In What Are Stock and Why Trade Them I explain a bit about stocks, how they work, how their prices moves up and down and we even compared them to forex. But, we will not go into much details about stocks as you can read more about it, from the link above.
We will discuss about shares and the role they play in the stock market.
What are Shares?
Shares are unit of a stock. When a company issue out a stock to the public, each unit of that stock is considered as shares.
The term shares generally refer to unit of a stock of the company listed in an exchange floor or rather stock exchange.
Consider a stock to be a bunch of broom and shares to be single sticks of that broom.
What are Stocks?
Stocks are securities that represent ownership in a company. They are used to raise capital from investors, traders and from the ordinary citizens who have no idea about the financial market.
When an individual buys a stock, he is not only lending money to that company, but rather his buying a percentage of ownership in that company, you can read more about stocks from our previous article on . What Are Stock and Why Trade Them.
Are Stock and Shares the Same?
Take for example, a company called ABC issue out there stock of 500 shares valued for 1 dollar per share. Therefore, we can see why I said earlier “a stock is like bunch of broom and shares to be single sticks of that broom”
But over time, people now interchange both words to mean the same thing as they consider it the same with less difference.
How do shareholders Make money from shares
Let me give another example using an investor let’s call him Kim. Kim buys ten unit of share at 10 dollar each from a stock a company issued via a local exchange. The shares which Kim bought automatically made him a shareholder and an owner of that company except, he is not the sole owner, there are probably hundreds or thousands more who owns the company since they bought the shares along with him (Kim).
It may amaze you, that Kim only bought one unit of the stock while others might have bought hundreds or even thousands units of that stock but they all have the same equal rights as Kim irrespective of the volume of stocks acquired.
So how do Kim makes money from the sharse he had acquired, Kim will makes profit from two ways which are either from receiving dividend (profit the company made) which are paid quarterly or annually or from price movement of the stock.
Since Kim bought 10 units of shares at 10 dollar and if he decides to sell them to another person willing to buy them at 15 dollars, Kim will now make a profit of 5 dollars, cool right.
Misconception about the stock market
Most individuals see the financial market as gambling, they believe if they should buy a stock right now, it will bounce up in price the next day. They do not bother to make research to find out what really move the stock market.
To matured traders and investors the stock market is more of a business than “a thing of fun”. The stock price can be analyzes, calculated and predicted to show the future price movement.
But many people do not want to get into the stress of having to go gain this knowledge through reading and practicing and would prefer to be hypnotized by what others says about the financial market.
Why do people buy shares?
Though there are many reasons people buy stocks, some, which are personal, and others, which are more of investment and business inclined but we will highlight just two which are
One of the reasons is to receive dividends. Dividends are the amount of money paid to shareholders from the profit the company makes for that quarter or that year.
While the other is more of speculating than investing. Speculators find companies, which have good potential of growing and buy huge shares in those companies, and sell them up when they make profit.
In summary, we can accept that the word SHARES can be used for STOCKS and can be a great financial market to dive into, same with the foreign exchange market.
However, all financial market does have a risk, risk that may consume your initial deposit. But, when used with good money management, knowledge and patience can be a great business opportunity.
I would love to hear from you please do comment below.