What are shares and how do they work in the stock market?
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Skilling Writers Team
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- Trading
- Stocks
If you've ever been curious about how companies raise funds or make their shares available for public investment, then you've likely heard of the stock market. The stock market is a fascinating and dynamic world, where millions of people trade shares of publicly traded companies every day. But what exactly are shares, and how do they work?
Shares represent ownership in a company, and by buying shares, investors become partial owners of that company. Understanding how shares work is crucial for anyone interested in investing in the stock market, and it's also an important piece of knowledge for anyone who wants to understand the inner workings of the modern economy.
What are shares?
Shares, also known as stocks, are units of ownership in a publicly traded company. When a company wants to raise money to finance its operations or expand its business, it can issue shares of stock to the public. By purchasing shares of a company, you are entitled to a portion of its profits in the form of dividends.
Shares are typically traded on stock exchanges, where investors can buy and sell them. The price of a share is determined by supply and demand, with the value fluctuating based on factors such as the company's financial performance, market trends and investor sentiment.
Did you know?
Shares come in different types, including common stock and preferred stock.
Common stock represents the majority of shares issued by a company and entitles the holder to vote on corporate decisions and receive dividends.
Preferred stock, on the other hand, typically does not carry voting rights but entitles the holder to receive dividends before common shareholders in the event of a company's liquidation.
How do shares work?
They work by allowing investors to buy a piece of ownership in a company, and thereby participate in the company's growth and profits. When a company issues shares, it sells them to the public through an initial public offering (IPO) or secondary offering. Once they are available for trading, investors can buy and sell them on the stock market through a broker or trading platform.
When an investor buys shares, they are effectively investing in the company's future success. If the company does well and increases its profits, the value of its shares may rise, allowing the investor to sell them at a profit. Additionally, many companies pay out dividends to their shareholders, which provide a regular source of income to investors who hold the shares.
The difference between investing in and trading shares
It's important to distinguish between investing and trading shares. Investing in shares typically involves buying shares with the intention of holding onto them for the long-term and benefiting from the company's growth and profits over time. Trading, on the other hand, involves buying and selling shares frequently with the goal of making short-term profits by taking advantage of price fluctuations in the market. More on this later.
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Why are companies listed on the stock market?
Companies are listed on the stock market for several reasons, including raising capital, enhancing their public profile, and providing liquidity to existing shareholders.
- When a company goes public and lists its shares on the stock market (IPO), it can raise significant amounts of capital by selling them to investors. This capital can be used to fund operations, research and development, expansion, or other strategic initiatives.
- Listing on the stock market can also enhance a company's public profile and help it attract new customers, partners, and employees.
- Another reason companies list on the stock market is to provide liquidity to existing shareholders. Prior to going public, a company's shares may be owned by a small group of investors or insiders, making it difficult for others to buy or sell them. By listing on the stock market, the company provides a platform for its shares to be bought and sold by a wider range of investors, which can increase liquidity and potentially improve the value of the shares.
- Finally, being listed on the stock market can also help companies attract and retain top talent. Many companies offer stock options or other equity-based compensation to their employees, which can be more attractive if the shares are publicly traded and have a transparent market value.
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How much is a share worth?
The value of a share is determined by the market and can fluctuate based on various factors, including the company's financial performance, market trends, and investor sentiment.
Let’s take Tesla for example
As of March 21, 2023, the price of a single share of Tesla (TSLA) was approximately $193.92 USD. However, it's important to note that the price of Tesla shares can (and does) fluctuate significantly over time, based on a variety of factors such as earnings reports, product announcements, and macroeconomic trends.
Tesla's (TSLA) stock has experienced a significant recovery this year, with an increase of over 87% as of the start of March 2023, representing a notable contrast to the previous year 2022 when the stock lost nearly 70% of its value.
One of the main reasons for the increase in the stock price of Tesla this year is the reduction in prices of its vehicles. In both US and European markets, the company decreased the prices of its two popular models, the Model Y and Model 3, in January.
It's important to keep in mind that share prices can change rapidly and are subject to market fluctuations. It's essential for investors to do their own research, consider their own risk tolerance and investment goals, and consult with a financial professional before making any investment decisions.
Why trade or invest in shares?
People trade shares for a variety of reasons, including:
- To invest in companies
- One of the main reasons people trade shares is to invest in companies that they believe have the potential for growth. By buying shares, they become part owners of the company and can benefit from its profits and growth.
- To earn income
- Some people trade shares to earn income in the form of dividends, which are payments made to shareholders by a company.
- To diversify their portfolio
- By investing in shares, people can diversify their investment portfolio, spreading their risk across different companies and sectors.
- To speculate
- Some people trade shares with the goal of making a profit by buying low and selling high. This is known as speculation and can be risky, as share prices can be volatile and unpredictable.
- To exercise voting rights
- Shareholders are often entitled to vote on important company decisions, such as electing board members or approving mergers and acquisitions. By owning shares, people can have a say in the direction of the companies they invest in.
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Pros & cons of trading shares
| Pros | Cons |
|---|---|
| Potential for high returns: Trading shares can offer the potential for high returns, especially if you invest in companies that experience significant growth over time. | Risk: Trading shares can be risky, as the value of your investment can go down as well as up. There is always the possibility of losing some or all of your investment. |
| Diversification: Trading shares allows you to diversify your portfolio, spreading your risk across different companies and sectors. | Volatility: Share prices can be volatile, and can fluctuate rapidly in response to changes in the market or company-specific events. |
| Flexibility: Shares can be bought and sold quickly and easily, giving you greater flexibility and control over your investments. | Time commitment: Trading shares requires time and effort to research companies, monitor the market, and stay up to date with news and events. |
| Access to information: As a shareholder, you will have access to a wealth of information about the company, including financial reports and performance data. | Fees: There may be fees associated with buying and selling shares, such as brokerage fees, which can eat into your profits. |
| Voting rights: Shareholders are often entitled to vote on important company decisions, giving you a say in the direction of the company. | Psychological factors: Trading shares can be emotionally challenging, as investors may become attached to their investments or feel anxious about market fluctuations. |
How to trade shares with Skilling
In conclusion, understanding how shares work is important for anyone looking to invest in the stock market, as it can help you make informed decisions about which companies to invest in and when to buy and sell shares.
If you're interested in trading share CFDs, Skilling is an online trading platform that can help you get started. With Skilling, you can speculate on the price movements of more than 700 shares around the world from around the world. Our user-friendly platform makes it easy to place trades and manage your portfolio, and it offers a range of educational resources to help you learn more about trading.
So, if you're ready to take the plunge and start trading shares, sign up with Skilling today and start exploring the exciting world of the stock market. Remember to always do your research and invest wisely, and you could be on your way to achieving your financial goals.
Not investment advice. Past performance does not guarantee or predict future performance.
