Too embarrassed to ask: what is a share?

When people talk about investing, they often refer to putting money into “shares”, or buying “stocks and shares”. But what is a share anyway?

When people talk about investing, they often refer to putting money into “shares”, or buying “stocks and shares”. 

But what is a share anyway?

Most companies, including privately-owned ones, have shares. But usually, when we’re talking about investing, we mean investing in publicly-traded companies. That is, companies whose shares can be bought and sold on a stock exchange. 

These are known as “listed” companies. When a company sells shares in itself on the stock exchange for the first time, this is known as “going public”. 

Companies sell shares in themselves for lots of reasons – perhaps to raise money for expansion, or to allow the original founders to sell out. 

But why would you want to own the shares?

A share represents a sliver of ownership in a company. If you own shares in a company, you are entitled to a share of the profits that the company makes, often in the form of dividend payments. You are also typically entitled to vote at the annual general meeting, for example. 

So if you believe that a business has good prospects, then you might want to buy the shares so that you can benefit from that bright future too. 

As an asset class, shares are riskier than bonds for a number of reasons. The most obvious one is that if a company goes bust, its shareholders will almost certainly be entirely wiped out, whereas its lenders – the banks and bondholders – may at least be able to salvage some value from the carcass of the business. 

However, to compensate for this added risk, shareholders also have potentially unlimited upside. They get to share in any future profits the company makes. So the better the company does, the better the shareholders do. 

Bondholders, on the other hand, will benefit from a fixed interest payment plus their money back if a company thrives. But if it becomes the next Apple or Amazon, they won’t get paid anything more than if it enjoys more modest success.  

Shares are also commonly known as “stocks” or “equities”. So when people say “stocks and shares” it means the same thing as saying plain old “shares”. 

For more on investing in shares and how to decide which ones to buy, subscribe to MoneyWeek magazine

Recommended

Stockmarkets have a spring in their step
Stockmarkets

Stockmarkets have a spring in their step

Global stockmarkets have been basking in the post-Covid economic recovery as GDP, retail sales and manufacturing are all on the way back up.
23 Apr 2021
Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
I wish I knew what a central bank digital currency was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what a central bank digital currency was, but I’m too embarrassed to ask

Governments around the world are considering creating their own digital currencies. But what are they and how do they compare to cryptocurrencies such…
4 May 2021
Things are looking up for income investors as dividend payouts start to rise
Income investing

Things are looking up for income investors as dividend payouts start to rise

UK dividend payouts are ready to grow again, but this crisis has shown why income investors must diversify overseas.
3 May 2021

Most Popular

What is hyperinflation and could it happen here?
Inflation

What is hyperinflation and could it happen here?

The Bank of England has been accused of the kind of money-printing that could lead to Zimbabwe-style hyperinflation. But that's very unlikely to happe…
4 May 2021
Micro-cap stocks: how to get huge returns from tiny firms
Small cap stocks

Micro-cap stocks: how to get huge returns from tiny firms

Micro-cap stocks are often overlooked, but the British market has plenty of them and their potential is massive. Max King picks the best two investmen…
3 May 2021
Copper has hit a ten-year high, but this could just be the start of a huge bull market
Industrial metals

Copper has hit a ten-year high, but this could just be the start of a huge bull market

The price of copper is at its highest for ten years. But supply constraints and a massive rise in demand mean it’s not going to stop there, says Domin…
5 May 2021