest rates can lower share prices because they increase borrowing costs for companies, reducing investment appeal compared to risk-free returns from government securities. High inflation can erode purchasing power and affect companies' costs, potentially leading to falling share prices.
Trends within specific sectors, like technology or energy, can drive prices up or down based on a company’s place in an industry and its future growth prospects.
Traders also need to consider things like new regulations or changes in tax policies. These can have significant impacts on company profits and, consequently, their stock prices. Wider geopolitical events, wars and natural disasters can also affect investor confidence and influence market sentiment.
You can find out more about shares, and how to trade them, in our complete guide.
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