Stocks and shares – what exactly are they? When you first start looking into the world of investing, all the different acronyms and terminology, as well as images of people yelling at each other in front of giant computer screens, can feel really overwhelming. But it doesn’t have to be. Once you’ve grasped the basics you’ll see it’s not as complicated as perhaps you first thought.
This “all you need to know” guide will explain the fundamentals and help you get to grips with everything you need to understand. We’ll take a detailed look at stocks and shares including what they are, how they work, and ways you can invest.
History of stock markets
Stock markets have been around in one form or another since the 1300s. The original purpose was exchanging debts and loans, giving birth to the bond markets (click here for more information on what the bond markets are).
As business and trade developed, so too did the ability to invest. Eventually, this interlinking exchange system spread throughout Europe. Until… a problem needed a solution.
Sea voyages during the 1600s to remote places in Asia and the East Indies were proving to be both extremely profitable, and extremely risky.
A successful voyage could lead to great wealth. But, an unsuccessful venture could lead to immediate bankruptcy.
So, to spread risk, ship owners would seek investors to own a ‘share’ of the burden.
This meant lower profits. But more importantly, lower risk by spreading funds across many journeys.
Rather than keep organising this trip-by-trip, larger companies emerged. Companies that began issuing stock that would pay a dividend based on multiple trips.
This method grew in popularity and trading of these stocks in London coffee shops became a staple societal pastime.
Modern stock markets
What we have now is just a faster and more sophisticated system. You can easily buy stocks and shares from stock markets around the world.
When investing, you are buying pieces of companies, and get to share in the profits or losses. Companies sell shares to raise money. They then use these funds to grow, reinvest in the business, or develop new technologies.
Lots of companies, particularly UK firms, still pay a dividend. Other stocks generate returns through capital appreciation. The stock becomes worth more, so your shares become more valuable.
What is a share?
In the world of investing, a share simply refers to a piece of ownership in a company.
This is because for every company, there will be a set amount of pieces (shares).
As an investor, you can buy one share or multiple shares. Therefore owning a fraction of that company and becoming a ‘shareholder’.
The more shares you own, the more of that company you own. Simple stuff see!
Although you can sometimes buy shares in private companies, you’re most likely to only own shares in public companies. This is because these are the shares being bought and sold on stock exchanges like the London Stock Exchange (LSE). But, more on that later.
What is the difference between stocks and shares?
The main difference is that ‘stock’ refers to broad ownership of a business. Whereas a ‘share’ is an individual unit of ownership.
These words can make things seem confusing. Because people often intermingle the use of ‘stocks’ and ‘shares’.
In the UK, we also tend to refer to US-based companies as ‘stocks’. But generally speaking, ‘stocks’ refers to whole businesses and ‘shares’ to pieces of a business.
How do shares make money?
It’s not actually the shares themselves that make money, it’s the underlying company that you own when you hold shares.
So, when you make the exciting step of buying some shares, if that company performs well and makes money – the price of your shares can go up.
The price of your shares might also go up simply because there’s more demand for them. Imagine that your share is like a ticket to a sold-out Adele concert. For people who don’t have tickets to the gig, they might offer more than what you paid. Then, you have the option to sell your ticket (your share) for a higher price. Or, hold on to it until someone bids even more for it.
But, what makes investing more exciting than a concert is that the stock market is never-ending! So, there’s no time limits involved and you can hold your shares for as long as you live if you like.
And, if the company or fund you own shares in performs well – those shares will gradually become worth more and more over the years. Because everyone wants a front row seat to financial freedom!
How do you buy STOCKS and shares?
Gone are the days where you’d have to be located near a stock exchange in London or New York to buy shares.
Now, you just need to have an account with a brokerage. A brokerage is a platform that allows you to buy or sell shares. They provide you access to major stock exchanges such as the London Stock Exchange (LSE) or the New York Stock Exchange (NYSE).
Click here to find out what is a brokerage account and why do you need one? A complete explanation for beginners.
Luckily for you, these services are cheaper and easier than ever to use. Most will let you create a basic account for free. And, some platforms like eToro (see below) will even let you buy or sell shares for free.
Click here for more information on how to buy shares.
Investment platform: eToro
If you don’t have an account set up or it feels somewhat daunting, we’ve written a guide on how to create a free account and buy shares with eToro.
In fact, we think eToro is so good, we’ve put together a series of what and how articles with them:
FURTHER READING
JAsmine Says….
If you’re reading this articles you probably either own shares or are thinking of owning shares very soon.
Good for you! At MoneyMagpie we are keen on everyone owning some shares, whether directly or within funds, and the easier and cheaper the process of buying and selling them can be, the better.
However, once you own them there are many improvements that could be made to the way shareholders (you and I) are treated by the companies we effectively ‘own’.
Marryn Somerset-Webb, FT columnist and editor of MoneyWeek has written a guest column for us here, explaining what she believes needs to be done to make share-owning more attractive and more profitable for British consumers.
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This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.
