What is... | February 23, 2011

What is a share?

Understanding what shares are and how they work can be important. Shares prices are constantly in the news – and they are often used as a sign of how a company or a whole economy is faring.


Owning a share
Shares – also known as stocks or equities – are a method of ownership used by many businesses. Each share effectively gives a tiny share in the ownership of a company to the holder – thus the name. A company’s capital might be divided into a million shares, for example, meaning each share owner has a one-millionth stake in the business.

Market trading
Shares can be bought and sold by investors if the company is listed on a share market – this is known as being publically listed. Some companies are held privately so their shares can only be sold through one-to-one deals. Public companies allow their shares to be traded through stock exchanges. Billions of shares are bought and sold each day around the world. Private investors trading in shares usually need to use a stockbroker, either in a high street shop or online. They typically pay a commission to the stockbroker for each transaction.

Taking stock of a company’s worth
The price of a share indicates how much a company is worth. A company with 50 million shares priced at €5 a share is worth €250m. This is known as its market capitalisation – or cap for short. The share prices of the biggest companies in a country are often aggregated to form an equity index that indicates how the wider market is faring. Famous examples include the FTSE 100 in the United Kingdom, the CAC 40 in Paris and the Dow Jones Industrial Average in New York.

Sharing the fruits
Investors can make money from shares if the share price rises as well as through dividend payments. An eZonomics poll tells how dividends are a way some companies distribute profit to shareholders. Dividends are typically paid once or twice a year and are usually expressed as an amount per share.

Share prices can go down as well as up
Like all investing, buying shares involves taking on financial risk. Just as a share price can rise, it can also fall – and drops in price mean the value of an investor’s holding may fall. The video tutorial What are the basic investment products? details return and risk characteristics of four types of investments. An eZonomics video on share investing argues investors should organise their savings before diving in to the share market and suggests diversifying across asset types.

Taking stock of investments – objectively
Be aware that behavioural economists argue owning shares in a company can skew an investor’s view of its value. The tendency for investors to overvalue what they own is known as the “endowment effect”. As this eZonomics blog post describes, the endowment effect can have negative financial implications if investors become reluctant to sell shares they believe are worth more – as the price slides further.

InvestingShares

eZonomics team
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