Most people know that shares are something that you can buy and trade on a stock market without really knowing what shares are.
This article provides a beginner’s guide to company shares on the stock market, explains what shares are and where shares come from.
Owning A Business
There are many business owners in the world today.
You may even be one of them yourself, especially if you have a small business?
Maybe you own a retail shop, a freelance consultancy company, or an e-bay company for example?
You may even be a successful entrepreneur owning a large business worth millions?
Okay, possible but unlikely.
The point is that although companies exist in many shapes and sizes, they are usually sizable financial assets worth thousands or hundreds of thousands, if not millions or billions, even.
Hence, the chance of owning one yourself is beyond the reach of most people.
But let’s just hypothesize for a moment.
What if you are a successful entrepreneur and have built a large business worth millions, what do you do when you want to release some of the funds from your business without selling the entire business?
Or, how do you allow an investor to add more funds to your business in return for a percentage of the ownership?
One of the most common ways of doing this is to create shares.
A share is a piece of a financial asset, in this case, a piece of a company.
When creating the company shares, it is possible to create as many shares as you wish.
Raising Funds With Shares
So if you are an entrepreneur with a company worth £1 million, you could decide to sell only 10% of your company by creating 100,000 shares valued at £1 each (making up £100,000 or 10% of £1 million).
The shares don’t have to be valued at £1 each of course.
They could be anything as long as the number of shares multiplied by their value equals the £100,000.
So 50,000 shares of £2 each or 200,000 shares of £0.50 each are equally valid.
In our example, having created our 100,000 shares of £1 each, they could all be sold to a single investor or shared between a number of investors.
In this way, the entrepreneur attracts new funds into their business and/or sells off part of their ownership.
Investing In Shares
If you are an investor, rather than the entrepreneur, then you can invest in a number of businesses by buying shares in them.
If you own one or more of the shares of a company, you own a piece or several pieces of the company.
Buying shares of a company therefore makes you a partial owner of the company!
This means that you can share in the future profits and growth of the business without working in it!