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?
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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.
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